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No Regrets, No Responsibility: Strauss Zelnick, Take Two Interactive's Chairman

By Perry H. Rod, Published: July 20th, 2009 11:03 AM CDT


“I don’t engage in regrets,” he said in an interview with CNBC last month.

It was a revealing statement by the chairman of Take Two Interactive, Inc. (TTWO).

A humble man may have had some regrets, given the dramatic fall of the company’s stock.  But humility is almost certainly not a quality requirement for one who engages in a corporate coup d’etat.  Zelnick, with the backing of several hedge funds including Tudor Investment Corp, SAC Capital, Icahn Partners and D.E. Shaw, won control of Take Two’s chairmanship two years ago with the promise to unlock shareholder value.

Those hedge funds mostly sold out of Take Two stock for a profit and moved on before Mr. Zelnick was installed.  Zelnick, meanwhile, began his regretless tenure of the company in March of 2007 with the stock in the low 20’s.  A few months later he was on his first quarterly conference call and was asked about the high price point of the Sony console and how it may affect the release date of Take Two’s crown and jewel, Grand Theft Auto.  He went beyond the question and offered this:

“In terms of the release date, no, we’re confirming the release date [of Grand Theft Auto 4] and we’re going to meet the release dates, so let me just say that clearly.”

Less than two months later, Zelnick announced the game would be delayed for six months.  The stock immediately fell nearly 25%, and fell 40% in that one week period.

But Mr. Zelnick was not to engage in any regrets.  And as the stock lingered in the mid teens for many months, Electronic Arts (ERTS) eventually came knocking on the chairman’s door with a formal private offer of $25 on February 6th, 2008.  But the door was apparently sealed shut.  Zelnick responded that the offer was too low and privately asked EA to wait until April 30th, after the launch of GTA4, for deal negotiations.

A week later, Take Two’s board tripled ZelnickMedia's cash compensation from $750,000 to $2.5 million and tripled their eligible bonus also from $750,000 to $2.5 million.  That wasn’t enough.  Zelnick’s board, who was installed along with his management team, granted ZelnickMedia 1.5 million additional Take-Two restricted shares added to a previous share grant and made sure the shares would mostly vest in the event of an acquisition.  That wasn’t enough either.  The board made certain that any change of control would result in ZelnickMedia receiving a large chunk of their new management fees and bonuses through the end of 2012, whether or not they had to work that long.  After all, Zelnick said Take Two was in “vastly” better shape than when he took over management of the company months before (Take Two’s investors were apparently not as impressed up to the buyout offer, as the stock had dropped 16% since the company’s change of control).

Lo and behold, Electronic Arts went public with a $26 tender offer just five days after Take Two’s board made the compensation amendments.  EA’s CEO later said he was “surprised” to learn about the new compensation arrangement.  So much so that a week later EA made an amendment of their own and discounted their bid to $25.74.  Zelnick resisted the buyout offer until the end and claimed there were other interested parties in Take Two, which never emerged.

"To this day, I don’t know what [EA] was up to. Everyone knew they couldn’t have been unmindful of the fact that their initial offer couldn’t have been a final offer… It’s hard to imagine what we could have done better. My job is to ensure value for the shareholders."

Take Two lost over half of its value in the months after EA announced it was giving up on its hostile bid attempt.

But Zelnick was still upbeat.  In November 2008, well into the beginning of the financial crisis and while Electronic Arts was having its own problems and making cuts, Zelnick had this to say:

"So far, we're not seeing any negative influence of the overall economy on sales of our titles.''

Just a little over a month later, as if he was not aware of his own company’s financial situation, Take Two significantly reduced guidance based on soft sales.  The stock which had been trading in the 12’s would drop to a price of under $6.

"We can’t be unmindful of the fact that the market was 13,000 and the market is now 8,800," he said. "We’re a market participant and there’s no one who is holding stock now that hasn't been affected. We take responsibility for what we do— good, bad or indifferent—but we can’t take responsibility for the market."

Mr. Zelnick does not engage in regrets, if you recall.  But he also apparently does not make mistakes. The 80% drop in his stock - from $26 to under $6 – according to Mr. Zelnick – was directly attributable to a 35% down stock market, and nothing besides.

On June 17 of this year, Zelnick decided to further challenge himself:

"It’s reasonable for them [the investment community] to expect us to deliver a breakeven performance in a year when we are not releasing a major GTA title. This is that year. They want to see what we can do. I think it’s appropriate for a company to be rewarded to deliver consistent results."

Less than one month later Take Two announced significantly lower non-GAAP EPS guidance of $(0.80)-$(0.95) from an earlier expectation of .00 to .20.  Needless to say, Take Two under Mr. Zelnick’s leadership, did not meet his own previous month’s challenge.

If you’re keeping score, in a two year period, Mr Zelnick managed to, on three occasions, make vital statements that were within a matter of weeks proven to be either fabricated or just incredibly incompetent (or worse).  Mr. Zelnick managed to resist and reject a buyout offer that was triple the company’s current share price while claiming other interested parties who never emerged.  And Mr. Zelnick, meanwhile, tripled his management company’s compensation for these efforts because, after all, he does not engage in regrets and does not “take responsibility for the market.”

These statements and others strongly suggest that investors should proceed with extreme caution with any investment that involves Strauss Zelnick.  His performance so far as an executive manager of a publicly traded company  is one of the worst I have ever seen in my professional investment experience.

Related: TTWO, ERTS

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