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Are videogamers Hollywood takeover bait?

(Reader note: as part of the new Reuters BreakingViews team, my beat now includes covering stocks, investments and corporate finance. It’s a bit of a change of pace from the macro, Fed, banking stuff I normally write about, but have no fear: I will keep opining on those topics in blogs and the occasional column. In the meantime, excited to be tackling some new topics.)

by Rolfe Winkler and Rob Cox

Are video-gamers Hollywood takeover bait? With their business models under threat and shares in the doldrums, game publishers like Electronic Arts look ripe for the picking by larger media conglomerates such as Walt Disney. But much as shareholders might hope for a quick exit, they shouldn’t bank on a quick M&A payday.

The argument for entertainment companies buying video-game makers is compelling. Publishing video games is like making movies: Invest millions developing titles and pray for blockbusters. As in Hollywood, the trick is to establish successful franchises and regularly ride them to riches. Studios look for the next Harry Potter. Game publishers search for the next Call of Duty.

The economic lumpiness of the movies eventually drove all the major studios to become subsidiaries of media behemoths like News Corp, Time Warner, Viacom and Sony. These larger groups could lay claim to content and corporate synergies that offset the volatility in performance of the film business.

With some of the biggest gaming groups now struggling, it looks like a buyer’s market for acquisitive media groups hoping to burnish their gaming credentials. From previous highs, EA and Take-Two Interactive Software are off 70 percent and THQ is off 90 percent. Their combined enterprise value is now just around $4 billion.

But there’s no rush. Next year isn’t shaping up well for the gamers so they may get cheaper. EA will be releasing 30 titles, down from 50. Take-Two, creator of Grand Theft Auto, is expected to report its fourth losing year in the last five. THQ has no breakout hits on the horizon, Wells Fargo notes, and faces another difficult year.

All the while, the industry is struggling to adapt to a changing market where packaged games sold through retailers like GameStop are losing ground to online gaming alternatives. That trend motivated EA’s purchase of social networking game developer Playfish for $300 million last month.

It might be comforting for shareholders to have a rich corporate Daddy to support this wrenching transition. But big media can wait. Indeed, it need only look at the bullet EA dodged when it stepped back from a $25.74 a share hostile bid for Take-Two in 2008. That’s over three times Friday’s closing share price.

Tags: call of duty, electronic arts, hollywood, news corp, Sony, take-two interactive, time warner, viacom, walt disney

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