Is Take Two a takeover target?

SAN FRANCISCO (CNNMoney.com) -- When shareholders of Take Two Interactive Software convene March 23 for their annual meeting, they're going to see a fight - and possibly the beginning of the end for the company.

If you haven't heard, investors owning some 46 percent of the game publisher's shares are looking to take over the board and kick current CEO Paul Eibeler to the curb. The move comes after years of scandals and allegations ranging from backdated options to overstated revenue to hidden sexual content in its most popular game: "Grand Theft Auto: San Andreas."

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Game industry insiders at the Game Developer Conference here who are familiar with Take Two (Charts) but asked not to be named because of ongoing relationships with the company said they expect the shareholder action to be successful - and that could lead to some dramatic changes.

What those changes might be is a matter of debate. Some think a sale of the company is a possibility, while others believe a new board might sell off underperforming units to concentrate on Take Two's core strengths.

"Take Two's stock is a troubled bag now for two reasons: One, there's a high concentration of ownership in a very small number of hands - and at last report, nearly 30 million shares are short," said John Taylor, an analyst for Arcadia (who also owns shares of Take Two). "So you have a tug of war between two muscular groups. One is made up of people who think the worst is yet to come. The other is made up of a small number of increasingly activist shareholders.

"It would not surprise me is this had some kind of pile-on effect with people getting behind the activists to squeeze the shorts."

As for potential buyers, the list is long. Game publishers UbiSoft and Activision (Charts) have reportedly explored a possible bid. Elevation Partners, the venture capital group whose members include U2 front man Bono, is a possibility as well. And Rupert Murdoch's News Corp (Charts). has also been mentioned regularly as a possible suitor.

"The most important thing is the closure of the legal uncertainties," said Taylor. "With or without this activist shareholder group, if there were no legal cases, we'd be hearing a lot more about [a possible takeover] already."

One company that says it's not in the running is Microsoft (Charts). Because today's independent publishers are platform agnostic - that is to say, they build games for all major systems - taking over one would result in a massive revenue loss for Microsoft, as all development would be redirected toward the Xbox 360.

"We could never launch an acquisition bid at a third party publisher," said Shane Kim, corporate vice president of Microsoft Game Studios.

Take Two has many holdings, though, which leads some to think an asset sale is more likely. On the game development and publishing side are Rockstar Games (makers of the "GTA" series), 2K Games and 2K Sports and Global Star Software. In addition, it also distributes games through its Jack of All Games subsidiary and manufactures peripherals and accessories via its Joytech branch.

Of those, Rockstar is the breadwinner, of course - and should a new board decide to pare down the company, this is the unit that's most likely to stay.

"The [GTA] brand has only gotten stronger," said P. J. McNealy of American Technology Research. "It's foolish to think the brand has been diminished. They've certainly recycled it quite a bit, but it's still one of the biggest franchises in the cycle."

2K Games has some notable properties in its portfolio, including games made by industry legend Sid Meier ("Civilization," "Alpha Centauri"). 2K Sports, though, would be vulnerable to sale. Ubisoft, for instance, has made it known it would like to start a sports brand to compete with Electronic Arts, makers of the popular "Madden" series. EA, meanwhile, would likely make a bid as well.

Global Star, Jack of All Games and Joytech are considered underperformers - and would be the most likely to be jettisoned.

The looming shareholder battle is just the latest in a series of troubles for Take Two. The company spent a significant part of last year dealing with a scandal involving backdated stock options. Former CEO (and company founder) Ryan Brant in February pled guilty to criminal charges in connection with the option scandal and settled a civil suit for $7.3 million. Brant is expected to cooperate with investigators as they expand their case against the company.

The company also entered into settlement talks in a lawsuit tied to the so-called Hot Coffee scandal, in which a sex mini-game was hidden in the code of "GTA: San Andreas".

The stock has suffered as a result of the problems, hitting a 52-week low of $9.06, though share prices have rebounded since news of the shareholder action. Last week the company reported a net loss of $14 million for the fourth quarter.

Of course, it's impossible to know what the shareholder group has in mind should it assume control of the board. It's entirely possible the group will keep the company intact and work to rebuild it.

"These guys aren't doing this without a plan," said McNealy.

Morris is Director of Content Development for CNNMoney.com. Send him an email at chris.morris@turner.com