Microsoft compra Midway?

January 13, 2003 - Xbox may marks the spot at Midway
Players see Microsoft engaging in Mortal Kombat

Bill Gates appears ready to play Mortal Kombat.
The Microsoft Corp. chairman needs video game franchises for his company's struggling Xbox game console, and the maker of the renowned Mortal Kombat franchise, Midway Games Inc., desperately needs a savior.


Despite the popularity of Mortal Kombat, the Chicago-based maker of video games has posted 12 consecutive quarterly losses, seen a 75% drop in its stock price over the past 12 months and watched most of its significant new releases flop in 2002. Midway laid off 10% of its workforce in March and another 5% in December.

Microsoft, meanwhile, needs some established video game titles for its Xbox console to begin eroding the hefty lead of Sony Corp.'s PlayStation 2. The Redmond, Wash.-based software giant has already purchased one games maker in Midway's price range.

"Microsoft has to do something," says industry analyst Michael Pachter of Los Angeles-based Wedbush Morgan Securities Inc. "They've got lousy sports games; Midway has some good ones. Mortal Kombat would be great if they had it (exclusively). They've got to make a dent in Sony's lead, and Midway would help. It makes a lot of sense."

Indeed, Xbox has become the Betamax VCR of the video game world. Xbox offers plenty of features the competition doesn't — including the ability to play video games in high definition — but there's not much to watch on it. Microsoft acknowledged the problem in September, when it paid $375 million for British games manufacturer Rare Ltd., maker of such titles as GoldenEye 007 and Donkey Kong Country.

Brand name needed

Though the Rare acquisition drew industry raves, Microsoft will need to acquire an even larger stable of games to cut into Japan-based Sony's marketshare. And while analysts say the struggling video games sector is ripe for consolidation, few companies are more vulnerable to a takeover than Midway, which has exactly what Microsoft needs: name-brand game franchises like Mortal Kombat, a graphic martial-arts fantasy game in which players can virtually rip their opponents' hearts out with their bare hands. It's been a top-10 seller since it was rolled out in 1992, and popular games like it have driven the sales of game consoles.

"The quality is better with Xbox, but they just don't have the must-have games," says Dan Macias, store manager at Bricktown Square's Game Stop, which sells far more PlayStations. "If (Microsoft is) going to catch up to PlayStation, they need more games."

At a press conference announcing the Rare deal, Microsoft officials emphasized that the purchase signaled a long-term commitment to the video games business and to improving its games portfolio. Most observers interpreted that to mean the cash-rich software behemoth isn't finished shopping. Microsoft declined comment.

What Microsoft needs to buy, industry watchers agree, is the type of exclusive game franchise that propels console sales. The success of PlayStation, which is universally regarded as the less powerful and technologically advanced console, is often linked to Sony's wide array of popular games that are unavailable in other formats, such as the Grand Theft Auto series. Midway's games are currently available for all three major consoles, Xbox, PlayStation and Nintendo Co.'s GameCube.

In fact, PlayStation commands a 67% marketshare in the United States, selling 13 million units in the first 11 months of 2002. Microsoft's Xbox holds an 18% share, with 3.5 million units sold in the same period, according to data provided by Wedbush Morgan.

"Everybody says Xbox's problem is that it lacks viable exclusive franchises," says Todd Martin, chief analyst at investment firm Robert Coates Group in Lake Forest. "Well, Midway has two or three great franchises that aren't reflected in the (stock) price. . . . Mortal Kombat could be the Grand Theft Auto for Xbox."

(Grand Theft Auto, the industry's best-selling game, urges players to "own the city" by providing a richly detailed landscape — the sun moves with the time of day, the radio stations in the car range from talk to hip-hop — in which they can wreak as much havoc as possible.)

Midway declined to comment about a possible sale, but a spokesman acknowledged that the company's heavy investment in character-based adventure games such as Dr. Muto, Defender and Haven: Call of the King had paid scant dividends.

And the sting of losses associated with those games has been particularly sharp this year because Midway disbanded its arcade business in March, leaving the company solely dependent on revenues from its console-game sales.

Midway's troubles — a sagging stock price, a string of earnings setbacks, and a series of disappointing product launches — represent "a familiar refrain among the have-nots of the video game publishing community," writes industry analyst Edward Williams of Gerard Klauer Mattison, a New York-based securities firm, in a recent research note.

Potential suitors

Midway has been the subject of takeover rumors before. Last summer, Business Week reported that Japanese software giant Sega Enterprises was interested in making a bid.

And Mr. Martin speculates that Midway could also draw interest from Sony or a larger games maker. Nintendo of Japan would probably not be interested, he says, because the company, with a large stable of software designers, has a far better record of developing games internally.

If Mr. Gates does indeed decide to try his hand at Mortal Kombat, a potential winner would be Viacom Inc. Chairman Sumner M. Redstone, who controls 28% of Midway's shares. (Mr. Redstone's ex-wife Phyllis owns about 8% through their divorce settlement.)

A deal at a premium to Midway's current share price — the stock has sunk to the $4 range — would benefit Mr. Redstone, who has been buying up shares for months.

Mr. Redstone, whose Viacom holdings are worth about $8 billion, has never commented publicly about his intentions for Midway, forcing analysts and investors to speculate about his intentions.

"Relative to his net worth, what Redstone spent on Midway is what you and I spend on a suit, so I wouldn't read too much into it" says Wedbush Morgan's Mr. Pachter. "Of course, if Sumner picks up the phone and calls Bill, Bill probably takes the call."


Info: http://www.chicagobusiness.com/cgi-bin/article.pl?article_id=19372