Take-Two Interactive Software, Inc. (NDAQ: TTWO) shares soared today after Electronic Arts Inc. (NDAQ: ERTS) offered to acquire the company for $26 per share, or about $1.9 billion, which is a 64 percent premium over the stock’s prior closing price. The video game maker rejected the offer, calling it a “highly opportunistic” attempt to take advantage of the upcoming release of Grand Theft Auto IV set for April 29th. The company said that it would resume buyout talks after the game’s release, but EA fired back that there can be no certainty in the future that any buyer would pay the same high premium being offered today. So, is this a stock worth watching for your portfolio or is the stock now grossly overpriced?

Activist hedge funds have been pushing Take-Two towards a sale for some time now amid poor financial results, accounting problems, and controversy surrounding violent and sexual content in the company’s games. These hedge funds, which own a combined 46% of the company, were successful in forcing the company to evaluate a sale last March but nothing came of it. Then, billionaire activist Carl Icahn joined the fight back in November - a great invesment in today’s terms! These activists now likely own more than 50% of the company and will definitely vote in the best interests of shareholders if a serious offer is made for the company. They will also take action if the company decides to ignore great bids.

The other key point within this story is that the $26 per share offer was the second one made by EA. The first $25 bid was rejected and never presented to shareholders for reasons unknown (maybe it wasn’t material enough?). This is important because it could mean two things: (1) There are other unannounced potential bidders for the company, and (2) there is a good possibility that the company could hold out for another sweetened offer. Often times, initial offers are low-balled at first to gauge interest and then built up until it meets investor demands. Clearly, EA is interested in Take-Two’s hit titles and it will be interesting to see how much they are willing to pay for them.

Hank Greenburg also points out another interesting point to this story. Electronic Arts sent a letter to Take-Two not long ago arguing that it faces ongoing financial, legal and operating issues and a very intense competitive environment. In fact, EA even said that it would be increasingly difficult for the company to create sustainable shareholder value while it remaisn exposed to considerable risk of value loss. Just recently, EA also commented that once GTA IV ships, Take-Two will again be dependent on less-popular titles and face increasing challenges to compete with larger and better-capitalized competitors. So, all of this begs the question of why they are interested in the company at all?

In the end, it will be interesting to see how activist shareholders respond to this rejected offer given their new found wealth. Investors can bet that they will take action if they believe that the offer represents a fair price in order to unlock value. This is why shares are currently trading above the $26 per share buyout price and why many are so bullish on the stock. Combined, these factors make TTWO a stock worth watching!

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