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AN UNUSUAL STORY hit the news this week. GameStop, the struggling video game retailer, announced a bid to buy eBay. The offer was unexpected, but what surprised investors more was the economics of the proposed deal. eBay is many times larger than GameStop, making it difficult to understand how GameStop would be able to finance the acquisition.
GameStop has offered $56 billion for eBay, comprised of cash and stock. For the cash portion, according to its May 3 press release, GameStop would use the $9 billion it has in the bank and borrow the remainder from TD Bank, which has committed up to $20 billion to the deal. But that, in a sense, is the easy part. The stock portion is what left investors with many more questions. That’s because GameStop’s total market value is in the neighborhood of just $11 billion, so it isn’t clear how it would be able to hand over $28 billion of shares. Its share price would somehow have to multiply for this to work.
In an interview Monday on CNBC, GameStop’s chairman, Ryan Cohen, offered little clarity. When the reporter asked Cohen to explain his financing plan, the details were sparse. More than once, Cohen just repeated: “It’s half cash, half stock.” When the reporter challenged him to say more, Cohen stared back stone-faced. “I don’t understand your question…it’s half cash, half stock.” This went on for several minutes without much more clarity.
Cohen’s parrying was amusing, and it’s an open question where this all ends up. In the meantime, this story is instructive for investors because it helps illustrate some of the stock market’s inner workings. For starters, it can help us understand the market’s seemingly split personality.
At first glance, this story seems to highlight the more casino-like side of the stock market. After all, GameStop was the original “meme” stock, rising 30-fold in January 2021 when a YouTube personality promoted it to his followers. GameStop is now using its cult status as currency to support a deal that, according to conventional analysis, doesn’t add up.
That said, it isn’t entirely irrational. Putting aside the financing, there is precedent for an online-only business merging with a traditional retailer. Amazon purchased Whole Foods, a grocer, in order to gain a retail footprint, and GameStop envisions something similar, where eBay customers could drop off goods at a physical location rather than hauling them to the post office. To be sure, eBay isn’t Amazon, and GameStop isn’t Whole Foods, but there is some logic to Cohen’s argument.
How can we assess investors’ opinion of this deal?
A pillar of Cohen’s pitch to investors is that he can make eBay much more profitable, such that it will essentially pay for itself. In an interview on Wednesday, he argued that under new management, eBay could operate much more efficiently. “There’s 11,500 employees,” he said. “It doesn’t make sense. I could run that business from my house. It doesn’t need 11,500 employees.”
The implication: Right now, it might not look like the math works for this deal, but if GameStop proceeds with the acquisition, its shares deserve to rise very considerably. Even if GameStop has to issue many new shares, in other words, each share would become much more valuable because of the addition of a newly more profitable eBay. Those additional profits, in Cohen’s view, would offset the dilution caused by the issuance of new shares.
That’s the argument GameStop is making. What does Wall Street think? It turns out this question has a straightforward answer.
GameStop has offered $125 per share of eBay. If investors were confident in this deal, then eBay’s shares would now be trading right around $125. That’s according to the principle of arbitrage, which says that there shouldn’t be a way to purchase a dollar for any less than a dollar. In other words, if eBay shareholders really stand to receive $125 a share, then it would be illogical for the shares to trade much below $125. But today, eBay shares are trading far below that, falling to as low as $105 on Wednesday. That tells us that investors have little confidence in the deal, most likely because of the difficult-to-explain financing.
As Benjamin Graham famously wrote, in the short run, the stock market is a voting machine—a popularity contest—but in the long run, it’s a weighing machine. It’s rational. And though corners of the market often devolve into irrational and speculative excesses, that’s not always the case. More often than not, in my view, the market is better behaved than it’s commonly perceived to be, and I think that’s what we’re seeing here. eBay’s share price today tells us that investors are keeping their feet on the ground.
In 1901, J.P. Morgan coordinated the acquisition of Carnegie Steel in a deal that, in its time, was the most audacious ever undertaken. Through massive leverage, it created the first company in the United States worth more than $1 billion. At the time, it was astounding. This tells us that unusual and unlikely things can happen. On the other hand, in 2001, the highly-leveraged merger of AOL and Time Warner was a disaster almost from the start.
Which way will the GameStop-eBay deal go? Right now, it’s anyone’s guess. And as with most things involving great amounts of financial engineering, my recommendation is to steer clear. But this case is instructive because it illustrates many of the principles that drive the market from day to day.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Cohen sounded incompetent. It’s a complete no go. Makes zero sense.
question: how did GameStop accumulate $9 billion in cash if its Market value is $11 billion?
possible solution to the financing: cash, stock and the US treasury, since the government has lately been investing in companies like Intel.