GameStop‘s (GME 3.45%) meme stock glory days have long since passed. However, CEO Ryan Cohen has a new bold plan to turn the video game retailer into one of the top e-commerce companies.
With the company’s bid to acquire online marketplace eBay (EBAY +2.13%), Cohen could be setting himself up for a large payday, and not necessarily from growth in GameStop’s share price.
However, even if GameStop’s offer, which Wall Street has already dismissed as “questionable,” never leads to a completed deal — eBay stock could continue to benefit from the offer. Why? It may well put the company “into play,” given the potential upside that the bidder sees from reducing eBay’s operating costs.
Image source: Getty Images.
A lack of confidence in GameStop’s offer
On May 3, GameStop submitted a non-binding letter to eBay, proposing to acquire it for $125 per share in cash and stock. At that price, based on eBay’s outstanding share count, GameStop would have to pay nearly $55.5 billion to acquire this large, profitable company.
Today’s Change
(2.13%) $2.31
Current Price
$110.44
Key Data Points
Market Cap
$48B
Day’s Range
$105.73 – $110.58
52wk Range
$68.60 – $111.38
Volume
429K
Avg Vol
6M
Gross Margin
72.15%
Dividend Yield
1.09%
That may sound far-fetched at first, given that GameStop’s market cap is just $10.9 billion, but public companies have successfully acquired larger targets than themselves before. Then again, there is a good reason why skepticism runs high regarding this proposed deal. For one, Cohen has indicated that the plan is to pay for eBay half in cash and half in GameStop stock.
It’s unclear whether eBay shareholders will accept a deal in which half the consideration comes in the form of a highly volatile stock. Also, while GameStop has said that it has a $20 billion financing commitment from TD Bank, said commitment requires the combined company to maintain an investment-grade credit rating.
This may prove difficult, given just how much debt the combined company would have on its books post-merger. Still, despite the skepticism, eBay shares have rallied slightly since deal rumors first emerged on May 1.
Takeover talk could keep shares elevated, for now
As GameStop’s CEO, Cohen could earn as much as $35 billion in performance-based stock options, making him one of the highest-paid CEOs ever. All that would be required for that to happen is for GameStop’s market cap and annual EBITDA to hit $100 billion and $10 billion, respectively.
As Cohen is free to increase the share count to achieve this goal, making big acquisitions could pave an easy path for him to get there. That said, there could be another way for GameStop, Cohen, and eBay shareholders to all “win.” Before making its bid, GameStop acquired a 5% “economic stake” in eBay.
If other potential buyers emerge and make higher or more credible bids, GameStop, and in turn GameStop shareholders like Cohen, could profit from selling that stake. Moreover, a central point of the proposal is that GameStop believes it could cut eBay’s annual operating costs by $2 billion within a year of taking it over. If that assertion inspires other bidders to run the numbers themselves, it could lead to large private equity firms like Apollo or Blackstone getting interested in taking eBay private.
Still, I’d tread carefully here. While eBay didn’t zoom “to the moon” on the GameStop offer, if it walks back its bid and other buyers fail to show up, shares could still experience a sharp pullback, given that their latest gains have come primarily from takeover speculation.
