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GameStop's (GME) attempt to acquire eBay (EBAY) has turned into a high-stakes corporate chess match after eBay's board of directors rejected GameStop's initial offer. If you haven't been keeping up with the news, GameStop made an unsolicited, non-binding proposal to acquire 100% of eBay. The offer was 50% cash and 50% GameStop common stock, with a total value of $55.5 billion, or $125 per share.
The issue is that GameStop is worth only $10 billion right now, whereas eBay's market capitalization is approaching $50 billion. Unsurprisingly, eBay's board called the proposal "neither credible nor attractive." Now, GameStop CEO Ryan Cohen is taking the rejection personally and refusing to back down. Cohen has taken to the media — including a lengthy interview with Barron's — to say he intends to present the offer directly to eBay’s shareholders.
How Is a Takeover This Large Even Possible for GameStop?
GameStop has some $8.37 billion in cash. This pales in comparison to other companies that have conducted massive mergers recently, deploying tens of billions in cash to acquire companies similar in size to eBay.
GameStop still believes it is possible to acquire eBay because it secured a letter of confidence from TD Securities to borrow an enormous $20 billion in debt financing. Plus, the company hopes to pay the remaining amount by issuing millions of new shares and handing them to eBay's current shareholders.
This is possible only if EBAY stock shareholders are willing to accept a negligible premium, only to get absorbed by a smaller company with a weaker brand name and a more volatile stock.
In short, eBay will likely never accept.
GameStop CEO Ryan Cohen Is Still Trying to Buy eBay
GameStop has been escalating the pressure after eBay's initial rejection. Ryan Cohen has dug his heels in and is now directly appealing to eBay's shareholders. To bypass the board and pitch the investors, Cohen went on a media blitz. Meanwhile, GameStop has increased its beneficial ownership of eBay to 9% by using cash from working capital, plus a complex web of derivative trades.
With the Hart-Scott-Rodino antitrust waiting period satisfied in early June, GameStop's derivatives are now eligible for physical share settlement. This gives them even more leverage over eBay's future.
GameStop buying EBAY stock might look counterproductive, but it is a smart idea since the company is partaking in eBay's stock market gains while amping up pressure on management. If it dumps its current 9% stake into the market, the ensuing selling pressure could cause EBAY stock to crash as GameStop pockets hundreds of millions. It will also make any future acquisition offer look juicier.
Will GameStop Be Able to Buy eBay?
Pulling off this "David swallowing Goliath" merger hinges entirely on whether Cohen can convince Wall Street and retail investors to accept massive potential stock dilution or unprecedented debt needed to fund this merger.
If GameStop keeps accumulating EBAY stock, it will boost shares higher and higher, and GameStop will get diminishing returns trying to buy ownership. On the other hand, even if the company does sell its stake to pocket the difference, it may not make a big enough dent to convince eBay shareholders to take the leap.
And even if they do take the leap, they're at the mercy of GameStop's CEO, who may then dilute whatever GME stock these shareholders receive.
What You Should Do if You Hold GME or EBAY Stock
The aggressive moves made by GameStop are great for EBAY stockholders for now. However, you may be holding a time bomb if GameStop's CEO decides to suddenly dump his stake.
For GME stockholders, things don't look as bad. GameStop isn't only buying EBAY stock, since it recently authorized a massive $2 billion share buyback. If you think these tactics will catch short sellers off guard and the core business is strong enough to withstand any merger, it's not a bad idea to hold.
I'd still lean toward selling GME stock, however. The stock has been treading water for too long, and your money would've likely done far better elsewhere.
