OK, so on Sunday evening, the video game retailer GameStop
announced a $55.5 billion unsolicited bid to buy the
online auction site eBay. This is an ambitious move for
GameStop, primarily because GameStop itself only has a
market capitalization of around $12 billion O they're attemting
to buy a company that's roughly five times their size, which can
happen, but it's not normally how acquisitions work.
Now some people have questioned the ambition of targeting eBay.
It is, after all, only five times GameStop size.
If you're going to announce a transformative, non binding
acquisition funded partly with shares that don't exist, why
things so small? NVIDIA has a market cap of
around 4 1/2 trillion dollars. GameStop could issue $5 trillion
of stock and make a proper run at it.
There would even be genuine synergies.
GameStop stores already sell graphics cards to gamers.
You could describe it as a vertical integration play.
That's the kind of language that gets sovereign wealth funds
excited. I'm not sure why Cohen left this
on the table now. eBay was founded in 1995 and went public
in 1998. It was one of the original.com
stocks, and it might surprise you to know that even in 2005 it
was a bigger company than Amazon.
When it went public. Almost all of the listings on
eBay were for Beanie Babies, which were themselves in a
bubble at the time. I think at one point a stuffed
purple bear was worth more than eBay servers.
So in a sense, eBay has always been a meme stock.
It just took 30 years for a meme stock to try to buy it back.
Amazon started listing used goods on their marketplace and
was able to out compete eBay with their logistics network.
At the same time, a whole ecosystem of niche marketplaces
appeared. Vinted and Depop for second hand
clothing stock X for sneakers. Reverb for musical instruments.
The Real Reel for luxury goods. And they all did the same thing.
They took specific profitable categories away from eBay and
offered authentication so that buyers could trust that the
vintage Rolex they were purchasing was not, in fact, a
vintage Folex. EBay was left as a sort of
general purposes digital car boot sale where you could buy
anything but couldn't be entirely sure what you'd
receive. Over the last few years, eBay
has actually managed a fairly successful corporate turnaround
under their new CEO. They stopped trying to compete
directly with Amazon and went back to focusing on their
heritage selling used goods, auto parts, and collectibles.
Sales grew by 17% in the first quarter.
They have around 135 million active buyers and their stock is
up over 130% since the start of 2024.
So things are going reasonably well for eBay.
GameStop, on the other hand, is a famous meme stock.
It recently reported a 14% drop in quarterly revenue and is
currently in the process of closing nearly 500 of its retail
locations across the United States.
Their core business is selling physical video game discs to
people who increasingly just download their games.
So naturally, the next logical step was a $56 billion hostile
takeover of a much larger, more profitable tech company.
Because that just makes sense. The CEO of GameStop is Ryan
Cohen. Now, meme stock companies making
unusual capital allocation decisions is not new.
A couple of years ago, the CEO of AMC, the movie theater chain,
spent $28 million of actual cash to buy a 22% stake in a Nevada
gold mine. The gold in the mine is what
geologists call refractory, meaning it is chemically trapped
inside sulfide minerals and is very difficult to extract.
So a cinema chain spent real money on largely inaccessible
gold. But I suppose if you think about
it, gold is really just a 4000 year old meme too, so at least
it was on brand. Cohen has been taking a similar
approach. In 2025, dozens of companies
started imitating Microstrategy's corporate
treasury strategy of issuing shares and debt to buy Bitcoin.
It was a trend. The idea is that if you put
Bitcoin on your balance sheet, your stock goes up because
crypto people get excited and then you issue more stock to buy
more Bitcoin and so on. It was supposed to be a
perpetual motion machine, which it is, until it isn't.
Last year, GameStop spent half a billion dollars buying Bitcoin
in an attempt to join this trend.
The market responded to this bold financial innovation by
immediately dropping GameStop stock price by 11%.
It turns out that when you layer a meme stock on top of a crypto
treasury strategy, the two memes might cancel each other out
rather than reinforcing one another.
Who could have predicted that? This is not the first time that
Cohen has attracted attention for the way he moves in and out
of struggling companies. In 2022, he built a large stake
in Bed Bath and Beyond, filing disclosures that drew
significant attention from retail investors on Reddit, many
of whom bought shares on the basis of his involvement.
Cohen then sold his entire position near the peak in August
2022. The stock subsequently
collapsed. The SEC opened an investigation.
A class action lawsuit was filed alleging that his disclosures
and social media activity amounted to a pump and dump
scheme, allegations that Cohen denied.
He was not charged by the SEC. The class action survived a
motion to dismiss, though a separate short swing profits
claim was later dismissed as mood after Bed Bath and Beyond
filed for bankruptcy. Now, none of that means anything
improper occurred. It's entirely possible that
Cohen simply changed his mind about the investment.
People are allowed to change their minds, and ebay's board
will no doubt have reviewed all of this publicly available
information before deciding how to respond to his offer.
I'm sure it'll all be fine. Undeterred by the fact that his
company's worth a fraction of the company he's trying to buy,
Cohen went on CNBC on Monday morning to explain the deal to
Andrew Ross Sorkin. He appeared via webcam wearing a
black leather jacket in the style of NVIDIA CEO Jensen Huang
or even Elon Musk against a blurred background.
I think the idea was to channel the energy of a visionary tech
CEO, but the overall effect was less.
I'm reshaping the future of computing and more.
I'm about to ask you to invest in an unregistered crypto token.
It was giving Timu Elon Musk, which to be fair is probably the
most on brand aesthetic choice a meme stock CEO has ever made.
GameStop is the future of e-commerce.
The details are on our website. I don't understand what's
confusing about that. So that is essentially how the
interview went. Now, Andrew Ross Sorkin has
essentially become the patron St. of enduring unhinged
billionaire interviews. He's the guy that Elon Musk kept
calling Jonathan at the Deal Book Summit right before telling
advertisers to GFY a few years ago.
It's a hard job, and Jonathan has to do it, but even he seemed
to struggle with this one. The core problem was simple.
Sorkin kept asking Cohen how GameStop plan to pay for a
company that cost $56 billion when GameStop is worth $12
billion. Cohen kept saying it's half
cash, half stock, and the details are on our website.
Sorkin pointed out that the math didn't add up.
Well, I think we can start with the idea that the, the market
cap of, of GameStop is call it $11 billion.
You have $9 billion on your balance sheet.
Arguably, if you're, if you're providing effectively all of
your stock and then, and then the cash that gets you to 20,
you have this letter from TD, that's another 20.
We're now at 40, but we're still off by call it 16.
And and the 20 as far as I understand, while it's
considered a highly confident letter, meaning CD saying
they're highly confident that they would provide the
financing, it's not locked financing.
Yeah, we'll see what happens. I hear you.
Becky Quick tried the same question and Cohen said I don't
understand your question again, Quick said.
But you're on our air, and Cohen said.
So, but I don't understand your question.
It was like watching a man try to exit a conversation by
walking into the same locked door over and over again.
It's worth noting that the interview was not universally
received as a disaster on Reddit.
Super stonk, the spiritual home of GameStop retail shareholders.
The reaction was overwhelmingly positive.
Comments describe Cohen as savage, a bad ass, and more
succinctly as having put Sorkin's anatomy in Sorkin's
mouth. The general theory was that
Cohen was deliberately giving Cnbca bad interview as
punishment for their years of negative coverage of GameStop,
and that the real, genuine interview would be given to
friendlier outlets. Specifically, a later appearance
on Fox Business with Charles Payne, which by all accounts was
considerably warmer. Now, this makes a certain kind
of sense if your goal is to manage the mood of a loyal
retail shareholder base who will not sell no matter what.
It makes less sense if your goal is to convince the institutional
investors who own the majority of eBay shares that you're
capable of running a $56 billion leverage buy out. eBay
shareholders are not on Reddit. They're fund managers who'll
need to vote on this deal, and they will want to understand the
financing before they do. Repeating it's on our website to
Betty Quick three times is not the kind of capital allocation
communication that typically moves institutional
shareholders. So let's do what Cohen wouldn't
and look at the math. The crude version is this, $9.4
billion of cash shown and Gamestop's balance sheet, a $20
billion loan which he may or may not be able to get from TD Bank,
and $28 billion in newly issued GameStop stock.
Half cash, half stock. On paper, it adds up.
The reason Cohen didn't want to explain this on television is
that each component is worse than it sounds.
The cash portion. GameStop says it has 9.4 billion
in cash and liquid assets, according to Robin Wigglesworth
at the FT. That breaks down into 6.3
billion in actual cash, 2.7 billion in unexplained liquid
investments, whatever that means at a company like GameStop, and
roughly $368,000,000 in Bitcoin. So the cash is mostly cash.
Fine, the debt portion. TD Bank has provided what is
called a highly confident letter saying that they're highly
confident that they could arrange $20 billion of
financing. Now, as FT Alpha Bill pointed
out, a highly confident letter is not a binding commitment.
It is essentially a bank saying we think we could probably do
this if we tried, which is the kind of assurance that has
historically done a lot of heavy lifting in transactions of this
nature. The only reason these letters
ever meant anything was because in the 1980s Drexel Burnham
Lamberts letters were backed by the credibility of Mike Milken
and the entire junk bond market he had created.
TD Securities is a fine Canadian investment bank, but it's not
Drexel Burnham Lambert in 1986. Also, and this is important,
GameStop itself cannot support $20 billion of debt.
It's estimated EBITDA is around $469,000,000 and it already has
four billion of existing debt. This is not GameStop borrowing
money, this is a leveraged buyout for the debt would be
secured against ebay's cash flows.
GameStop is essentially proposing to use ebay's own
balance sheet to finance its acquisition.
And then there's the stock portion.
This is the part that Cohen really didn't want to discuss,
and it's easy to see why. GameStop stock is trading at
around $24.00 a share. To deliver $28 billion of stock,
they would need to issue more than a billion new shares, and
there's a small problem with that.
Gamestop's corporate charter only authorizes 1 billion shares
in total, and 448 million shares are already outstanding.
So they're proposing to pay for half of this acquisition, which
shares that do not currently exist and they're not currently
authorized to create. This is a fixable problem.
Shareholders could vote to authorize more shares, but this
is the kind of thing that you might want to have looked into
before announcing a $56 billion takeover on a Monday morning.
But perhaps that level of detail was on the website.
Now, that authorization issue aside, here's where it gets
interesting. As Matt Levine pointed out in
his Money Stuff column, if you issue a billion new shares to
buy eBay, legacy eBay shareholders would end up owning
roughly twice as much of the combined company as legacy
GameStop shareholders would. GameStop has 448 million shares
outstanding. After issuing another billion or
so, the former eBay holders would own the majority already
of the combined entity. So this is not really GameStop
buying eBay. It's closer to eBay accidentally
acquiring GameStop, with Ryan Cohen volunteering to be the CEO
of the new company, which is possibly why he preferred to say
it's on our website rather than explain this on live television.
Now, it's worth being clear about who benefits from this
structure. Cohen recently struck a new pay
deal and his options payout if Gamestop's market capitalization
hits $100 billion. To get from 12 billion to 100
billion, he needs the number to go up.
He does not necessarily need the value per share to go up.
If you issue a billion new shares and the market cap grows
accordingly, Cohen hits his target.
The shareholders who own GameStop today end up with a
much smaller slice of a larger pie.
Whether that slice is worth more or less than what they started
with depends entirely on whether Ryan Cohen is a better manager
of eBay than ebay's current management, which is, at this
point, an untested hypothesis. This also, incidentally,
explains why the interview kept circling back to Cohen's
compensation package. In January, Gamestop's board
granted Cohen a Performance Based Stock option award that
would pay out up to $35 billion if GameStop hits a market
capitalization of $100 billion and $10 billion in cumulative
EBITDA within 10 years. GameStop is currently worth
around 12 billion. Getting from 12 to 100 billion
organically is difficult. Getting from 12 to 60 billion by
bolting on a $46 billion company and then growing 10% a year for
a decade is considerably less difficult.
As Matt Levine notes, in the corporate governance literature,
this sort of thing CE OS pursuing size rather than return
on investment is called empire building, and it's generally
considered a bad thing. On CNBC, Cohen said his
compensation package was designed to align his interest
with shareholders. Becky Quick noted that it might
instead be designed to align his interests with a very large
number. Cohen said that he didn't
understand the question, but anyhow, So what is the actual
strategy to force this deal through?
Well, in his letter, Cohen pointed out that GameStop had
built a 5% stake in eBay, making them one of ebay's largest
shareholders, which he says forces the board to take his
proposal seriously. But when the FT looked at
Gamestop's 13D regulatory filing, they found a slight
discrepancy. GameStop had only purchased
25,000 actual shares of eBay. The rest of their 5% economic
exposure was a series of American style put and call
options. Now a corporate board has a
fiduciary duty to it's actual shareholders.
They do not have a fiduciary duty to people who bought
derivatives betting on the direction of the stock price.
Those are not the same thing. Cohen also told the Wall Street
Journal that if the eBay board isn't receptive to his
unsolicited offer, he's prepared to run a proxy fight and take
the offer directly to shareholders.
Which sounds very aggressive and hostile until you read ebay's
proxy materials and realize that the deadline for shareholders to
nominate director candidates for the upcoming annual meeting has
already closed. It's generally considered poor
corporate strategy to threaten a hostile board takeover a few
weeks after the deadline has passed, but maybe the workaround
is on their website. So let's set all of that aside
for a moment and ask the more basic question.
What's the actual business logic of combining A shrinking video
game retailer with an online auction house?
Well, Cohen says that Gamestop's 1600 physical US locations will
give eBay a national network for authentication, intake,
fulfilment, and live commerce. The idea is that instead of
mailing a vintage Rolex or a rare Pokémon card to a
centralized eBay authentication hub, you could just walk it into
your local GameStop. This is actually not a terrible
idea. The only slight issue is that
GameStop is currently in the process of closing nearly 500 of
those exact locations. It's a bit difficult to serve as
a national logistics and authentication network for a $50
billion tech company when your windows are boarded up and your
lease has been terminated. I'm also not entirely convinced
that the teenagers working at GameStop are qualified to
authenticate luxury goods, though to be fair, they probably
know their way around a Pokémon card, and a vintage Rolex is
really just a Pokémon card for people who wear suits, so
perhaps there's something there. The other part of the strategy,
the cost cutting, is just killing ebay's marketing budget.
Cohen proposes $2 billion in annual savings, most of which
comes from slashing 1.2 billion from sales and marketing and 500
million from general and administrative costs.
As FT Alphaville noted, this is the kind of thing a first year
private equity associate would propose.
Cut the marketing budget, fire the admin staff, make the
numbers look better. It might even work for 1/4 or
two. The first year associates would
then leave for a better job and someone else would deal with the
consequences. Cohen, to his credit, has not
indicated any plans to leave. When you put it all together, a
$56 billion bid funded with shares that don't exist, a proxy
fight that missed the deadline, and a retail strategy reliant on
stores that are closing and a cost cutting plan that amounts
to slashing the marketing budget of a company that you're trying
to grow, you start to understand why Michael Bury sold his entire
GameStop stake this week. Sometimes the smartest trade is
just leaving. Now, it's worth looking a bit
closer at Michael Berry's decision to sell his stake,
because his relationship with GameStop goes back quite a long
way. For those who aren't familiar
with him, Michael Bury is a hedge fund manager who's
probably best known for successfully betting against the
US housing market before the 2008 financial crisis and for
being played by Christian Bale in the film The Big Short.
But he's also one of the people who inadvertently helped start
the GameStop frenzy. Back in 2019, long before Ryan
Cohen arrived, Burry took a large stake in GameStop and
began writing letters to the board urging them to buy back
stock. Those filings drew attention
from retail investors on Reddit. And while it was Keith Gill,
known as Roar and Kitty, who actually lit the fuse on the
2021 short Squeeze, Burry was the one who left the matches
lying around. He then came back a few years
later, saw the fire, and decided to warm his hands on it for a
while. He's now left the building
entirely, which is probably the right call when I say he came
back to warm his hands. More recently, Bury had bought
back into GameStop. His thesis was what he called
Instant Berkshire, the idea that GameStop, sitting on a massive
cash pile with a declining retail business, could simply
stop pretending to be a video game store and instead become a
holding company making disciplined acquisitions with
cash, much like Warren Buffett did with a failing textile mill
called Berkshire Hathaway back in the 19 60s.
It's a nice theory, but Cohen is no Warren Buffett.
Half of Gamestop's offers in shares of a volatile meme stock.
Buffett famously and consistently signals that his
shares are strongly undervalued and therefore prefers to make
only cash bids, which are also easier to value.
Buffett doesn't usually wade in telling the world how much
better he would be at running things than the incumbent CEO.
Instead, he aims to select managers he believes in and lets
them get on with running their businesses.
Warren Buffett has also never tried to pump the value of
Berkshire Hathaway by buying Bitcoin.
The GameStop offer is trying to buy a company 8 times it's own
size, $12 billion market cap plus $4 billion in debt -9
billion in cash against a $56 billion offer which works out at
roughly 8 times it's enterprise value.
Now it's not unheard of for a smaller company to acquire a
larger. 1-2 years ago, David Ellison, Skydance Media, a
company a fraction of the size of Paramount, managed to
complete, need exactly that kind of deal.
The key difference is that David Ellison had his father, Larry
Ellison, one of the world's wealthiest people, putting $6
billion of real money into the transaction.
David Ellison also spent the better part of a year finding
additional Middle Eastern investors to close the financing
gap. The deal was binding, the money
existed, and it closed. Cohen's offer is non binding.
The financing is described as highly confident and the shares
required to complete it have not yet been authorized by
shareholders. These are slightly different
situations. On Monday, Bury announced on his
sub stack that he had sold his entire GameStop position.
He wrote that the instant Berkshire thesis was never
compatible with greater than five times debt to EBITDA, and
that he was never OK with interest coverage under 4 times.
He calculated that the eBay deal would push leverage to roughly
7.7 times earnings, a level he described as bordering on
distressed. He pointed to Wayfair and
Carvana as companies that struggled under similar debt
burdens, noting those are the survivors, they are few.
His closing line was never confused.
Dead for creativity. That is genuinely a very good
line. It's the kind of line you arrive
at after spending years watching people do exactly that.
It's also a fairly concise summary of the entire GameStop
eBay proposal, which is impressive efficiency for five
words. So the man who predicted the
2008 financial crisis and who helped spark the original
GameStop mania looked at a $56 billion takeover, funded with a
highly confident letter from a Canadian bank and a billion
shares that don't exist, and decided that the road to
becoming Berkshire Hathaway probably shouldn't pass through
capitalist hell. So with the smart money quietly
heading for the exit, no authorized chairs to issue, and
a non binding letter from a Canadian bank, where exactly is
the missing money going to come from?
The Wall Street Journal floated the idea that Cohen might tap
outside investors, specifically Middle Eastern sovereign wealth
funds. Now this actually makes perfect
sense if you're looking for an investor to throw 10s of
billions of dollars at a structurally unsound business
plan proposed by a charismatic founder.
You call the people who funded We work?
The people who gave SoftBank $45 billion for a vision fund that
managed to lose money on technology investments during
the greatest tech bull market in history?
The people who have poured over $6 billion into Lucid Motors, an
electric car company that lose is roughly $800 million a
quarter and is yet to turn a profit.
The people who put a billion dollars into magically AVR
headset company whose product was so underwhelming that their
own demo videos had to be faked. And of course the people whose
own 170 kilometer long Mirror City in the desert has been
scaled back by 98.6% because they ran a bit low on cash.
I believe the latest plan is to just use the neon port to export
oil by passing the Strait of Hormuz, which is a slight pivot
from the holographic teachers and the robot dinosaur cage
fighting that was pitched a few years ago.
So asking these funds to back a used video game retailers
hostile takeover of a $50 billion auction site, it fits
right into the portfolio. Now to be fair to Cohen, we do
live in an era where making enormous M&A announcements with
questionable follow through has become fairly normal.
Just two weeks ago, SpaceX announced that it had secured an
option to acquire an AI coding startup called Cursor for $60
billion. Or alternatively, to just pay
Cursor $10 billion for collaboration and not buy them
at all. So it's a $60 billion deal for
the buyers explicitly built in the right to not do the deal for
a $10 billion break fee. That's just how things work now.
Acquisitions are optional and the $10 billion is just a
conversation starter. Cohen doesn't even have that to
worry about. His offer is non binding.
If this bid falls apart, which it almost certainly will, he can
just walk away. In the meantime, he's generated
a massive news cycle, drawn attention to GameStop stock, and
positioned himself closer to the market capitalization thresholds
in his $35 billion compensation package, all without having to
buy anything. Some skeptics might describe
this as a very innovative approach to corporate strategy.
They might note that announcing that you're going to buy
something to generate excitement around your stock price with no
real ability to follow through is, well, It's the sort of thing
the SEC used to frown on back when things like that were
frowned upon. But who knows?
Maybe the sovereign wealth funds will come through, TD will find
$20 billion down the back of the sofa, and GameStop will start
authenticating vintage Rolexes next to the used PlayStation
controllers. We'll have to see what happens.
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