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¶ GameStop's Bold eBay Bid
GameStop, the meme stock that listeners will remember was destined to go to the moon, has decided to stay on Earth instead, where it will attempt to buy a much larger company, eBay. Today on the show, Can the Mouse Eat the Lion? This is Unhedged, the Markets and Finance Podcast. From the Financial Times and Pushkin, I am Rob Armstrong, coming to you from an unseasonably chilly New York City. And joining me in the studio is the head of the FT's Lex Column, John Foley. Hi, John.
I'm here to announce that Lex is performing a hostile takeover of Unhedged.
I'm calling my own.
I want that.
My initial temptation on hearing that GameStop Which w we last heard of when it was chased to unrealistic highs. by adrenaline addled retail investors is trying to buy mighty eBay was to dismiss it as a gag that would soon go away. But you've written that maybe it this is something that deserves to be taken seriously. Can can you walk us through that?
Well, for full disclosure, I always like it when people in finance try and do silly things.
Yes.
'Cause it's interesting and I think creativity should be praised. So I was thinking about not d not dismissing this out of hand when it happened, but it is, on the face of it, completely wild the idea that GameStop, which is about an eleven billion dollar company could buy eBay, which is like a forty six billion dollar company. Yes. And eBay a company that's doing really well. I mean I haven't
eBay's doing well.
Yeah, I haven't I I will admit also second piece of full disclosure is that I haven't actually used ebay in about fifteen years, but the share price has been rocketing. It's up about fifty percent in a year.
I have a disclosure to make too, which is that this pair of shoes, which I am showing to John right now. That are from back when Alden and Brooks Brothers made shoes together. This is a prized item. They're a kind of burgundy color. I got a great price.
I wonder who owned them before though. Do you not find yourself every day wondering who walked in those?
Like a dead guy's shoes and his ghost
Oh, I am the
I don't know They were stolen off their off a corpse after a shootout.
So so right, GameStop uh wants to buy eBay. It's an unsolicited offer. It's uh the CEO of GameStop is this guy called Ryan Cohen, who is a sort of um like an icon in the meme stock world. But he's very, very hostile towards traditional corporate governance and big, you know, America Inc. So he's launched this hi there's something very um he's kind of trolling eBay at the same time as trying to buy it. He's just gone gone out with it in public, said here's what I want
If you don't if you're not interested eBay board, I'm gonna try and do it anyway by going hostile. Um it's fascinating.
Is it a massive PR stunt? Or do you think he means...
¶ GameStop's Financial Leverage Strategy
Well GameStop is so GameStop was once a chain of video game stores. And it still is kind of, but it's a much shrunken version of of that. What it really is now is a pile of cash. So Cohen has been using the meme stockiness of it to issue convertible bonds and raise cash. So he now has about nine and a half billion dollars of cash and the idea is that at some point he would invest it in something that would make lots of money.
By the way, I've often said this about the meme stock.
Like
the market for reasons unknown decides to massively overvalue your shares. For goodness sake, sell the market more of the shares. Which That is the rational thing to do. That is the best thing you can do for shareholders.
So he has this cash, right? And he and and the idea is he'll spend it on something and he's decided that eBay is the thing and there is a there is a fig leaf of industrial logic to this because eBay So GameStop as well as selling video games and secondhand video games is also doing a lot of collectibles like trading cards and things like that. eBay is also doing a lot more of that. One of the fastest growing parts of eBay is now collectibles and also trading cards.
So his theory is that if you put them together, you turn his stores into kind of eBay real world outlets and you you focus on more like live streaming sales and you also sell more kind of expensive trinkets. So think like e really expensive luxury fountain pre owned fountain pens. He thinks this is gonna make eBay grow even faster. And he also thinks that he's really good at retail, cutting costs, so he's gonna cut eBay's costs.
Before we get to management competence, let's just talk about the hard finances. What do eBay shareholders own now, and if they accept this deal, what will they own after the deal is done?
That's and that's the way that we're trying to encourage people to think about this, because there's a lot of it's very confusing often when a a small company buys a big company and
And people start saying, well, how can it afford this? Where will it get the money from? So what actually is happening here is that GameStop is it has some cash and it's borrowing some cash from a Canadian bank called T D. This is very like Canada Canada first angle to this because Cohen is Canadian, T D Bank is Canadian.
Um goes terribly wrong.
So they're raising mots and cash that way, tw twenty eight billion dollars. The cash isn't like in the bag, but T D th reckons that it would it it could it could pull that together.
And then the rest of it is going to be funded by just printing new GameStop shares, like a billion new GameStop shares. So what you're doing is you're giving eBay and and you can you can do this ad infinitum, right? GameStop can just print shares, print shares, print shares. The risk that it has when it does this that it is that it's like The Bank of Zimbabwe printing currency, right?
And if you're an ebay shareholder, the risk is that you Print shares, print shares, print shares and this leads to an unsustainable financial structure for the
Yeah, and one with lots of debt.
Yes.
As well. So he so what they're the what what he's really doing and what's kind of interesting about this is what he's saying to eBay is We will take your company and put it in my wrapping paper. So this will be GameStop, but you eBay, you shareholders will still own, by my num by my reckoning, about seventy percent of the new company.
But I, Ryan Cohen, will be in charge. I'll be running it. It'll be my board. Um it'll be called GameStop, presumably, it'll have a different stock ticker. But eBay shareholders will still have will they'll have a bunch of cash they'll take away and they'll also have But a major collectively probably a majority of the new enlarged company.
How much cash do they each take away?
It's twenty eight billion dollars in total and so the the offer the headline offer is half cash, half shares. It's one hundred and twenty five dollars per share, which is half cash, half shares. That is actually not quite Right, because the shares go up and down in value, obviously.
So I take fifty six dollars or something in cash or w
Yeah, you get like $62.50 in cash.
Sixty two and a half that was terrible math by the way. Awful. Uh sixty two and a half dollars in cash. I still own eBay. Yep. Plus I own GameStop now. Yeah. And I have how much more debt on that company. How much more
¶ Corporate Governance and Debt Concerns
So this is why this is why an eBay shareholder would want to think very carefully about this and may not like what they see. Because this company would have a lot of debt. The debt would be about f net debt would be about five times EBITDA, which in real speak means a lot of debt. Um and it would have Ryan Cohen in charge of it and you either like him or you don't.
Right. It would have g uh he they'd probably have to do something like GameStop's board, which is like super flimsy in my opinion. It's not a strong board, it's not an independent board very much.
And is Cohen's aspiration to have an equally flimsy board at the combined company?
Can he well he has absolute contempt for the concept of corporate boards, so he may need some persuading to do that, but I think If I if I were eBay and eBay by the way has rejected this offer this morning as I think everyone thought it would. Yes. But if you tick through the things that they will want to object over, one of them will be the the board.
So, you know, they all it it's easy for eBay to say why would we subject shareholders to this very imperfect is a bit of an understatement, but like a a a weak board structure.
Yeah. I like strong board structures because Investors directly exert so little control and influence of companies at this point of history, we're kind of left with boards to be muscular and often they stink too. Yeah. But just giving up on having a strong board in a modern Publicly traded company just seems bonkers to me.
I I th I agree with you. I think we are I do think we're living in a post governance world to some degree where people don't really care about that stuff anymore, but I think the value of a board, a strong board. is that you, the shareholder, don't have to think about it. You don't have to worry about governance. It's just someone is taking care of stuff and you know it's a board like all the other companies' boards. It's kind of standardised, a bit like accounting rules.
So that you can focus on what does the company do and is it doing a good job. Correct. But like GameStop is not that. Like the lead independent director who's I guess the chief what you what British people might think of as either the chairman or the senior independent director, used to work for Ryan Cohen for many years at his previous company, which to I would argue is not the strongest kind of independence.
So I think that's going to be a one of the many problems. I guess what I'm saying is the problem is not that GameStop is small, the problem is all the other stuff.
Yes, uh which is a fair point. And I just want to flag the idea of what is essentially an ownerless company, which is what you have when you don't have an activ you don't have activist investors. You don't have a strong board. It's like nobody owns the company except the people.
Yeah, that's true.
I think this is a bad idea. Um, what do you think about leveraging this these combined businesses up? Are these good businesses for carrying leverage and presumably eventually paying it down?
¶ eBay's Counterattack Options
Well eBay at the moment has almost no debt. It has a little bit. Which is
If they'd been sensible. Yeah.
And I'm sure they will. I'm sure they absolutely will now because p because if I were an eBay shelter like I so I can devil's advocate this, I can see myself on both sides, but if I'm on the ebay side I say, Well, you're gonna pay for this bid by taking out debt which is actually secured against our business. Like you're you're leveraging our balance sheet to pay us a dividend. We can do that ourselves. And they can. So eBay eBay's defence would likely be to take on some debt.
Exactly.
And and maybe not five times net debt to EBITDA, which is a lot of debt. So the so the question for GameStop would be can you bring down that debt very quickly? And of course, because the guy who runs this company has boundless self belief. He thinks that he can cut costs, grow the company, pay down the debt in no time.
You and I have both listen to many promises in our career as financial journalists about cost cutting campaigns. And especially after mergers, they do disappoint probably a bit more than they appear, in my experience.
I can think of examples of companies that have cut costs very effectively and especially in p in industries like consumer goods, it's actually not that hard to cut costs and often you end up with s cutting cutting more costs than you thought you would. Uh banks also are the case that's the case. But
In this situation but obviously like that doesn't always h happen and you can still get a company that ends up being worth less because it's just harder to run. Yes. But I think in this case there isn't obviously much overlap. This is this guy Ryan Cohen saying, I'd be better at running this business than eBay. I will cut costs because they're just not very good at like managing the business eff efficiently, which is why the other way to think about this
Is that this is an attempt by Ryan Cohen to insert himself as the CEO of eBay through a sort of convoluted version of a takeover. So eBay shareholders are basically going to be Asking themselves do we want a different CEO and do we want that CEO to be this guy who runs GameStar?
And what is your answer?
Well he has to pr so right now they've said no and I can see why. If his challenge is now to prove or convince them that he has a plan and would be really good at creating value and cutting costs. And if he is, then actually the maths of the deal that look pretty
could look pretty good for eBay. Like eBay is going to get a premium. Like d e even if he doesn't manage to cut any costs, on paper he would be paying eBay shareholders about three or four billion dollars for the privilege of becoming CEO of the company.
But that all reappears as death. In a more rational world, would it go like this? eBay looks at this offer and says, Hmm, this is a good idea. Here's what we're gonna do. We're gonna buy GameStop. Using our shares as currency and our balance sheet as a a pro a more solid balance sheet on which to to to borrow. And that that might save a lot of trouble.
Totally. I mean you you'd end up with a similar result. The problem there as an eBay shareholder is that you would be paying the premium. You'd have less leverage, but you'd be paying I think that's called a Pacman defence, is it?
Yeah. Let us pause for a moment on this outstanding metaphor, John. So those of us who were playing video games in the early nineteen eighties will remember the crucial moment in the game Pac Man. In w in which you're this creature who goes around a maze trying to eat dots, chased by ghosts.
Tell me when I'm getting this wrong as you remember it, but there are these special big dots you can eat, and when you eat one of those, there is a period in which you can eat the ghosts that are chasing you. Yeah. And that is the the image that we're and it's very appropriate by the way we're using this image for a video game company.
It's so true.
Right. So uh an eBay could eat the big power dot. And turn around and consume the ghost GameStop. Uh has anybody ever done this before?
So so I and by the way as a fun as a journalist who's been covering M and A for like twenty odd years, I've the Pac Man defence comes up frequently as I'm like, Oh, what if they did a Pac Man defense? Yeah. Um
But it rarely happens.
I can't think of it actually happening. Like there was Porsche and V Volkswagen.
Men's Warehouse and Joseph A. Banks. Uh men's warehouse did did a Pac-Man on Joseph A. Banks. These are b both kind of uh affordable menswear.
company. More examples in the US I think. Also m the Rio Tinto and BHP billets in the miners, although they it didn't happen, it was on the table, I think. It was something that Rio Tinto thought about doing to BHP.
So sometimes Pac Man eats the goat.
But it's hard to do and it's stupid. Like let's face it.
That never stops us in American finance. Hard to do and stupid is no obstacle. That is for sure.
¶ Cerebras Challenges NVIDIA in AI
I want to quickly pivot to get your view of another story that came out this week, which is the story of Cerebrus. Did I pronounce that correctly?
John?
I didn't I don't know which syllable to emphasize really, but that's what I'm going with.
Cerebral but with the end.
Um this is a company that makes chips for AI. Are we watching as NVIDIA's Monopoly. on chips for AI is being broken up in real time.
That's a great question. So NVIDIA so this company, Cerebrus, tried to go public a year ago, a year and a half ago, and it didn't really manage it. And it would have had a valuation probably of about maybe ten billion dollars, and now it's got a valuation of nearly fifty billion dollars. And part of that is because NVIDIA is kind of a victim of its own success. Everyone wants NVIDIA's AI chips, but it can't make enough of them. And may maybe it doesn't really want to.
Um because obviously scarcity has value. But um because everyone is desperate to get these chips, they're now starting to consider alternatives. So Google is making its own chips, Amazon is making its own chips, and Cerebrus is is increasingly a serious alternative.
Course there's something else of NVIDIA's that everyone wants, which is not just chips, but its profit. Right. And I've been sitting here in this very booth for some time now saying, Yeah, NVIDIA is amazing and it's the most valuable company in the world and it's so profitable, but capitalism works. Which means somebody is gonna look at those margins and that growth and come in and try to reproduce the product or compete or get get their share. I i th what I'm getting at is If cerebrus works.
Should we be worried about the valuation of NVIDIA, which is the largest company in the world and the cornerstone of the S P five hundred or or do these things take a long time, I guess would be the answer to
I think we should be alert to the idea that NVIDIA has competition that didn't seem to be there before. And it we should not be surprised by that because as you say, NVIDIA has what, seventy five percent ish gross margin. So for every dollar of chips it sells it keeps seventy five cents after paying for like the ingredients as it were. That's really high. That's like s luxury goods on steroids.
So it makes sense that other people try and come in and take some of that. And that's exactly what Google is doing, right? Google and Google and Amazon that they want to make money while they're investing in all this AI and selling chips is quite a good way of doing it. So it like the thing is though NVIDIA is still the go to. Everyone understands that it works. It has its own kind of software platform that makes it easy to use. It's just that
I think people are are trying to get capacity where they can. And also I would imagine if your open AI You don't want to be totally dependent on NVIDIA because you're thinking about your own bargaining power. And if you have alternatives, you can then go back to NVIDIA and say, Oh, we might use these cerebrus chips in our next model.
What this brings to mind for me a little bit is is ARM, which is the the UK chip designer that m basically designed the low power chips that people use in smartphones. And for years everybody looked at their profits and said, you know, Intel's gonna make a mobile chip or whoever is gonna come in and get a chunk of this market but
Arms incumbency turned out to be incredibly hard to break for the reasons you just described. Once the industry is kind of running on your rails and your software, it's uh uh it's an enormous pain to switch over.
Игорь Негода.
If you're paying through the nose for the product.
Totally. ASML is the other example of that in chips. It's that Dutch company that makes the machines that make the chips and it's the only one that does. So so it's kind of a monopoly and no one's coming close to to getting rid of it. Nvidia doesn't have quite that kind of moat.
Unfortunately. We do not have a monopoly on listeners time, so we will be back. In just a moment, with
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¶ Long and Short Market Views
Listeners, welcome back. This is Long and Short, that portion of the show where we go long things we like and short things we don't like. John, what do you have for me?
I'm gonna go short high rocks. So Hyrocks is like a sort of sport race thing that kind of look is a bit like CrossFit where you have to like run around and throw things and push things and it's become incredibly popular among type A personalities and is now trying to get into the Olympics. Oh yeah.
Olympic.
race coming up in New York at the end of this month. Well, so I'm shorting it because I've been trying to do it and it's horrible. It's so hard.
Yeah, stop doing it.
No, of course not. I'm going to keep doing it. You are silence the voices.
You're having a moment of conflict.
I'm also shorting'cause I think that all exercise things like that turn out to be fair.
It's true. Tough mudder. All of that stuff. Yes. Uh I'm gonna go long inflation, by which I mean I think it continues to be a problem we have to reckon with. And not just because of the war in Iran, and not just because of tariffs. The inflation report was out this morning, and I think underlying inflation is creeping up, and we have not killed that dragon yet, and it's gonna be a story that we're following for the next twelve months. Listeners, we will be back in your feed. On Thursday.
tune in then
Unhedged is produced by Jake Harper and edited by Brian. Our executive producer is Jacob. help from TOFR 4 has Cheryl Brumley.
Laura Clark.
And Natalie Sadler. FT Premium subscribers can get the Unhedged Newsletter for free, a 30-day free trial. is available to everyone else. Just go to Ft.com slash unhead.
Offer.
I'm Rob Armstrong.
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