Key Points
GameStop buying eBay makes some strategic sense, given its ties to the collectibles market.
However, the deal would essentially just create a highly leveraged eBay with some physical stores.
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GameStop (NYSE: GME) surprised investors when it made a $56 billion, or $125 per share, offer to acquire eBay (NASDAQ: EBAY). The shocking part of the proposal is that GameStop has a fraction of the market cap of the online auction site.
The question is, does the deal make sense for GameStop?
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Making a large acquisition would be very beneficial to GameStop CEO Ryan Cohen, who, in January, received a $35 billion pay package tied to GameStop hitting a $100 billion market cap and achieving $10 billion in cumulative earnings before interest, taxes, depreciation, and amortization (EBITDA). If these goals were attained, he would receive options for 171.5 million shares at an exercise price of $20.66 per share. However, the awards have nine tranches, so he can get a portion of the award starting at a lower market cap hurdle of $20 billion and $2 billion in cumulative EBITDA.
An acquisition of eBay would put GameStop well on its way to a much larger market cap and EBITDA and give Cohen a big payday in the process. However, is such a deal good for other GameStop shareholders?
Does an eBay acquisition make sense for investors outside of its CEO?
From a purely operational perspective, the deal does make sense. Cohen helped turn the GameStop business around by pivoting to the collectible card industry. eBay, meanwhile, is a huge collectible marketplace, not just through its namesake website, but it also owns high-end auction house Goldin, which it acquired in 2024.
With eBay under its umbrella, GameStop could use its store base as a drop-off point for sellers and buyers. The company's stores are already a drop-off point for collectors to get cards graded by PSA, so the model is already in place. It could send out cards to get them graded and have them then directly sold through eBay. Having a neutral place to send items could help eliminate fraud when dealing with collectibles.
However, GameStop buying eBay is like a guppy trying to swallow a whale. Cohen has said the deal will be half in stock and half in cash. GameStop has $9 billion in cash on its balance sheet and $20 billion in debt financing lined up. It would then issue a whole lot of stock to the rest.
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If GameStop has more than half the deal lined up in cash, in a 50/50 cash-stock deal, it would pay the remaining portion by giving eBay shareholders the rest of the payment in newly issued stock. This is common practice and how deals work. The fact that GameStop is the smaller company doesn't change the dynamics.
The issue, though, is that the new entity would basically be a highly leveraged eBay with some physical stores. Putting $25 billion in debt on a company that might be able to generate $2.5 billion a year in operating cash flow, and which will give a massive payday to its CEO, doesn't exactly excite me.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends eBay. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
