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Comment by orlp | Hacker News Reader

GameStop doesn't have (even close to) $55.5B. Their offer from the letter is literally impossible:

> Our offer is $125.00 per share, comprising 50% cash and 50% GameStop common stock

Even if you magically included all existing GameStop stock in the offer, it still would not comprise 50% of $55.5B.

EDIT: looks like it's not impossible and I misunderstood. It's a proposed change of leadership with a $25B injection of cash to sweeten the deal. GameStop would issue shares which would capture the original eBay value (since GameStop would own eBay after the trade), making that part a wash. At least assuming people owning eBay stock currently would value the combined company at at least the sum of their parts, which is a big if.

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> GameStop doesn't have (even close to) $55.5B

When the merger concludes, the former shareholders of eBay will have $27.5bn of GameStop-eBay stock and $27.5bn of cash. (“Cohen said GameStop has a commitment letter from TD Bank to provide up to $20 billion in debt financing” and “GameStop has around $9 billion in cash on its balance sheet to put toward a deal” [1].)

[1] https://www.wsj.com/business/deals/gamestop-is-offering-to-b...

I don’t understand why eBay shareholders will suddenly want GME memestock and find any interest in voting for this.

I don’t understand either but wouldn’t they still be owning eBay? Just with GME?

I’m not totally sure how it would be structured but if GME is the purchaser then the merged company would be listed under GME and eBay would become a brand in the GME group and no longer a stock listed under the eBay ticker.

The whole thing seems incredibly dubious and fishy. The eBay board should vote this down which is why the CEO of GME has already realised that and said he’ll appeal to the shareholders directly. If eBay wanted to load themselves with twenty billion dollars of unnecessary debt and extra complications which would kill the company then they could do it themselves. They’re not in that kind of business.

There is, literally, nothing fishy about this offer. It’s a cash and stock offer from a public company to public company shareholders. We could call the financial or shareholder benefits to ebay dubious (I don’t hold any opinion about this) but this is a very aggressive offer, and allows the chance for GME to keep some cash - if enough shareholders of ebay opt for stock, then they’ll have cash available after. Plus they’d keep whatever current net assets ebay has.

ebay was at like 100 before the offer went out, it’s trading up to 120 or so in early hours this morning, so speculators and institutional desks do not find this offer fishy or dubious - they are pricing it as likely to be pretty well received.

As a side note, one of many plays you might make in this situation is what Cohen has done here; they bought a bunch of options. Those options are now worth a lot; before the letter if it was all options, they controlled $2b of EBAY shares, today that’s $2.6b. We might imagine the options at least doubled the underlying return. The market had not priced in a rapid jump to $120 when he bought them. If the deal closes, then this will put at least another billion or two of liquid capital into GME.

The end of your post negates the first line of it.

Its just financial engineering.

But his mention that it is a form of options is laughable. Thats not what is going on here.

Buying calls before a credible buyout pitch is a pretty standard strategy -- good leverage, what's laughable here?

The credible part.

TD Bank also believes it will work, i.e. return them a profit.

They've seen the detailed plans and I haven't. But they're the ones with real skin in the game. It seems like an opportunity for them to lose their shirts.

So yeah, eBay shareholders should take TD Bank's free money and run.

Or ignore the free money/destroy company offer and hold.

TD Bank believes it will make them a profit. Their interests are not those of eBay’s shareholders: if they can juice the financials long enough to sell their loan, they don’t care if the company goes bankrupt the minute after that sale closes.

TD Bank is the perfect lender for this.

https://www.fincen.gov/news/news-releases/fincen-assesses-re...

They own eBay + GME + some financial alchemy. If you aren't a financial wizard you should assume that the value of the financial alchemy is negative. (Because 99% of the time it is.) Now, what are the synergies of eBay + GME that outweighs the chaos caused by the merger and the finance stuff?

they will be getting 20% more than what Ebay is worth today

Once. Followed by a tank in price and descent into chaos.

You can sell the stock. This isn't complicated.

Neither is ignoring the offer and continuing to hold, if you’ve already been in for two, five, ten, twenty or more years like some have been.

Selling is a taxable event

Only for individuals, isn't it? Mutual funds etc don't have to pay CGT on everything, do they?

It looks like mutual funds pass the gains, and the tax, onto those holding shared of the mutual fund.

> Because mutual funds are pass-through vehicles, they are required by law to distribute most of these gains to shareholders each year. These are called capital gains distributions.

Other types of funds don't necessarily have this problem, or lessen it.

> Holding mutual funds inside an IRA, 401(k), or Roth IRA shields you from annual tax bills.

> Index funds: Passive funds trade less frequently, leading to fewer gains.

> Tax-managed funds: Specifically structured to reduce taxable events.

> Exchange-Traded Funds (ETFs): Use an “in-kind” redemption mechanism that avoids triggering taxable sales.

https://mutualfundnation.com/mutual-fund-capital-gains/

Won’t eBay shareholders own most of the combined company though? They won’t all be able to exit at the sale price.

True, it isn't complicated. With everyone rushing for the doors the price will rapidly tank.

Isn’t that just a https://en.wikipedia.org/wiki/Leveraged_buyout ?

Yup.

The stock part is more like a merger than a buyout.

That's just for the cash part. The stock part makes no sense. For this 50/50 deal to work in principle, they'd need to issue around a billion new shares, which would massively dilute the existing ~450M shares. So Ebay shareholders would suddenly own 70% of Gamestop after the deal. It's also highly questionable if investors actually believe the combined stock is worth that much, so the stock price would probably fall and turn those 70% into >90%. At this point it basically becomes a reverse acquisition plus a large loan for the final company from the cash part of the deal.

This is not atypical; smaller company “buys” the larger company with debt on the larger company’s books. The blended shareholder mix is mostly the larger company; management comes from the smaller company.

The one I was most familiar with was the Discovery “acquisition” of Warner Brothers. Though apparently that’s a little complicated because AT&T was divesting itself of Warner.

Yes. See [1] for an overview of how this works.

When the SEC filing is made, we'll get to see how the deal is structured. The $20 billion from TD Securities becomes a debt obligation of the combined company. There's a tax break in equity to debt conversion, and a second tax break for carried interest. [2] There may be a preferred stock deal or debt refinancing so that TD gets their $20 billion back. Usually, the private equity firm exits within a few years.

[1] https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.1.121

[2] https://www.pgpf.org/article/what-is-the-carried-interest-lo...

No, it's not a leveraged buyout

Sure it is. The acquirer is borrowing money for the buyout, and the debt will become a debt of the acquired/merged company. That, by definition, is a leveraged buyout.

That is not the definition of a leveraged buyout.

This is a public-to-public merger. Some mergers and acquisitions are financed with debt. That does not make them leveraged buyouts.

LBOs are private equity deals in which there's no issuance of public stock. The equity portion is, well, private equity.

Source: I've advised over 100+ clients on billions worth of M&A and LBO deals in my time as an investment banker in New York.

No, unless any control transaction using any leverage counts.

A third of the deal is financed with debt. A fifth is financed with cash. The bulk—fifty percent—is being financed with equity. An LBO would see debt and a thin tranche of cash finance the bulk of the acquisition.

It's newly issued stock, a common form of making acquisitions cheaper

How is a 20bn company going to issue 27bn worth of stock? Or are they just going to pretend the newly issued shares are valued the same per share as existing stock is right now?

via a cunning pump on Wall Street Bets

Because it acquires an asset worth roughly that much, it’s neutral. GME is (probably!) not doing a huge at-the-market offering, they’re creating the shares and immediately giving them to eBay shareholders.

In practice the price paid for the company being acquired is usually a bit higher than the market value (so the shareholders take the deal), and the market usually punishes the acquirer a bit and the resulting entity’s stock will fall a bit. (This is most definitely not investing advice.)

the stock they'd be issuing would be for (GameSpot + eBay) whereas the current stock is for GameSpot alone

Both stocks went up in value after the announcement, so it's a good sign that if it comes to it, eBay stock holders would vote for a merger, because they value the combined company at at least the sum of their parts.

why do i keep seeing comments of this sentiment? can't they just take loans? I thought there were serious consequences to making an offer, and then backing out , especially if the other party accepts your offer.

It’s wild to me that you believed that they would make an impossible offer.

man, those GME bagholders are gonna love diluted shares.`

They already increased total number of stock by +39% in last 12 months, GME will squeeze the last penny from those people.

… and the stock has not dropped 39%, in fact it’s trading about where it was a year ago. Shareholders have been content to let Cohen add to the balance sheet, adjust operations and make a large move. This is one such move. And GME is up 5+% in pre trading, so shareholders are generally positive about this idea.

the shareholders of GME operate under the delusion that there's gonna be another magic short squeeze.

I operate under the delusion that it was a $400 gamble and there is no point selling stock that I forgot I even owned at all, when it's such a small amount.

Waiting for the MOASS… it’s coming any day now!

If Cohen's "large move" was to buy EBay, investors could have done that themselves. They would have gotten a better deal on shares in the new company. Also, they'd be up 50% over 12 months. Partly because Cohen "adding to the balance sheet" has meant dilutions, and there will be more for this deal.

Yeah this is the funny part to me - if you thought EBay was an amazing business then you could have just bought that stock months or years ago. Maybe the combined company will really be worth more than both companies individually, but for the most part this is just GameStop deciding how you should have invested your money months ago.

Technically, we only know that the marginal non-shareholder is 5% more positive about the idea, since the price represents what the marginal buyer and seller are willing to transact at. The only shareholders involved in the increase are actually selling.

They can sell now and pocket some extra money. What's not to like?

you think all the bagholders are in at the current price?

If they didn't like the current prospects they can bail at a profit.

If they do like them they have no excuse if things go south.

If bagholders were capable of buying low and selling high, they wouldn't be bagholders.

Perhaps that is part of the scam here. Meme stock buyers will think this means something and will spend more on worthless shares so that ebay executives can sell.

Have your ever heard of debt? They have a 20B line secured from TD.

Yes, that goes into the '50% cash' part of the offer. With a 20B credit line and 7.5B cash from their own coffers (which they claim to have, so let's believe them on their word there), you cover the cash portion.

The issue is the non-cash portion of the offer. They claim that the remaining 27.5B is covered by GameStop stock. But that's more than double the market cap of GameStop.

You understand that the gamestop stock would then be owning ebay, thus be worth Ebay + Gamestops Valuation?

Alright, my company MEME offers to buy Apple then for $1 plus 100% of MEME's stock, which is worth more than Apple then since it will own Apple.

If you word it like this it's just a hostile proposed change of leadership. Weird way to apply to become CEO of eBay, but sure.

You can do that.

The shareholders have to vote for it, though.

They would also be owning a company that now would have +20B in debt.

They now own ebay. They would include in that math 20B in debt plus Gamestop.

This sounds like a pretty bad deal for ebay investors.

Are they under any obligation to ground the value of their own stock or can a salesman simply claim that the "true" value of that stock is much much more than it currently seems to be?

Stock is worth exactly what people will pay for it. Ebay share holders get to vote to accept or reject this deal

Presumably stock market valuation is grounding?

Also, eBay shareholders can vote down the acquisition if they don't think the deal is good for them.

With the approval of the board of directors (in most cases), a company can simply create new shares and give them to whomever they like.

I would guess that this information will bother you.

If it helps, because many public company executives are compensated on earnings per share, most C level teams are incentivized to buy back shares, thus decreasing the denominator for the EPS calculation without changing fundamental economics of the company.

If this also bothers you, you should guess what Buffet says and thinks about those two dynamics, and then read up on it, and you will learn something interesting about public markets!

I’m sure if eBay wanted to build 1800 brick and mortar stores they could do so for less than twenty seven billion dollars.

> which they claim to have, so let's believe them on their word there

So you're just outright accusing GameStop of fraud?

https://www.sec.gov/ix?doc=/Archives/edgar/data/1326380/0001... page 36 of their filing with the SEC lists the cash and marketable equities.

The non-cash (stock) portion of the offer needs to be valued against the resulting entity, which will own eBay. This will likely result in current eBay shareholders owning half or more of the resulting entity. (Though we don't know specific numbers yet). That's normal for a M&A where the smaller company is doing the buying.

> So you're just outright accusing GameStop of fraud?

I have no idea why you interpret my words that way. I just meant that I didn't want to analyze the cash portion of their offer any further and just wanted to take it at face value.

They don't claim to have it; they have it.

It's like saying 'tobacco allegedly causes cancer' - the proof is very public and available. The typical reason for saying it like that is to indicate you don't believe it.

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