EBay Won’t Play With GameStop

The problem with GameStop’s bid to buy eBay is that it’s half cash, half stock. GameStop, a company with $9 billion of cash and a stock market capitalization of about $10 billion, wants to pay $28 billion of cash and $28 billion of stock for eBay, a company with a stock market capitalization of about $48 billion.1 The cash is more or less fine; GameStop’s Canadian bank is “highly confident” that it could raise the money. And the problem with the stock is not that a $10 billion company can’t issue $28 billion of stock: Technically GameStop can’t (it doesn’t have enough authorized shares), but that is a solvable problem, and there is no general rule that a company can’t issue more shares than its current market value. If the stock market says you are worth $10 billion, but you want to issue stock to acquire a $28 billion asset, then your stock market value after the acquisition should be $38 billion, fine.

The problem is that, in issuing $28 billion of stock to buy eBay, GameStop would essentially be issuing $28 billion of eBay stock. Current eBay shareholders would get shares of a combined GameStop/eBay that is almost all eBay. The enterprise value of eBay is something like $51 billion, including debt. The enterprise value of GameStop, meanwhile, is less than $10 billion, because it has $9 billion of cash. (It has about $4.4 billion of debt, for an enterprise value of about $5.7 billion.) You can think of GameStop’s $10 billion market capitalization as being made up of (1) $5 billion of net cash plus (2) $5 billion of GameStop. GameStop successfully converted its meme-stock status, over time, into actual cash, which is good. But if it gives eBay that cash in the acquisition, then you are combining a $5 billion video game retailer with a $51 billion internet company. Virtually all of the value in that company is eBay’s business, not GameStop’s.2