Online marketplace eBay on Tuesday rejected a $56-billion takeover bid from GameStop.Steve Marcus/Reuters
Gus Carlson is a U.S.-based columnist for The Globe and Mail.
Some people are calling GameStop chief executive officer Ryan Cohen’s US$56-billion takeover bid for eBay audacious. Others are calling it delusional.
On close examination, it seems to be a bit of both.
Mr. Cohen, the billionaire Montreal activist investor best known as the founder of pet food supplier Chewy, launched the bid for eBay last week, offering US$125 a share in cash and stock for the giant online marketplace.
Market analysts and observers were mystified. Questions swirled about how the much-smaller video game retailer would finance the deal and, as important, the strategic logic of the combination.
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The David-versus-Goliath unsolicited offer was audacious. GameStop’s market cap is about US$10-billion, compared with eBay’s valuation of more than US$48-billion.
Earlier this week, eBay’s board rejected the bid. In a statement, the board echoed analysts’ concerns, saying the unsolicited offer was “neither credible nor attractive.”
In its decision, eBay called out several concerns with the offer, including “the uncertainty regarding your financing proposal,” as well as operational risk and a back-breaking debt load that would be a by-product of the combination.
And this is where the delusional part kicks in. Mr. Cohen said GameStop had lined up a US$20-billion financing commitment from TD Securities and had about US$9-billion in cash on hand.
Here, the math gets fuzzy. He said the deal would be half cash, half stock – neither of which adds up – and GameStop could issue more stock to get the deal done.
But the delusion doesn’t stop with the numbers. The TD Securities commitment letter, made public by eBay earlier this week, said the bank’s confidence in the deal hinged on the assumption that the combined company could maintain an investment-grade credit profile from at least two of the top three ratings agencies.
That is a significant condition to the financing deal and, like Mr. Cohen’s math, is questionable.
In examining the GameStop bid, Moody’s Ratings said last week that the proposed acquisition would be “credit negative” for eBay because of the significant increase in leverage generated by the deal structure.
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Mr. Cohen’s behaviour in defending GameStop’s ability to do the deal didn’t help his cause. In a cringe-worthy appearance on CNBC’s Squawk Box, he became agitated and combative when pressed to provide details about how the deal would be financed.
“Where’s the rest of the money coming from?” anchor Becky Quick asked twice, with a chuckle at his evasiveness, suggesting it was a straightforward question.
“I don’t understand your question,” Mr. Cohen replied, followed by awkward silences.
“We are offering half cash, half stock, and we have the ability to issue stock in order to get the deal done,” Mr. Cohen said. “But the full details of the offer are on our website. We’ll see what happens.”
Note to Mr. Cohen’s and his handlers: Don’t propose a US$56-billion hostile takeover, agree to an on-air television interview to promote the deal, and then play dumb when asked how you’re going to pay for it.
And then there’s the industrial logic thing. In his proposal, Mr. Cohen pledged to operate eBay “a lot more efficiently” through layoffs and marketing cuts. He criticized eBay CEO Jamie Iannone for overspending without showing meaningful growth.
To be sure, eBay has been in the throes of a turnaround, focusing on specialty areas such as collectibles and used luxury goods as competitive differentiators to larger rivals such as Amazon. But it is seeing positive results. Its shares are up 24 per cent year-to-date.
Mr. Cohen also said GameStop’s 1,600 U.S. retail stores could be used to fulfill eBay orders. Again, Wall Street showed a remarkable lack of excitement about the potential strategic and operational synergies of the combined company.
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After all, eBay revolutionized online retailing. A step back to bricks and mortar would seem a peculiar strategic move.
Mr. Cohen is nothing if not persistent. As if he anticipated rejection, he pledged to take his offer directly to eBay shareholders if the board said no to his offer.
Audacious? Yes. But also a bit delusional.
Unless he can answer the most basic question and provide more solid financial footing for his proposal – as in math that actually adds up – it seems unlikely that eBay shareholders will bite.
And he had better hope they don’t watch his CNBC television interview. No amount of money could make them unsee what leadership of the combined company might look like.