Can GameStop buy eBay?

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0:11John Foley: and economic issues with the Flipside podcast from Barclays Investment Bank. Hear two research analysts in a lively debate and get insights from every angle to further inform your view. Listen to the Flipside on your favorite platform. 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.

0:57And joining me in the studio is the head of the FT's Lex column, John Foley. Hi, John.

1:04John Foley: I'm here to announce that Lex is performing a hostile takeover of Unhedged. Oh, man. I'm calling my lawyer. I don't think I want that. My initial temptation on hearing that GameStop, which 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 this is something that deserves to be taken seriously. Can you walk us through that? Well, for full disclosure, I always like it when people in finance try and do silly things. Yes. Because it's interesting and I think creativity should be praised.

1:53John Foley: So I was thinking about 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$11 billion company, could buy eBay, which is like a$46 billion company. Yes. And eBay, a company that's doing really well. I mean, I haven't... eBay's doing well. Yeah, I will admit also, second piece of full disclosure is that I haven't actually used eBay in about 15 years. But the share price has been rocketing. It's up like 50 % in a year. I have a disclosure to make too, which is that this pair of shoes, which I'm showing to John right now...

2:25John Foley: From eBay. ...are from eBay. These are a pair of wingtips 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. I don't know. Do you not find yourself every day wondering who walked in those shoes? They're like a dead guy's shoes and his ghost is following me around. Did they die in the shoes? They were stolen off a corpse after a shootout. So, right, GameStop wants to buy eBay. It's an unsolicited offer. it's 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 yeah so he's launched this there's something very um he's kind of trolling eBay at the same time as trying to buy it he's just gone got out with it in public said here's what I want if you don't if you're not interested eBay board I'm going to try and do it anyway by going hostile um it's fascinating so is it a massive pr stunt or do you think he means it 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 in something that would make lots of money.

3:59And by the way, I've often said this about the meme stocks. Like if the market, for reasons unknown, decides to massively overvalue your shares, for goodness sake, sell the market more of the shares. Yeah, which they did. That's exactly what they did. That is the rational thing to do. That is the best thing you can do for shareholders.

4:21John Foley: So he has this cash, right? And the idea is he'll spend it on something and he's decided that eBay is the thing. And 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 focus on more like live streaming sales and you also sell more kind of expensive trinkets, I think like really expensive luxury fountain, pre-owned fountain pens.

5:00John Foley: He thinks this is going to make eBay grow even faster. And he also thinks that he's really good at retail cutting costs. So he's going to cut eBay's costs. Whether any of that is true is the big question that is going to have to be answered later. But before we get to management competence, let's just talk about the hard finances. Yeah. What do eBay shareholders own now? And if they accept this deal, what will they own after the deal is done? And that's the way that we're trying to encourage people to think about this, because there's a lot of it. It's very confusing often when a small company buys a big company and people start saying, well, how can it afford this?

5:34John Foley: Where will it get the money from? So what actually is happening here is that GameStop has some cash and it's borrowing some cash from a Canadian bank called TD. There's a very like Canada, Canada first angle to this, because Cohen is Canadian, TD Bank is Canadian. So we can blame Canada if it all goes terribly wrong. So they're raising some cash that way,$28 billion. The cash isn't like in the bag, but TD reckons that 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.

6:08John Foley: And 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 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 company. Yeah, and one with lots of debt. Yes. As well. So 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.

6:42John Foley: but you eBay, you shareholders will still own, by my reckoning, about 70 % of the new company. But I, Ryan Cohen, will be in charge. I'll be running it. It'll be my board. It'll be called GameStop, presumably. It'll have a different stock ticker. But eBay shareholders will still have, well, they'll have a bunch of cash they'll take away. And they'll also have collectively probably a majority of the new and large company. How much cash do they each take away? So it's$28 billion in total. And so the headline offer is half cash, half shares. It's$125 per share, which is half cash, half shares. That is actually not quite right because the shares go up and down in value, obviously.

7:25So I take$56 or something in cash.

7:29John Foley: Yeah, you get like$62.50 in cash. 62.50. That was terrible math, by the way. That was terrible math. That was awful. Well, $62.50 in cash. I still own eBay. Yeah. Plus I own GameStop now. Yeah. And I have how much more debt on that company? How much more? Yes. Loads for debt. So 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 net debt would be about five times EBITDA, which in real speak means a lot of debt. And it would have Ryan Cohen in charge of it. And you either like him or you don't.

8:10John Foley: They'd probably have to do something about 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? 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 were eBay – and eBay, by the way, has rejected this offer this morning as I think everyone thought it would. But if you tick through the things that they will want to object over, one of them will be the board. So it's easy for eBay to say why would we subject shareholders to this very imperfect – it's a bit of an understatement – but like a weak board structure.

8:51Yeah. I like strong board structures because investors directly exert so little control and influence of companies at this point in 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.

9:16John Foley: I agree with you 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 but GameStop is not that the lead independent director who's I guess 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 I would argue is not the strongest kind of independence.

9:56John Foley: So I think that's going to be 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, 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. You don't have activist investors. you don't have a strong board. It's like nobody owns the company except the people running. Yeah, that's true. I think this is a bad idea. What do you think about leveraging these combined businesses up? Are these good businesses for carrying leverage and presumably eventually paying it down?

10:31John Foley: Well, eBay at the moment has almost no debt. It has a little bit. Which is what got it into this problem in the first place. If they'd been sensible and took on a little debt, someone never would have showed up. I'm sure they absolutely will now because if I were an eBay shareholder, 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 going to pay for this bid by taking out debt, which is actually secured against our business. Like you're leveraging our balance sheet to pay us a dividend. We can do that ourselves. And they can. So eBay's defense would likely be to take on some debt.

11:05Take on some debt and either pay a special dividend or buy back some shares. Exactly.

11:09John Foley: And maybe not five times net debt to EBITDA, which is a lot of debt. So the question for GameStop would be, can you bring down that debt very quickly? And of course, because the guy who runs his 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 listened 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, especially in industries like consumer goods.

11:54John Foley: It's actually not that hard to cut costs and often you end up with cutting more costs than you thought you would. Banks also, that's the case. But in this situation, but obviously like that doesn't always 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 managing the business efficiently, which is why the other way to think about this is that this is an attempt by Ryan Cohn to insert himself as the CEO of eBay through a sort of convoluted version of a takeover.

12:35John Foley: 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 GameStop? And what is your answer? Well, he has to – 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 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 debt But in a more rational world, wouldn't it go like this?

13:19eBay looks at this offer and says, hmm, this is a good idea. Here's what we're going to do. We're going to buy GameStop using our shares as currency and our balance sheet as a more solid balance sheet on which to borrow. And that might save a lot of trouble.

13:39John Foley: Totally. I mean, you'd end up with similar results. The problem there as an eBay shareholder is that you would be paying the premium. You'd have less leverage, but you do pay. I think that's called a Pac-Man defense, 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 1980s will remember the crucial moment in the game Pac-Man 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.

14:18And when you eat one of those, there is a period in which you can eat the ghosts that are chasing you. And that is the image that we're, and it's very appropriate, by the way, we're using this image for a video game company. So true. Right. So, uh, eBay could eat the big power dot and turn around and consume the ghost GameStop. Has anybody ever done this before? We quickly consulted the internet about this. What did we find?

14:47John Foley: So I, and by the way, as a journalist who's been covering M &A for like 20 odd years, the Pac-Man defense comes up frequently. It's like, oh, what if they did a Pac-Man defense? Yeah, but it rarely happens. I can't think of it actually happening. Like there was Porsche and Volkswagen. Men's Warehouse and Joseph A. Banks. So Men's Warehouse did a Pac-Man on Joseph A. Banks. These are both kind of affordable men's wear companies. More examples in the US, I think. Also, the Rio Tinto and BHP Billiton, the miners, although it didn't happen, it was on the table, I think. It was something that Rio Tinto thought about doing to BHP.

15:21John Foley: So sometimes Pac-Man eats the ghost. But it's hard to do and it's stupid. Let's face it. That never stops us. In American finance, hard to do and stupid is no obstacle. That is for sure. 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 correct, John? I think so. I don't know which syllable to emphasize, really, but that's what I'm going with. Like cerebral, but with an S in the end. 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?

16:09John Foley: That's a great question. So NVIDIA, so this company, Cerebra, has 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$10 billion. And now it's got a valuation of nearly$50 billion. And it's got OpenAI as a customer, which it didn't have before. and it's doing, by all accounts, pretty well. 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 maybe it doesn't really want to because obviously scarcity has value. But because everyone is desperate to get these chips, they're now starting to consider alternatives.

16:47John Foley: So Google is making its own chips. Amazon is making its own chips. And Cerebrus is increasingly a serious alternative. Of course, there's something else of NVIDIA's that everyone wants, which is not just chips, but it's profits. 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 going to look at those margins and that growth and come in and try to reproduce the product or compete or get, get their share. 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 500?

17:39Or do these things take a long time, I guess would be the answer to that.

17:42John Foley: I think we should be alert to the idea that NVIDIA has competition that didn't seem to be there before and we should not be surprised by that because as you say nvidia has what 75 percent ish gross margin so for every dollar of chips it sells it keeps 75 cents after paying for like the ingredients as it were that's really high that's like 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.

18:15John Foley: So the thing is, 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 trying to get capacity where they can. And also, I would imagine if you're 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 cerebrous chips in our next model. What this brings to mind for me a little bit is ARM, which is the UK chip designer that basically designed the low power chips that people use in smartphones.

18:56And for years, everybody looked at their profits and said, you know, Intel's going to make a mobile chip or whoever is going to 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 an enormous pain to switch over. Even if you're paying through the nose for the product.

19:24John Foley: 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 it's kind of a monopoly, and no one's coming close 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 Long & Short.

19:54Bull or bear? Trade or tariff? Future or fad? There's more than one side to every story. With the Flipside podcast from Barclays Investment Bank, you'll hear two research analysts having a provocative debate on hot topics in business and markets. Listen to the Flipside on your favorite platform. 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?

20:24John Foley: I'm going to go short Hyrox. I don't know what that is. So High Rocks is like a sort of sport race thing that kind of is a bit like CrossFit, where you have to 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. And there's a big race coming up in New York at the end of this month. Are you a type A personality? Well, so I'm shorting it because I've been trying to do it and it's horrible. It's so hard that I'm going to short it. But also I'm shorting it. So are you going to stop doing it? No, of course not.

20:57John Foley: I'm going to keep doing it. You are. You're having a moment of conflict. I'm also short-screen because I think that all exercise things like that turn out to be fads. It's true. Tough mutter. All of that stuff. Yes. I'm going to 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 going to be a story that we're following for the next 12 months at least.

21:37Listeners, we will be back in your feed on Thursday. Tune in then. Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Greta Cohn, 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 unhedged offer. I'm Rob Armstrong. Thanks for listening.

22:28We'll see you next time.