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...
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.
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.
But his mention that it is a form of options is laughable. Thats not what is going on here.
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.
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...
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.
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.
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.)
If they do like them they have no excuse if things go south.
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.
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!
Also, eBay shareholders can vote down the acquisition if they don't think the deal is good for them.
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.
The shareholders have to vote for it, though.
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.