Comment by pjc50
3 hours ago
Important background: https://investor.gamestop.com/news-releases/news-details/202...
CEO gets paid "only if GameStop achieves a market capitalization of $20 billion." Buying a $55bn company would certainly achieve that quickly. I'm not sure how they'd manage that (buy with what? Memes?), other than the should-be-illegal process of putting debt on the acquired company's balance sheet.
> the should-be-illegal process of putting debt on the acquired company's balance sheet.
I agree it's weird but ultimately the check against dumb lending is natural consequences for the lender, right? If you ask me for billions in loans for your zero revenue company and I give it to you, whose problem is that but my own?
Taking a $20b loan from TD Bank + sitting on $9b CASH + GameStop stock for the rest. They’ve made an interesting proposal around using 1600 GameStop locations for fulfilment. Smart if they can make it work.
Update: Numbers still don’t add to $55b - I think there’s a $14b shortfall. Not sure about how they are planning to fund that.
> They’ve made an interesting proposal around using 1600 GameStop locations for fulfilment.
Is that really an advantage? Fulfilment is always handled by a lot of places for the big e-retailers for returns, which is similar to what eBay needs for sellers.
How much does Staples charge for its Amazon return fulfillment where you don't even need to wrap up the item? It is really popular: https://www.staples.ca/a/learn/amazon-returns-now-available-...
My kneejerk is that most consumers these days expect delivery for items purchased online, and allowing them to pick up their items at a brick and mortar probably isn't the issue.
Now, dropping off items you're selling? That probably removes a decent hurdle for many first-time/one-time users who aren't familiar with shipping (what box/label/insurance/padding/...).
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GameStop has a standing approved agreement to issue up to a billion new shares. If you read the offer you will see it is 50% financed by GameStop stock.
They threw him a hardball today in his cnbc interview on this topic. $GME stock value would plummet short term, but the combined company would revalue much higher.
Wouldn’t that debt knock down the market cap as much as the value
Otherwise take out a $20b loan and put it in the bank. Assets increase $20b, job done.
There is precedent for this kind of trickery being played.
For example, Honeywell acquired Garrett AiResearch, a well known manufacturer of turbochargers for combustion engines, through a series of mergers.
Later on, it loaded them up with debt (over $1.5 billion, mostly asbestos related indemnity obligations from other parts of the business), before spinning them out as an independent entity again. Two years later, Garrett filed for bankruptcy claiming it was succumbing to the unsustainable debt burden placed upon it by its former owner.
So you mean...marrying someone but transfer all the personal debt to the others, then divorcing so that I have no responsibility whatsoever? Not even an obligation to settle for the debt just like disappeared through an expired relationship?
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I believe this is what they call the 'Texas Two-Step'
Perplexity wants to buy Google Chrome vibes.
They are paying half in GameStock equity. They will issue new shares so they will buy Ebay of $55bn, but add only $20bn debt.
Its good for GameStock management who will end up running a much bigger business. https://investor.gamestop.com/news-releases/news-details/202...
Game Stock management is essentially claiming that they can run Ebay better than the current management so Ebay shareholders will end up better off by selling to Game Stock: they get some cash and shares in a business that will be mostly a better run Ebay. Very possible bad for GameStock shareholders who will end up with a smaller stake in a bigger business.
Well, his argument is that he can remove inefficiencies in the combined company.
GME is ~12B, EBAY is ~46B (58 total) with net income of 0.4B and 2B (2.4 total). If he boosts profit by 1.2B then it's nearly a 50% increase and probably going to result in a more valuable combined company despite the debt.
He can argue that. But to me it seems more likely that culture and market demands are so different between the two companies that sharing any substantial resources would be to the detriment of at least one of the two halves. And more likely detrimental to both
The most beneficial thing is how even proposing this shifts peoples' perception of Gamestop from a beloved but struggling brick and mortar chain to a successful business
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>GME is ~12B, EBAY is ~46B (58 total) with net income of 0.4B and 2B (2.4 total). If he boosts profit by 1.2B then it's nearly a 50% increase and probably going to result in a more valuable combined company despite the debt.
GameStop had revenues of $3bn last year and eBay was $10-12bn, so combined it's $13-15bn. A net income increase of 1.2bn on that gross is a tall order for M&A efficiencies. Especially difficult when the two companies have essentially zero operational crossover, besides business admin. It doesn't seem likely to me that merging eBay's accounting/legal departments into GME's (and similar efficiency gains) is going to save anything close to a billion across the two entities.
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> Well, his argument is that he can remove inefficiencies in the combined company.
Sigh. The synergy argument, once again.
While historically most mergers don't work out particularly well, I'm absolutely sure this time will be different.
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That is a massive “if”
Depends on how market cap is defined for the purpose of the contract. Typical definition is just against floating shares in the market * share price. Debt doesn’t factor in at all except in so far as it will influence investor confidence -> share price.
That said: conceptually it’s not an awful fit for GameStop. In so far as video games discs and cartridges were the main disposable belonging i had as a kid and the main target for new purchases, Funcoland was (later to become GameStop), if you squint your eyes, a brick & mortar eBay scoped to only video games. If you’d been an SV startup at the time pitching the eBay concept you could have said “it’s like funcoland, but online and for anything and also lets people sell peer to peer “
Market cap will price in the debt, as it always does. Empirical evidence (dig through Google scholar) finds that cash assets, debt, profits, settlements, and the like, all are reflected in market cap changes at over 99% accuracy (the 1% is from measurement noise, so it may well be 100%).
Making debt of that form illegal would kill any company that needed money to stay afloat, such as during some emergency, or war, or COVID, or tons of events that companies regularly survive.
I’m disappointed and surprised you left out half of the conditions that grant him this compensation. You only included the one that suggests that all he has to do is buy a bigger company with GME stock. It was literally the first paragraph of your link:
“ The award is divided into nine tranches that are eligible to vest only if the Company achieves both a “Market Capitalization Hurdle” and a corresponding “Cumulative Performance EBITDA Hurdle”.”
This changes basically everything. He can’t just buy any bigger company. The company has to earn way more cash flow, cumulatively, as well.
The first two market cap hurdle is almost certain to be achieved, and the second should be easy (its less than current market cap plus value of new equity to be issued).
I was under the impression that it was either or, not both. Either reach market cap goal or EBITDA.
I’m disappointed and surprised you left out half of the conditions that grant him this compensation and only included one that suggests that all he has to do is buy a bigger company with GME stock:
“ The award is divided into nine tranches that are eligible to vest only if the Company achieves both a “Market Capitalization Hurdle” and a corresponding “Cumulative Performance EBITDA Hurdle”.”
This changes basically everything. He can’t just buy any bigger company. The company has to earn way more cash flow as well.
It doesnt really change much, by buying a company its future ebitda will be included, it only delays the reward by some time. So yes he can just buy a bigger company
> other than the should-be-illegal process of putting debt on the acquired company's balance sheet.
This is silly. No different than buying a house w/ borrowed money based on using that house as collateral.
Banks aren't stupid. If it's very likely to fail and the interest doesn't cover the risk, banks won't risk. There's typically no upside to banks. At best they get their interest and at worst they lose everything.
> Banks aren't stupid.
Even a cursory familiarity with the history of the industry shows both that this is untrue but also that it’s leaving out many of the core reasons why finance is regulated. Bankers do make mistakes, but also their focus is on what makes them a profit now rather than what’s good for their client or the country long term. The bank does not care if GameStop goes bust as long as that happens after the loans are repaid or, most likely, sold. None of the guys who sold incredibly dodgy mortgages—if you weren’t in the market in the late-2000s, they would literally let applicants pencil in their income and not check it—went to jail for packaging those mortgages up so many times removed that they couldn’t reliably prove the loan even existed and reselling them with inflated ratings, and absolutely none of them had to repay their bonuses. Once they found a buyer for an “AAA” derivative, foreclosure was a problem for the retirement fund left holding it after a couple of sales.
That’s what I’d expect here, too: they’ll make some flashy announcements to juice share prices (“AI powered auctions paid in crypto!”) and sell that debt, spin whatever’s left into a subsidiary which splits off, and then profess complete surprise when that goes bankrupt.
> Banks aren't stupid.
If they can gamble with other people’s money then why won’t they.
If they can get rid of those liabilities by offloading them in a hidden way why wouldn’t they.
If it all collapses and the government bails Them out, oh well.
It is different. You need somewhere to live. Buying a second home with what would presumably need to be at least a 90℅ mortgage is at best questionable.
I think your example if proving their point: that's exactly what happens and is incredibly common.
Cohen is already rich rich, his GameStop compensation doesn’t really matter much. The eBay acquisition could be a strategy to juice his compensation but I think it is much more likely he does believe that he can achieve his stated aims, which will financially benefit him much more in the long term.
> Cohen is already rich rich, his GameStop compensation doesn’t really matter much
I think this argument is much stronger in the opposite direction: if his motivations were not focused on accumulating wealth, he’d be retired or running some kind of charity once he was that far past the point where he had to work. The fact that he’s not suggests that he derives his self-identity from wealth and the guys who do that are rarely satisfied at mid-tier rich.
I'm not sure the fact that somebody is already rich rich would make them less likely to perform ethically dubious practices to juice their own compensation. In fact I'd say the opposite is more likely.
If there's anything rich people famously hate, it's making more money.
Few CEO’s in the US are rewarded for longterm thinking when there are unsustainable quarterly gains to be made. GameStop also has a strange history, especially the last decade, that no one could possibly describe as “cautious” or “planning longterm.”
I also can’t name a single CEO who had the mentality of “I’m rich enough to make personal/financial sacrifices for the good of the company.” That’s simply not how things work. I’m sure an example exists but it would clearly be an exception to the rule.