Analysts have poured cold water on the idea of GameStop acquiring eBay, saying it is unlikely to win approval from eBay’s board of directors because there is no functional overlap between the two businesses and there would be only superficial financial benefits. Wall Street firms said that eBay’s strong recent performance (its stock price is up 26% since the beginning of the year) and the fact that it is a much larger company than the bidder were also factors that could inhibit the deal’s viability. “In our view, there appears to be a lack of meaningful synergies between the two entities,” Youssef Squali of Trust Securities said in a note to investors Sunday. “Rather than driving the anticipated profitability improvements through revenue growth and synergies, any expected EPS improvement will come from cost reductions (in sales and marketing, product and development, and general administration and administration).” Analysts with Mr. Bernstein noted some overlap in the games, toys, and collectibles businesses, but said the companies’ different sizes make it difficult for the common ground to become a source of material gains. “EBAY has a much more diversified business and operates on a much larger scale,” Nikhil Devnani and others wrote to Bernstein. “It is not clear what GME will bring strategically to further enhance EBAY’s offerings.” Significant difference in scale GameStop has proposed to acquire e-commerce giant EBay for $56 billion in a half-cash, half-stock deal at $125 per share, a 20% premium to last Friday’s closing price of $104.07. GameStop itself had a balance sheet market capitalization of about $11 billion and $9.4 billion on the balance sheet as of January, according to a company statement, plus up to $20 billion in third-party financing from TD Securities. That’s about $40 billion, a far cry from eBay’s $56 billion price tag. Analysts at Trust Securities said they were “skeptical” given that “eBay’s market cap is approximately four times GME’s market cap, and the proposed $56 billion acquisition is five times GME’s market cap.” In an interview with CNBC, CEO Ryan Cohen declined to say where the rest of the proceeds from the sale would come from. After being pressed for a question, he replied curtly: “We’ll see what happens.” Bill Smead, chief investment officer of Smead Capital Management, the sixth-largest active owner of eBay among mutual funds, told CNBC he was wary of potential pump-and-dump plays. “We don’t know if this is legal and/or will pass. Last time there was a meme deal, we reduced ownership of everything related to growth,” he told CNBC through his news agency. “We’ve avoided meme trading companies, but it would be embarrassing to pump up and dump if that were to happen.” “Meme Multiple” GameStop became the definitive “meme stock” in 2020 when an online retail investor frenzy reversed short positions in the company from multiple hedge funds, turning the stock into a surprise winner while undermining some funds that had bet on GameStop. Colin Sebastian, a senior analyst at Baird Equity Research, said the logic of meme trading, which capitalizes on the excitement of the online investment community, may be influencing the current proposed acquisition. “We speculate that GameStop is also considering the possibility of a ‘meme multiple’ on the combined company’s total profits,” he wrote. In contrast, traditional e-commerce giant eBay has been performing well in recent quarters. Analysts said the company’s strong cash flow and margins make it a potentially attractive target for leveraged acquisitions, while the firm price multiple makes it unlikely to be undervalued. “EBay’s leadership in re-commerce and high-margin verticals fits well with private equity strategies. However, eBay stock trades at historically high multiples, which could constrain valuations for many PE firms,” BMO Capital Markets analyst Brian Pitts said in a note Monday. GameStop expects the proposed half-cash, half-stock acquisition to result in approximately $2 billion in cost savings, although analysts believe these savings will be driven primarily by management levels rather than core products or distribution. “Although the transaction is determined to be accretive, we believe the outcome is driven by financial engineering rather than operational synergies, raising risks to the platform’s long-term competitiveness,” Baird’s Sebastian wrote in a Monday note.
