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Written by Bram Berkowitz for The Motley Fool->
Cohen has had GameStop focus on collectibles in recent years, and has experience running a large e-commerce company as the co-founder of Chewy.
Still, eBay is much larger than GameStop and operates under a different model with a more diversified business.
There is skepticism about whether the deal makes strategic sense and whether eBay can obtain the necessary financing.
Since becoming GameStop's (NYSE: GME) CEO in 2023, Ryan Cohen has committed to transforming the struggling brick-and-mortar video game retailer.
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GameStop has publicly offered to acquire e-commerce company eBay (NASDAQ: EBAY) for $55.5 billion. The deal values the stock at $125 per share, representing a 27% premium on eBay's 30-day volume-weighted average price (VWAP) and a 36% premium on the stock's 90-day VWAP.
As of 10:45 a.m. ET, GameStop had a market cap of roughly $11.5 billion, while eBay's was nearly $48.5 billion. GameStop's stock traded roughly 5% lower, while eBay's stock traded over 5% higher.
GameStop has proposed structuring the deal as 50% cash and 50% stock. The cash would come from roughly $9.4 billion in cash and liquid investments on the balance sheet.
GameStop also said it has received a letter from TD Securities stating that it is highly confident it could provide GameStop with $20 billion in acquisition financing.
GameStop disclosed that it has already built an economic stake of 5% in eBay through derivatives and the purchase of common stock earlier this year.
Furthermore, Cohen told The Wall Street Journal that he is prepared to wage a proxy battle and go directly to shareholders if eBay's board of directors is not open to the acquisition.
GameStop has made a big push into collectibles in recent years, with promising results. Buying eBay would accelerate this push. Furthermore, eBay's 1,600 retail locations in the U.S. would give eBay a physical network for authentication, intake, fulfillment, and live commerce.
"There is nobody who is more qualified, based on my experience, to run the eBay business," Cohen, who founded the pet e-commerce website Chewy, told The Wall Street Journal. "It could be a legit competitor to Amazon."
In GameStop's offer letter, the company said it believed it could realize $2 billion in annualized cost savings within a year of closing the deal, achieved through reductions in sales and marketing, product development, and general and administrative expenses.
These cost reductions could help increase diluted earnings per share from continuing operations from $4.26 per share to $7.79 in one year.
If successful, the deal would bring Cohen much closer to a gargantuan $35 billion pay package he would be eligible for if the company's market cap hits $100 billion and achieves cumulative performance EBITDA of $10 billion.
While GameStop has made an offer, there is no agreement in place.
According to The Wall Street Journal, eBay said it would review the offer "with a focus on the value to be delivered to eBay shareholders, including the value of the GameStop stock consideration and the ability of GameStop to deliver a binding, actionable proposal."
While a smaller company like GameStop acquiring a much larger one like eBay is not unprecedented, it does pose challenges, as it will likely significantly increase GameStop's debt and cut into free cash flow.
Ebay's board of directors may also believe that the company is worth more than what GameStop is offering, or that a tie-up between the two does not make strategic sense.
In a research note following GameStop's offer, Bernstein analyst Nikhil Devnani expressed skepticism that eBay would bring strategic value, noting that while eBay does have a games, toys, and collectibles business, it operates under a different revenue model and is far more diversified.
Furthermore, eBay has been successfully executing on a turnaround plan that has led shares to appreciate by over 50% in the last year. "Why disrupt things? The turnaround is working," Devnani wrote.
While GameStop believes the deal would be highly accretive to earnings, investors will also need to feel comfortable with the projected cost savings and whether they make sense, because the deal would be highly dilutive if half of the offer comes from stock issuance.
Given the uncertainties, shareholders of both GameStop and eBay should sit tight and let things play out before deciding whether to invest in either stock.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and eBay. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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