I'll give Ryan Cohen and his team at GameStop (GME +1.29%) credit -- they're working hard to remake the meme stock darling of retail investors. First, Cohen announced plans in February to turn the video game retailer into a holding company, like Berkshire Hathaway.
And now GameStop is setting its sights on acquiring a much larger company, announcing on Sunday that it has made an unsolicited offer to purchase eBay (EBAY +1.18%) at $125 per share in a cash-and-stock deal.
The offer values eBay, a leading e-commerce company, at about $55.5 billion and represents about a 20% premium to eBay's closing stock price last week. GameStop currently has a market capitalization of nearly $11 billion, while eBay has a market capitalization of about $46.7 billion.
However, the market doesn't seem to be taking Cohen's bid seriously. GameStop stock dropped 8% this week, while eBay stock rose by only 2% as of this writing. That indicates to me that investors don't expect GameStop to close the deal -- if they did, eBay stock would be trading close to the $125 figure that GameStop offered.
Let's take a closer look at this deal.
Image source: Getty Images.
How would GameStop pay for eBay?
This is the crux of the issue -- it's not every day that you see a much smaller company trying to absorb a larger one. Cohen says the deal would be split 50% cash, 50% stock, though he raised the possibility of share dilution to make it work. "We have the ability to issue stock in order to get the deal done," he told CNBC.
GameStop also has a $20 billion financing letter from TD Bank and $9.4 billion in cash and cash equivalents on its balance sheet. The company says it's already acquired 5% of eBay stock, and will achieve $2 billion in cost savings within the first year through reductions in sales and marketing, product development, and corporate overhead.
NYSE: GME
Key Data Points
The company's proposal outlines a prospective business where GameStop's 1,600 brick-and-mortar locations can serve the combined company as a national network for authentication of goods, intake, fulfillment, and live commerce. "eBay supplies the inventory and the buyer base; GameStop supplies the physical footprint to compete in the live-commerce category," the company says in GameStop's proposal.
Cohen told the Wall Street Journal that the deal will help the company take a step toward being a legitimate e-commerce competitor to Amazon.
NASDAQ: EBAY
Key Data Points
Is this a serious offer?
Yes, it's a serious offer -- on paper. I do not doubt that Cohen, who built a great reputation as CEO of Chewy before taking the reins at GameStop, has a legitimate interest. But there is a lot of skepticism among analysts about whether the merger can come to fruition. Remember, this is an unsolicited bid, and GameStop acknowledged that it had no discussions with eBay before it announced the offer. So, there's a lot of due diligence that needs to be done before either company can move forward.
GlobalData analyst Neil Saunders didn't pull punches with his reaction, calling the deal "a David trying to take over a Goliath in order to buy David relevance."
Morgan Stanley analysts say the two companies have "fundamentally different" business models, which means there are few revenue or cost savings by combining forces. And analyst Youseef Squali from Truist expressed doubts that the deal will succeed because the companies have few aligned strategic goals.
For investors, this deal doesn't move the needle for either GameStop or eBay stock. If anything, it will be a distraction from both companies already navigating a difficult retail market.
