eBay rejected a $55 billion cash-and-stock takeover proposal from GameStop on Tuesday, calling the offer “neither credible nor attractive.” GameStop had put the proposal on the table the previous week, despite being roughly one-fourth the size of its target.
The bid divided Wall Street almost immediately, with analysts questioning how the video game retailer planned to finance a transaction of that scale. eBay reviewed the offer with legal and financial advisers before issuing its formal response.
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The Takeover Pitch
Ryan Cohen, chairman and chief executive officer of GameStop, launched the takeover proposal but initially would not say how he planned to fund it. The lack of a clear financing plan quickly became the central weakness in the pitch.
Cohen made clear that, should the merger go through, he intended to run the combined company as chief executive.
Why eBay Rejected The Bid
Paul Pressler, eBay’s board chairman, authored the rejection letter addressed to Cohen. After going through the proposal with legal and financial advisers, Pressler put the board’s objections on the table for all to see.
The list ranged from uncertainty about how the deal would be paid for and the debt load it would place on eBay, to questions about GameStop’s governance structure and the role executive incentives may have played in motivating the proposal. Pressler pointed to eBay’s recent operational record in defense of the board’s position.
“We have sharpened our strategic focus, strengthened execution, enhanced our marketplace and seller experience, and consistently returned capital to shareholders,” he wrote.
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Wall Street’s Verdict
Don Bilson, head of event-driven research at Gordon Haskett, left little room for interpretation. “eBay has officially turned down its lopsided marriage proposal. This news should surprise no one since the odds it would accept Gamestop’s brash offer were infinitesimally remote,” Bilson wrote in a research note.
Analysts at Morgan Stanley were equally direct, warning that raising the offer price alone would likely not be enough. “We believe it is quite possible eBay’s board rejects a sweetened offer unless the other issues are cleared,” they wrote.
TD Bank Letter And Financing
GameStop received a letter from TD Bank stating that the bank is “highly confident” in its ability to raise $20 billion to fund the offer. The letter was non-binding and relied partly on the assumption that the combined company would receive investment-grade ratings from at least two of the three major credit rating agencies.
Two people familiar with the matter, speaking on condition of anonymity, said eBay did not believe the merged entity would qualify as investment-grade. Cohen also cited $9 billion in cash on GameStop’s balance sheet as part of the financing structure.
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Moody’s Assessment
Moody’s came out against the proposed transaction, calling it “credit-negative” and projecting that it would push eBay’s total debt from $7 billion to $31 billion.
Cohen argued he would cut roughly $2 billion in costs from the combined company and repay the debt quickly. eBay expressed concern that those reductions would hurt the company’s revenue.
Executive Incentives
eBay’s rejection letter took direct aim at the degree to which “executive incentives” played a part in putting the proposal together. Under a compensation arrangement GameStop put in place in January, Cohen is set to receive billions of dollars in stock if the company surpasses certain profit and market value thresholds.
Cohen stated he would take no salary, no cash bonuses, and no golden parachute, with all compensation tied to the performance of the combined company.
eBay’s board, which has dealt with pressure from several activist investors over recent years, questioned whether Cohen would manage the company more effectively than current leadership. eBay shares were up roughly 55 percent over the past year, while GameStop shares were down roughly 16 percent over the same period.
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Questions Around Financing
Michael Burry, investor and former hedge fund manager, disclosed that he had sold his entire GameStop stake, citing concern about the debt a deal would require. Separately, GameStop filed with regulators on Monday seeking authorization to more than double the number of shares it could issue, which could fund large acquisitions but would dilute existing shareholders.
GameStop already held a 5 percent stake in eBay at the time of the proposal. Cohen said eBay shareholders would exchange roughly half their shares for stock in the combined company, likely giving them majority ownership of the new entity, and added that he might seek additional equity sources beyond the TD Bank commitment.
What Happens Next?
With the rejection now on the table, GameStop’s leadership must decide whether to raise the offer or go directly to eBay shareholders through a hostile approach. Under that route, support from 20 percent of eBay shareholders could compel a special meeting to vote on the deal.
At the time of the rejection, eBay shares were trading at roughly $107, well below GameStop’s proposed price of $125 per share. The broad skepticism the offer has attracted makes that path a hard one to take.
