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.
I read that book, and my recommendation is to skip the third act, which is painfully repetitive.
In fact, coming from a finance background, I didn't find the book in general to be particularly insightful, and much more ragebait / policy oriented (which makes sense given the author was a DOJ Antitrust prosecutor)
It's absolutely an LBO. The leverage is maximizing debt to equity. That debt is then transferred to the new entity.
It's how they destroy companies while making billions in private profit. They over leverage them. Accrue debts. Sell of equity. Wash, rinse, repeat until bankrupt.
Ryan is committed to not taking a salary, unless this changes the only way he stands to gain is by doing the opposite of this and undressing the share price long term.
This book got a unfortunate title. Private Equity can be a completely legitimate activity.
What it needs is some regulation on some underhanded financial tatics it uses, such as LBO.
The vast majority of the time, you don't hear about it at all. Leveraged buyouts and the monopolistic strategies like buying out all the private doctors or veterinarians in a region get all the negative press but they're a tiny fraction of private equity.
The big money is in really boring industries like mining/oil/resource extraction, power plants, infrastructure, construction, and other industries that are predictable and in high demand everywhere. PE firms often get the best deals because they thrive on those kinds of connections and can offer up large amounts of capital on favorable terms in exchange for first dibs. The "rich get richer" is their primary strategy and it works without minmaxing exploitation because that's a bottom feeder strategy, not one that can guarantee steady returns on tens of billions of dollars.
I've been through an LBO before, my first thought when I saw this news was: so eBay is going to have to pay interest on a $50B loan now?
eBay had $2B of net income in the last year. That might get them half-way to paying their annual interest payment if this deal closes. Get ready for the inevitable layoffs to cover that interest payment.
If there is iffy interest coverage for the debt and assets might be a stretch to cover (principal + interest), why will someone sponsor the debt here ?
Also, rates seems to be high, at least compared to recent history, to be favorable for this kind of LBO.
It may not be bad for the buyers, lenders, or the previous owners who all profit. But even then it could still be bad for regular people/society at large if it incentivizes anti-consumer practices by financial necessity when an otherwise healthy business suddenly has billions of dollars of debt it has to pay off ASAP. In which case it sort of looks like a simple transfer of wealth from existing customers to the organizers of the leveraged buyout with no broader societal value provided like new jobs created, R&D, etc.
You have a company "funded" with its own equity and now you turned it into a company exclusively made out of outside capital and an obligation to realize the terms of said outside capital.
Before, you could have had bad years in-between the good years, now you're only permitted to have good years and by good years I mean years that honor the financing terms.
When you understand this, you realize that functionally speaking, nothing has changed really, other than that the cost of financing has gone up significantly, since the company can't rely on its own equity anymore. Now the company can no longer earn what it currently earns, it needs to earn that plus some. Hence the deal was nothing but a burden to the acquired company.
The previous owners realized the value of their shares and don't have anything to complain about. The new owner acquired control over the company they wanted. So who is left to carry the burden? The employees and the customers.
It can be, sure. But a two-way deal might also affect third parties.
Example: what if Adleman hires Rivest to put laxative in Shamir's soup? Two consenting parties have made a deal. Shamir freely chooses to eat his soup, despite knowing that he has only imperfect information.
So that scenario works out as desired.
But intrusive government regulation might come into play. Maybe the state prohibits poisoning soup. That harms the free market, and it's wrong. But, perversely, Shamir might benefit (at Adleman and Rivest's expense).
Say you take out a mortgage, then rent the house to a series of meth dealers to extract the rent while devaluing the property, and then default: you're still personally on the hook for any post-foreclosure deficiency judgment. One issue with LBOs is that, after extracting cash and fees, PE funds have various ways to extinguish liabilities that individuals don't, both by shielding the PE fund from debts and the use of bankruptcy and restructuring of the acquired company to discharge liabilities, including those from litigation.
There are various proposals to deal with this, but the most effective are probably imposing joint and several liability on certain kinds of litigation (breaking the "investor veil" and allowing rights of action against PE funds for the actions of their portcos) and limiting business judgment rule protection for directors and senior managers who approve LBO sales that are reasonably foreseeable to end in bankruptcy, which creates personal liability for fiduciaries. In other words, align the financial and personal interests of the individuals and companies involved with those of the acquired entity.
>both by shielding the PE fund from debts and the use of bankruptcy and restructuring of the acquired company to discharge liabilities, including those from litigation.
Who's extending credit to these companies? Individuals can do something similar by declaring bankruptcy. I think banks can be considered sophisticated enough that if they got hosed on a LBO deal, that it's hard to feel sympathy for them.
The people doing the lending can still make a profit. They get their interest payments and have a secured debt against the company. I.e. If interest and repayments until time of bankruptcy + liquidation of assets at bankruptcy is more than you'd get investing elsewhere at lower risk it's still a good investment. It's the other stakeholders (employees/community/unsecured debtors) that lose out.
I mean, if I'm allowed to just make up silly hypotheticals, I can easily justify anything.
Say I raise money for a friend to buy a house and they proceed to rent it out to meth dealers. The friend is the one on the hook for the loans, of course; but would I not be on the hook for at least a reputation hit such that I can't do that again? Or do we think folks can get away with that sort of poor judgement forever?
In that sort of hypothetical the Mortgage bank is likely to take one look at your friend, see you with all the money for the down payment, and decide that you need to at least cosign the loan (if not be solely responsible). You would be on the hook for the reputation (and credit score) hit and certainly still paying off the rest of the loan or face foreclosure and possibly a criminal lawsuit for fraud.
Which yeah, leaves a lot of questions for why this is legal for an LBO. Where's the "credit score" hit on these PE firms doing LBOs? How is it that these investors are allowed to be their own mortgage bank, not require themselves to cosign the very loan they are providing the down payment equity for, and not be liable for damages such as bankruptcy of the entity they put on the hook for the loan?
If you give the friend the money as a gift, you have nothing to do with it, right? if you give it to him as a loan to inflate his assets and don't disclose that then you are committing a Federal crime.
I didn't give any money in that hypothetical. Rather, I convinced a lot of other people to give them the loan. That is, largely, exactly what fundraising is. You convince other people to give money to someone or something.
If people are regularly doing this at my request, and it is constantly going to someone that just burns the money, how are people still taking my requests?
Yes. That doesn't change my question, here. You can arrange to bootstrap another company. It could go bust in a way that you are not on the hook for any money, but you should be on the hook for the things you did. That is the entirety of my point.
The hypotheticals being pushed on this thread have a foregone conclusion that the arranging party is completely free of any hit.
The hypotheticals seem to be in line with reality though. This business model works because the people who make money are the ones who are in control of whether to do it. Liquidating a large company in bankruptcy can get a lot of the money back for the investors while leaving a smoking ruin where it used to be generating economic value.
Are they, though? There are certainly some cases where it has happened, but I don't think it has been established that that is the norm.
Naive searching on the term shows that they common in PE, and they do have a worse default rate at 20% over 2% otherwise. Certainly something to look at more closely. And I would be nervous being party to one. That said, 80% success is still better than what some companies are looking at otherwise.
It is a thorny question. The best way I can square the difference is that generally buying a house with debt is on the debtor and the house itself is collateral. The debtor can't pay back the loan the house is taken by the bank to be sold. Where as a PE leveraged by out the debtor is the target company. A company is different than real estate in that they are a legal entity that is now responsible to pay back a loan equal to their own value. The collateral is the business, but the business is now illiquid and has to sell of real assets and go bankrupt.
For example, Joanne's Fabrics was a profitable business with a fair amount of real estate. After PE bought them and was saddled with unreasonable debt they were in the red and had to sell all their stores. This removed useful and profitable business from the economy and sold off the assets in a fire sale. Where as me losing a house just means a bank now owns it and someone else can buy it. But if someone were to buy Joanne's they'd have to pay off the debt Joanne's owed for being bought and run into the ground
There is a long practice of having cosigners on home loans. This feels basically like that.
Which, granted, if you don't like the idea of establishing a company to take on loan responsibilities, I am not trying to offer a defense of that. Was a legit question of how you would structure it so that this is illegal, but home/auto loans are not.
A cosigner is different than what's happening in leveraged buy outs. A Cosigner is financially responsible if the debtor cannot pay back their portion of the loan. In a Leveraged buyout the purchaser does not take on financial liability for the debt, that is all placed on the company being purchased. This means that if the purchaser isn't even the cosigner in this scenario; the company being purchased is the sole entity responsible for repayment. So if GameStop goes through with this, but Ebay can't repay the debt than Ebay would suffer graver consequences than GameStop
But the biggest reason the purchaser does not have to cosign that loan is because in an LBO the purchaser is also essentially the mortgage bank for that loan. Should that be allowed?
Fair, but the nefarious scenarios people are talking about should at least be a major reputational hit for the people that did the fund raising. We are literally describing a ton of value getting destroyed. Someone is taking that hit.
It would be functionally the same as what you described if the parent company took on the debt, but that’s not how they do it. They make the purchased entity take on the debt. Hence why you often see mass layoffs in the company that was acquired soon after the deed was done. The company has so much debt it can barely function and the easiest way to pay some back is redirecting salaries at it.
Then once you realize why private equity firms do this, how their leaders have extreme monetary incentives to squeeze value out of companies in ways not limited to this, you realize why it’s insane how we have basically zero regulation on it.
Home owns are owned by people, not the home itself. If someone fails to pay a loan, their own credit score will be impacted
For these PE loans, its the new company that takes on the debt, not the buyer. Essentially any broke person can "afford" any trillion dollar company this way
Home loans are secured by the asset (the home). It's comparable to stock, but it's a less liquid asset.
Any broke person can afford a trillion dollar loan, if they can convince the bank that their house is worth 1.8 trillion dollars. But is that really possible?
Loan companies do due diligence so if GameStop is $A and eBay is worth $A + $B, then so long as $A/$B remains the same, the acquiring company owns two assets worth the full price of the loan.
It doesn't seem to be a scam to me. Am I missing something?
The difference is that when you buy a home the debt is in your name and you are required to pay it off. In a leveraged buy out wouldn't be to person taking out the loan, the debt is owned by the target of the purchase. If it were like a home loan and this deal goes south GameStop would go bankrupt and have to sell it's own assets to cover the losses. But in reality the debt from the deal would be owned by Ebay and if GameStop can't pay the loan back it'd force Ebay into bankruptcy and sell Ebay's assets. It's essentially a riskless move by GameStop and PE in general. Heads GameStop wins tails Ebay loses
There are other categories of real estate loans where the debt is against the property itself. The lender evaluates the property's income and expenses when underwriting the loan.
Fair point, it's a corporation taking out the loan so there's nobody to go after if the company goes under the way there is if the value of your house tanks and you stop paying your mortgage. But doesn't the bank take that risk into account when deciding whether to issue the loan? Why should that be illegal?
The way I’m reading your question, it seems like you are looking for the law to follow philosophically consistent principles.
That is simply not the case and lawmakers can make any kind of law to shape the society how we wish. If leveraged buyouts are creating problems for the country, then it’s totally valid to make them illegal in certain cases.
The problem is that people can take loans without financial liability (not how home purchases work) and drive profitable businesses (which are good for the economy) into the ground (bad for the economy and society).
No one is worried about the bank making the loan in this situation. They are concerned that PE is buying up large parts of the economy using debt they aren't responsible for, which makes them irresponsible owners because they do not face consequences when the moves fail
> which makes them irresponsible owners because they do not face consequences when the moves fail
Again, isn't that entirely the bank's problem? They're responsible for the debt if the company can't pay it, right? I agree on the surface this seems like a bad deal for the bank, but what makes you think you know better than the bank so much so that they shouldn't even be allowed to take that risk?
Leaving aside that the new company is the buyer; the point remains that home and car loans are leveraged loans. With the main asset in the leverage being that which is being bought. Defaulting on that loan results in the assets going to the lender.
If a lender builds a pattern of lending to people that can't make the payments, that lender will take a hit. If we think that isn't happening, why? And how could we return us to that?
Or, back to my question, how would you structure a legal framework where some loans can be done this way, but others could not? (I can think of a few ways, largely curious if I have a blind spot here.)
In a home loan, the borrower buys a house and pledges that house as collateral. The debt is the buyer’s obligation. The house does not have to “pay the mortgage” by laying off the kitchen, selling the roof, or cutting maintenance. The borrower uses outside income to service the debt.
In an LBO, a private equity buyer often buys a company using a large amount of debt, but the debt is typically placed on the acquired company’s balance sheet or serviced from that company’s cash flows. In effect, the target company helps pay for its own acquisition. That is the key difference.
In a lot of LBO schemas, the acquirer loads the target with, abusing leverage to maximize its returns, but this leaves the company with very little margin errors, any hiccup in the economy, and Kabum! The company goes under, an once viable company closes its doors, employees lose their jobs and local economies suffer. Meanwhile, the PE entity walks with as much cash as it could extract from the acquired company and debt-free.
Some PEs also go one step ahead, make the acquired company borrow more money, not to invest in the business, or restructure debt, but to pay a dividend to them.
In other cases, PE companies acquire a controlling block and then use it to make the company sell their assets to them, to be immediatelly leased back to the company. Then, there is also the practice of extracting all kins of "monitoring fees", "advisory fees", "consulting fees", etc. for services that are vague and frequently of questionable value.
PE companies also frequently engage in overly agressive cost-cutting to manipulate the EBITDA in the short run to sell the company at a appreaciated valuation, but hurting the long term value creation potential of the company and the quality of their services.
For PE, sometimes even bankruptcy is a business strategy.
Technically the lender is the purchaser in the LBO which is also why this is so much the purchased company having to pay for its own purchase. Which seems to me like the easiest part to regulate: require third party lenders who can also audit the details of the loan terms and fees.
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?
I question whether it is advantageous to use GameStop stores for this or just to piggy back on what Staples is already offering to Amazon and others for their returns? Fulfilling returns for Amazon isn't significantly different to shipping eBay orders.
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/...).
> My kneejerk is that most consumers these days expect delivery for items purchased online
100%.
> Now, dropping off items you're selling?
This is what Staples is offering to Amazon but for returns - quite similar. And they could offer them to eBay as well I am sure. You do not need your own chain of brick and mortar stores to do this and I am sure the cost per drop off would be cheaper with Staples than your own chain that only serves you.
GameStop is a game of constant pivots that sound good to its meme-believers that do not really work in the real-world.
> This is what Staples is offering to Amazon but for returns
Yes, and usps stores and Whole Foods do that for Amazon in the US as well. The difference is that each of those items don’t need to be individually packaged and shipped to unique locations. My local USPS put all the returns for the day in a giant bin and an Amazon driver picks them up.
I think the cost of labor and liability involved in having a local retail worker wrap, label, and ship every package would be an order of magnitude higher than shipping alone and destroy any value in offering it.
Sorry, are you saying that USPS cannot handle shipping across the country cost effectively? But somehow GameStop can, which has never done point-to-point shipping before?
A place that you could take items and have them packed and shipped for you would remove an enormous hurdle for new eBay sellers. It's easily the most annoying part of the entire process.
Hell, maybe they could even list items for people? Like a massive digital pawn shop.
I could see this really working out for them if they do it right.
Can confirm. The main reason why I don't sell stuff on eBay more is because of the high shipping costs and frequent scams.
Facebook Markerplace has issues of its own, but if you agree to meet up at a safe public location to buy/sell the item in person, then it mostly alleviates those two issues aside from the small chance of receiving counterfeit bills.
If Gamestop and eBay merge, then they could (potentially) offer a better deal to buyers/sellers by either buying certain items directly, shipping them at lower costs, or having an employee "verify" the item before it ships so that the seller receives better protections.
That's assuming that this is truly an ambitious merger rather than just being some kind of exit liquidity scam that gives Ryan Cohen a golden parachute right before he peaces out.
>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.
I think the advantage is going to be "bring your junk to GameStop and an employee will put it up for sale and handle shipping"
You'd get considerably more trust buying something on ebay that at least some teenager looked at and verified was real and powered on, etc.
A company doesn't need $55bn to buy a $55bn company. They can issue new GME shares and exchange $EBAY for $GME. These are sometimes called "stock-for-stock" transactions
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.
Current Gamestop shareholders would be diluted. They would own, proportionally, a much small slice of the combined company, but at a higher price point.
The framing of this as, "Ryan Cohen is diluting Gamestop shareholders in order to meet the terms of his enormous pay package" is disingenuous though, as his pay package is all stock. He's diluting himself too. He obviously has faith that, long term, the value of the combined company can substantially grow.
He has a massive stake in Gamestop outside of this pay package. The loss from diluting his massive accumulated position is not worth the bonus unless he thinks the price will recover long term.
My take? The strategy is like a contractor fixing up houses. GameStop was the crappiest house on the block. He’s fixed it up and is using it as collateral to take out a loan and buy the dilapidated mansion next door (eBay). He’ll keep going until he’s gentrified the whole neighborhood using the value of the current business as collateral to buy the next. He wants to sell only when the value of the entire gentrified neighborhood reflects market rate for the work he's put in.
The only thing that Cohen has done is shut down stores and cut costs massively at the expensive of revenue. He hasn't really fixed anything, he is just managing their demise. All of his strategic initiatives like expansion of e-commerce or an NFT platform were complete disasters that had to be wound down. The only reason the company is even showing a profit is because they repeatedly diluted shareholders to raise cash and then re-invested that money into Treasuries. Basically, if you are buying GME stock, you are getting an expensive fixed income wrapper.
Buying EBAY would be a bad deal for pretty much everyone involved. GME shareholders get diluted to buy EBAY for way too much money. EBAY shareholders get paid in vastly overvalued GME shares. And the entire thing would be managed by some guy whose only strategic idea is to cut costs. The only one who would benefit is Cohen, because it would create a sufficiently liquid market for him to sell his stake, something that is not currently possible in GME.
> The only reason the company is even showing a profit is because they repeatedly diluted shareholders to raise cash and then re-invested that money into Treasuries.
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?
To me it seems more like leveraged buyouts + debt restructuring all at once. I rather coin this term "debt offloading", which could also cover the cases with Enron for the tactics they used about 25 years ago
As soon as you mention Texas Two-step, you'll get a chorus of people who argue that it's a good thing, that it's really the defendants doing the plaintiffs a favor and making it easier and cheaper to sue them and the fact that each company that has done this has snuck out of between 90 and 99% of its obligations and washed their hands of them is a complete coincidence and that just wait, you'll see, the next time a company does it (using the same law firm that has handled all these) they'll really, truly, cover all of their obligations, perhaps even more, and at less cost and effort to their beleaguered plaintiffs.
In personal terms there is the "deathbed divorce", a uniquely American construct where couples, often elderly, get divorced while one is in hospital or hospice in an attempt to not saddle their soon to be widowed partner with six digits of medical debt.
In another uniquely American construct, that won't stop hospitals calling up all their relatives either implying that they are now responsible for those debts, or that it would be a mark of respect and honor if, even not, the relative would be willing to settle them anyway.
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
the only benefit I can see is some kind of eBay pick up and verification scheme where sellers use the gamestop locations to send their products and buyers go theere to pick it up. That would basically create a "this is garbage feedback" that could cleanup some of ebay's long standing problems in trust.
While this seems like the perfect synergy with a company that has too many branches and not enough business, those branches are also tiny. I'd bet employees are not enthusiastic about becoming UPS.
Becoming Radio Shack / Microcenter, as far as 3D Printing and DIY electronics, seems like it intersects with their target audience more, but they're also probably pretty short on space for that.
Employee enthusiasm isn’t really much of a factor. For better or worse, in the event of significant change of the brick & mortar day to day operations then employee continuity & institutional knowledge is even less of an actual strategic asset than the minimal treatment it already gets in consideration.
- SPAC IPOs that dodge standard disclosure requirements and worsen information asymmetry. See WeWork.
- Board positions filled with CEO loyalists instead of independent directors. See OpenAI firing Altman before Microsoft reinstated him.
- Management taking seemingly arbitrary decisions that turn out to be directly linked to their own compensation. SpaceX ordering a bunch of Teslas, or merging with a distressed asset (xAI). See above point on loyalist boards.
- The very concept of leveraged buyouts where financiers borrow money to buy a company, then put the burden on repayment on the company AND pay themselves hefty management fees. This inevitably leads to layoffs and a rapid decline in product/service quality while the company is scrapped for parts.
Slumlord owners of the network effect monopolies innovating ever lower investment in innovation and upkeep with ever higher increases in rent extraction, with a few nipple tassles slapped on the side to entice retail investor hype cycles.
>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.
I don't think this is a serious assessment. For years, the core business of both companies has been facilitating the flow of used goods. Gamestop has moved strongly into collectibles recently, with a partnership with collectible grading firm PSA and the introduction of (essentially) lucrative trading card lootboxes, whereas eBay has capitalized on the same expansion of the collectibles market with new live/flash auction features.
IIRC, Gamestop recently had a "trade-in anything" day, where they accepted a variety of products for store credit. Seems an awful lot like this was some sort of test for accepting products in-store for eBay listings, or something along those lines. They already accept trading cards to send off to PSA for grading and to place into their lootbox system.
As far as efficiencies go, you can see things like shifting shipping by individual sellers to mass shipping to/from a warehouse, a much heavier footprint in collectibles, and perhaps quality control that reduces buyer disputes (this one's a bit iffy).
Well let's be clear, the "trade-in anything" day was a fancy discount day. They gave everybody $5 for whatever they brought in, online you can read from employees that they just donated or threw it all away, no attempt to actually keep any of it to sell.
That said IMO the biggest difference in the two situations you're describing is that EBay is not in the business of buying the items to then sell later, they just facilitate transactions between two parties and some of the logistics (depending on the seller). They're similar as far as dealing with "used goods" but the actual design of the business and risk being taken on is very different.
EBay also not really lacking what you're describing - there are fufillment centers that can be used for EBay listings, there's the EBay "Authenticity Guarantee" program for cards, they already own TCGplayer which does all of this for trading cards way better than GameStop does, etc.
Perhaps somehow these things could be improved by GameStop but I can't imagine it being significantly better than it currently is.
I can't tell you where the nearest GameStop is because afaik they don't have any locations in my country. Can find half a dozen convenience stores that will handle eBay (or Amazon) goods for me within walking distance.
No, why does it matter? I also don't know where my local GameStop is since the few by me closed a couple years ago :P
Plenty of stuff on EBay offers me 2 day shipping clearly via fulfillment centers, as far as I'm concerned that's all that matters. Do you think the addition of GameStop stores would mean EBay can offer faster shipping than that on a significant number of items?
You asked what could be improved with Gamestop. Public knowledge of Gamestop locations is a boon if people don't know where your existing fulfillment centers are.
Sellers what? You generally don't just drop stuff off at a fulfillment center, when you get to that size you're dealing with large amounts of inventory and you ship it to them.
If you're saying sellers could come into a GameStop to have their individual items packed and shipped out, I suppose, but:
1. They don't really have the space for much shipping volume at any of their stores.
2. You can walk into any USPS, UPS, FedEx, etc. store and do that already, you don't need an 'EBay' store. GameStop would presumably get the packages picked up by one of those carriers so it's not saving any shipping time or expense.
For buyers, in many cases there's already alternative drop-off locations similar to GameStop Ex. For UPS deliveries I can get them shipped to a bunch of different convenience stores near me. GameStop stores might be a nice addition to that list but it's not enabling something you couldn't do before, and I would think for most people they already have a closer location than a GameStop.
Well, look at what you can already do with their trading card program. You could just list cards yourself on eBay, of course. You could drop them off at a shipper to send them off. You could keep them at home while you're waiting for a sale, where I guess they're insured by your renter's/homeowner's insurance. And if you want them graded, you can send them off for that however you like, too.
Or, you can bring your cards into Gamestop, and they'll send them off to get them graded and/or buy them from you, at which point they become inventory for their lootbox. With eBay, you'd be able to do all of that, too, except you'd be selling directly to someone else through a consignment service - more pricing freedom.
And then you could start doing it with things other than cards.
They are wildly different businesses. Ebay is not in the business of holding physical goods, they are a marketplace that connects buys, sellers, and shippers and adjudicates fraud, collects funds, handles taxes, etc. They are not a warehouse.
Gatestop is a retail operation that buys and sells goods. It takes on all the liability for fake products, it puts capital on the line to purchase used goods, it is a totally different (and worse) business
"How do you make money? Spinoffs, split-ups, liquidations, mergers and acquisitions." - Mario Gabelli
Just sample from these with replacement sufficiently many times and you're all set. At the very least, you'll owe people so much money that they'll have a massive interest in helping you.
I've been told that Australian company Wesfarmers fanatically avoids synergies when acquiring companies so that if the time comes to cast it off, there's no painful separation of a bunch of shared systems/departments/real estate etc.
Not saying synergy is a dirty word, always. It's the assumption that there is a lot of overlap (which rarely materializes) and that assimilation or merging has no cost. In practice, company cultures are rarely aligned (the merger wasn't conjured by employees, they weren't even consulted) and frustrated talent leaves. Time is lost navel gazing.
Synergy (i.e.: cost reduction) looks great in Q3 balance sheet, but in the mean time intrinsic company value has decreased. The long term prospect isn't so great.
Oh agreed - I was at a company that was the result of two companies merging and while the reduced head count was an easy synergy (don't need two legal, HR, cyber-security etc teams), everything else was pretty slow.
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.
It depends. If Gamestop is able to find the efficiencies that the CEO is claiming, EPS jumps between 50 and 100 percent. Gamestop shareholders get diluted down to owning a smaller piece of a much bigger earnings pie. That's if you don't engage in any conspiracy theories about how many shares retail traders really own (don't go down that rabbit hole).
Suffice it to say, the Gamestop's price floor has gone up each time it's been diluted in the past few years. Perhaps lower highs, but higher lows. And a company that can afford to try a stunt like this.
> Is Ebay really THAT badly run that they can find such efficiencies?
Well, we should point out that Gamestop hasn't grown their own business - they've lost 50% of revenue since 2020. Why would anyone trust that management to "turn around" another business?
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 “
> 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?
The 2023 mini banking crisis has its own wiki page and it's quite informative. Of the three banks involved, one bank saw its shares drop 97%, another "shareholders lost all invested funds" and the third got auctioned off for pennies on the dollar. No investors were bailed out.
Banks go bankrupt all the time. Community Bank and Trust of West Georgia went bankrupt just 3 days ago. The Metropolitan Capital Bank & Trust that went bankrupt back in January. 99% of the time the investors are completely wiped out. Bailouts almost never happen, which is precisely why it's such big news when it happens.
Eh, they were kind of bailed out in that uninsured deposits were made whole. Not saying they shouldn't have done it (fighting contagion is like fighting fire, earlier is prob better and potentially cheaper in the end if your confidence bluff succeeds) but "bail out" is a flexible enough term that electing to cover uninsured deposits at the expense of uninvolved parties feels like it qualifies to me. Plus it has some of the same smells as other bailouts - weighing moral hazard vs systemic risk.
“They” in your sentence is not SVB. Depositors who put money in an accredited bank should not have to worry about bank runs. Risk free banking for depositors is a cornerstone of the US economy.
There’s also no moral hazard here - the shareholders, equity partners, and debt holders were correctly wiped out.
Risk free banking past FDIC limits is not explicitly a cornerstone of the US economy, it is a thing that is sometimes done and sometimes not done depending on contagion risk. If it's so essential then we should make it explicit so that everyone pays the fair share for their deposit insurance.
The problem is that leveraged buyouts allow me to effectively inflict that debt on other companies, making a buyout offer the existing shareholders won't be able to resist and then reorienting its operations around servicing the debt I took out. In fact, lenders arguably favor this, letting me use the company I'm acquiring as collateral to acquire more debt at better terms than would otherwise be available.
The people who work at the bought-out company who will then be fired due to PE now gutting workforces to pay off the debt. Laborers are getting the shaft
It's the problem of all the employees (and potentially customers) of the company being plundered.
They have no say in the matter, and given that the lender can probably absorb the loss without, you know, missing mortgage payments or losing health insurance, I would absolutely argue it's not just their problem.
You can certainly hold the opinion that "it's just business" but it feels like an unnecessary part of business that very often has real disruptive and detrimental effects on average working people, for the sole benefit of rich people getting richer.
And yes I get that it's not just a PE problem, but PE is a big one of these kinds of problems.
This is a fundamental misunderstanding of the US employment model. Businesses can do all sorts of dumb things that end up making them unable to continue to invest in employees. The check against that is the greedy owners.
Regulations designed to ensure businesses never take risky bets lest they have to lay people off would be a nightmare of unintended consequences and surely in aggregate hurt employment.
I assume the person you answered is saying that level of risk taking should be regulated. Not that no level of risk should be allowed if they have to fire people. Surely there is a point where you want some guardrails, so the C-suite has to at least take in account their employees as part of their risk assessment
Is the idea that big companies take too many risks today? If so, I’d love to see data, because the usual knock on big companies is they become dinosaurs and risk-averse, and therefore stop innovating and eventually get displaced by upstarts.
You're bringing your own conclusions to this, I never said anything about regulation.
I was just responding to OP who said that PE plundering via debt loading is only the lender's problem when things don't work out, and I assert that it is not.
Employees often pay a much more impactful price when PE-driven cuts occur (whether by design or because the plan failed).
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.
It is not at all clear to me why people get upset about using borrowed money on the balance sheet of the acquired company.
Say company B wants to buy company A. Company A is worth $20B, but the buyer doesn't have that much, and the original owners/shareholders want to get paid. So Company A takes out a $20B loan, paying out the original owners, making that company worth $zero. Now Company B gets it - it's still worth zero because of the fat loan, but now Company B is the owner. I don't feel like anybody got taken advantage of in this financing model.
In fact, this is pretty close to what happens in the US real estate market. When I buy a house I take out a loan against that house. It's non-recourse, so it's very much like the house borrowed the money, not me. In any case, I got the house with a lot less money than the purchase price. Sometimes nearly zero from me in fact.
I do understand why people get angry about what often happens next - layoffs and such - but I think that's very independent of the financing used to purchase the company. The acquirer could pay all cash using money from it's own bank account, and then still lay a bunch of people off - and in fact that often happens.
If the market is "efficient", then the debt should work against the market cap. For example if we assume a $50B offer at 50%/50% debt and stock, then we should expect the market cap to only increase by $25B. And for GME shareholders, they should expect their stock price to stay roughly the same because that $25B market cap would be offset by a corresponding increase in the number of shares. The debt would increase the enterprise value of the company, which is the more comprehensive metric to use when trying to value a company as it takes into account both debt obligations and cash on hand.
Of course the market may move the price up or down based on how much they like the merger. If they think there is some synergy here, they may move things higher. If they think the debt is too burdensome or have other issues with it, they will move the price lower. But all things being equal, any market cap increase of a buyout should be offset by the dilution that was incurred to finance the deal.
What looks like a "hack" here though, is that Cohen tied his incentive structure to market cap and not share price. The fact that his award is in the form of options and not RSU's does add some incentive for a higher share price, but at the end of the day, it looks like he can get 100% of his award by simply buying companies using dilutive stock issuance. Not sure how much the GME faithful appreciated that at the time of the vote. I think Elon did something similar in his incentive package.
Yes...but isn't his employment contract structured to incent this kind of move? His pay is 100% at-risk in the form of 170M+ stock options that only vest if he hits some astronomical targets.
I'm just not sure his rationale is completely objective given such a structure...
> I'm just not sure his rationale is completely objective given such a structure...
Which is why the board would have to approve the deal and he can’t act alone on it. He was hired to create and execute the strategy including finding the target. The real question is, why did he get hired to do something anyone could have done?
Whether the acquirer or target borrows the money, this would not allow to increase the market cap of the company. It would increase the enterprise value (because the debt allows you to make a bigger acquisition), but not the market cap.
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’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.
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.
> Even a cursory familiarity with the history of the industry shows both that this is untrue
The modern trend of believing that “history” is made up of one or two things that everyone saw on the news is actually really entertaining. Definition of “cursory understanding” tbh.
The banking industry, historically is far from stupid.
This particular story is just basic PR driven market manipulation and has nothing to do with the banking system.
> The modern trend of believing that “history” is made up of one or two things that everyone saw on the news is actually really entertaining.
It would be useful if you could provide a more detailed version of your argument. I don’t think you seriously believe that banks don’t make mistakes but the way this is written does sound like you’re saying it’s highly unlikely while ignoring the other half of the sentence you quoted.
I think you’re missing a basic fact here. No bank has offered to finance this deal.
Furthermore, historically, banks generally don’t make mistakes. You can find news stories from over the years showing that some banks have made some mistakes, but that would only reinforce my general point about people confusing one or two things they see in the media with “history” as a whole.
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.
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.
He wants to be the next Warren Buffett, I believe this is a stated goal, or at least he’s been very clear that this is his inspiration. He wants GameStop to become the next Berkshire.
It’s not always wealth accumulation as driver. It’s often just chasing deals and fixing companies that is fulfilling for some people. But, it’s also the thrill of the hunt and he’s effectively a big game hunter looking for a huge trophy.
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.
Yes and it was 1) incredibly notable, 2) 13 years ago, 3) in another country, and 4) following one of their worst performing products ever. Iwata's (maybe voluntary) temporary pay cut was big news because of how exceptional it was.
As of a few months ago yes he does not take a salary anymore and he has actual skin in the game that could pay off in the tens of billions.
Taking $0 is unusual but not unheard of (Musk I think does this too) and it’s very common for CEO’s to make $1mill (or even less) and have like…80%+ of their compensation tied to performance metrics/stock options. There are a lot of caveats to saying “he takes no salary.”
It sounds nice on paper but he isn’t really doing something revolutionary here. He also has rather ambitious numbers to hit if what I’m reading is accurate, so it makes sense he’s taking massive swings like this. We’ll see if it happens, let alone pays off.
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.
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.