Three months after Ryan Cohen startled Wall Street with an unsolicited $56 billion bid for eBay Inc. (NASDAQ:EBAY), GameStop Corp. (NYSE:GME)’s CEO appears to be backing away from it. Bloomberg reported on August 10 that Cohen is considering withdrawing the offer entirely and replacing it with something far more modest: a partnership or joint venture. Following reports describing the probable change, GameStop Corp. (NYSE:GME) shares climbed 1.6% in early trade, while eBay Inc. (NASDAQ:EBAY) shares sank 2.2%. The turnaround caps a saga where the stock market gave its verdict on the deal’s worth long before Cohen did.
Audacious Bid to Quiet Retreat
GameStop’s initial approach, made in May, was a $125-per-share offer divided evenly between cash and GME stock, an attempt by the much smaller video-game store to swallow a firm approximately six times its size. eBay’s board rejected it days later, calling it “neither credible nor attractive”, flagging concerns over how GameStop Corp. (NYSE:GME), which had just $8.4 billion in cash compared to a market value that had dropped to $8.6 billion, would actually fund it.
Cohen didn’t take no for an answer. The CEO of GameStop kept buying eBay stock through the summer, building the company’s stake to 9.75% to become eBay’s second-largest shareholder, trailing only Vanguard’s index funds. He stated on Bloomberg TV that he planned to close a deal “one way or another.”
That said, it appears this conviction is waning. Cohen is reportedly exploring a more limited approach, which would allow eBay Inc. (NASDAQ:EBAY) to expand in high-margin areas like trading cards and collectibles by utilizing GameStop’s roughly 1,600 US retail locations. In exchange, GameStop Corp. (NYSE:GME) would want a seat or two on eBay’s board. Notably, GameStop has not yet made a choice, and it is only a fraction of the initial bid’s ambition.
The Market Already Had An Opinion
GameStop’s stock has dropped 28% since the bid was revealed in May, while eBay’s has increased 7.6%. That’s about as clear a signal as markets can give. Investors viewed the acquisition as detrimental to GameStop’s value and mostly disregarded it as a major risk to eBay Inc. (NASDAQ:EBAY), whose stock continued to rise throughout the whole incident. The response to the news on August 10 followed the same pattern. In premarket trading, GameStop Corp. (NYSE:GME) shares slightly increased while eBay slightly decreased. The market saw a withdrawal from an excessive, ill-funded bid as positive news for the acquirer and only slightly negative for the target since few investors appeared to think the original deal would ever close.
Institutional Positioning
Prior to the report, smart-money positioning indicated a growing sentiment gap between the two retailers. Insider Monkey’s 13F database shows that institutional hedge funds reduced their exposure to GameStop Corp. (NYSE:GME), down from 31 in Q4 to 29 in Q1. Adding to this pressure, GameStop has a strong short interest of 13.55% of the float, suggesting that a number of institutional investors are betting against its core retail activities. Meanwhile, institutional backing for eBay Inc. (NASDAQ:EBAY) increased from 59 fund holders in Q4 to 61 in Q1, while short interest remained low at 3.51% of float.
The Verdict
The M&A retreat greatly affects the risk-reward balance of both equities. Dropping the $56 billion bid eliminates significant equity risk for GameStop Corp. (NYSE:GME), while its 9.75% stake in eBay provides solid asset support despite ongoing core retail headwinds and significant short interest. Meanwhile, eBay Inc. (NASDAQ:EBAY) remains an attractive asset for value and income portfolios. De-risked from hostile takeover disruption provided GameStop abandons the takeover bid, eBay provides consistent free cash flow as well as low-cost upside from scaling its high-margin collectibles should GameStop’s 1,600 physical locations become available.
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