The Dumbest Takeover Bid!

Okay, so on Sunday evening, the video game retailer GameStop announced a $55.5 billion unsolicited bid to buy the online auction site eBay.

This is an ambitious move for GameStop, primarily because GameStop itself only has a market capitalization of around $12 billion. So, they're attempting to buy a company that's roughly five times their size, which can happen, but it's not normally how acquisitions work.

Now, some people have questioned the ambition of targeting eBay. It is, after all, only five times GameStop's size. If you're going to announce a transformative, non-binding acquisition funded partly with shares that don't exist, why think so small? Nvidia has a market cap of around $4.5 trillion dollars. GameStop could issue $5 trillion of stock and make a proper run at it. There would even be genuine synergies. GameStop stores already sell graphics cards to gamers. You could describe it as a vertical integration play. That's the kind of language that gets sovereign wealth funds excited. I'm not sure why Cohen left this on the table.

Now, eBay was founded in 1995 and went public in 1998. It was one of the original .com stocks, and it might surprise you to know that even in 2005, it was a bigger company than Amazon. When it went public, almost all of the listings on eBay were for Beanie Babies, which were themselves in a bubble at the time. I think at one point, a stuffed purple bear was worth more than eBay servers. So, in a sense, eBay has always been a meme stock. It just took 30 years for meme stock to try to buy it back.

Amazon started listing used goods on their marketplace and was able to outcompete eBay with their logistics network. At the same time, a whole ecosystem of niche marketplaces appeared: Vinted and Depop for secondhand clothing, StockX for sneakers, Reverb for musical instruments, The Real Real for luxury goods, and they all did the same thing. They took specific profitable categories away from eBay and offered authentication so that buyers could trust that the vintage Rolex they were purchasing was not, in fact, a vintage fake. eBay was left as a sort of general-purpose digital car boot sale where you could buy anything, but couldn't be entirely sure what you'd receive.

Over the last few years, eBay has actually managed a fairly successful corporate turnaround. Under their new CEO, they stopped trying to compete directly with Amazon and went back to focusing on their heritage: selling used goods, auto parts, and collectibles. Sales grew by 17% in the first quarter. They have around 135 million active buyers, and their stock is up over 130% since the start of 2024. So, things are going reasonably well for eBay.

GameStop, on the other hand, is a famous meme stock. It recently reported a 14% drop in quarterly revenue and is currently in the process of closing nearly 500 of its retail locations across the United States. Their core business is selling physical video game discs to people who increasingly just download their games. So, naturally, the next logical step was a $56 billion hostile takeover of a much larger, more profitable tech company, because that just makes sense.

The CEO of GameStop is Ryan Cohen. Now, meme stock companies making unusual capital allocation decisions is not new. A couple of years ago, the CEO of AMC, the movie theater chain, spent $28 million of actual cash to buy a 22% stake in a Nevada gold mine. The gold in the mine is what geologists call refractory, meaning it is chemically trapped inside sulfide minerals and is very difficult to extract. So, a cinema chain spent real money on largely inaccessible gold. But I suppose if you think about it, gold is really just a 4,000-year-old meme, too. So, at least it was on brand.

Cohen has been taking a similar approach. In 2025, dozens of companies started imitating MicroStrategy's corporate treasury strategy of issuing shares and debt to buy Bitcoin. It was a trend. The idea is that if you put Bitcoin on your balance sheet, your stock goes up because crypto people get excited, and then you issue more stock to buy more Bitcoin, and so on. It was supposed to be a perpetual motion machine, which it is, until it isn't. Last year, GameStop spent half a billion dollars buying Bitcoin in an attempt to join this trend. The market responded to this bold financial innovation by immediately dropping GameStop's stock price by 11%. It turns out that when you layer a meme stock on top of a crypto treasury strategy, the two memes might cancel each other out rather than reinforcing one another. Who could have predicted that?

This is not the first time that Cohen has attracted attention for the way he moves in and out of struggling companies. In 2022, he built a large stake in Bed Bath and Beyond, filing disclosures that drew significant attention from retail investors on Reddit, many of whom bought shares on the basis of his involvement.

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After disclosing his investment in Bed Bath and Beyond, which caused a spike in the stock price, Cohen then sold his entire position near the peak in August 2022. The stock subsequently collapsed. The SEC opened an investigation. A class-action lawsuit was filed alleging that his disclosures and social media activity amounted to a pump-and-dump scheme, allegations that Cohen denied. He was not charged by the SEC. The class action survived a motion to dismiss, though a separate short-swing profits claim was later dismissed as moot after Bed Bath and Beyond filed for bankruptcy.

Now, none of that means anything improper occurred. It's entirely possible that Cohen simply changed his mind about the investment. People are allowed to change their minds, and eBay's board will no doubt have reviewed all of this publicly available information before deciding how to respond to his offer. I'm sure it'll all be fine.

Undeterred by the fact that his company is worth a fraction of the company he's trying to buy, Cohen went on CNBC on Monday morning to explain the deal to Andrew Ross Sorkin. He appeared via webcam, wearing a black leather jacket in the style of Nvidia CEO Jensen Huang, or even Elon Musk, against a blurred background. I think the idea was to channel the energy of a visionary tech CEO, but the overall effect was less "I'm reshaping the future of computing" and more "I'm about to ask you to invest in an unregistered crypto token." It was giving "T-U Elon Musk," which, to be fair, is probably the most on-brand aesthetic choice a meme stock CEO has ever made. "GameStop is the future of e-commerce. The details are on our website. I don't understand what's confusing about that." So, that is essentially how the interview went.

Now, Andrew Ross Sorkin has essentially become the patron saint of enduring unhinged billionaire interviews. He's the guy that Elon Musk kept calling "Jonathan" at the Dealbook Summit right before telling advertisers to "GFY" a few years ago. It's a hard job, and Jonathan has to do it. But even he seemed to struggle with this one. The core problem was simple: Sorkin kept asking Cohen how GameStop planned to pay for a company that costs $56 billion when GameStop is worth $12 billion. Cohen kept saying, "It's half cash, half stock, and the details are on our website." Sorkin pointed out that the math didn't add up.

"Well, I think we can start with the idea that the market cap of GameStop is, call it, $11 billion dollars. Uh, you have $9 billion uh on your balance sheet. Arguably, if you're, if you're providing, uh, effectively all of your stock and then, and then the cash that gets you to 20, you have this letter from TD, that's another 20. Uh, we're now at 40. Uh, but we're still off, uh, by, call it, uh, 16, and, and the 20, as far as I understand, while it's considered a highly confident letter, meaning TD saying they're highly confident that they would provide the financing, it's not locked financing."

"Yeah, we'll see what happens. Um, I, I hear you." Becky Quick tried the same question, and Cohen said, "I don't understand your question again." Quick said, "But you're on our air." And Cohen said, "So, but I don't understand your question." It was like watching a man try to exit a conversation by walking into the same locked door over and over again.

It's worth noting that the interview was not universally received as a disaster. On Reddit's WallStreetBets, the spiritual home of GameStop retail shareholders, the reaction was overwhelmingly positive. Comments described Cohen as "savage," "a badass," and more succinctly as having "put Sorkin's anatomy in Sorkin's mouth." The general theory was that Cohen was deliberately giving CNBC a bad interview as punishment for their years of negative coverage of GameStop, and that the real, genuine interview would be given to friendlier outlets, specifically a later appearance on Fox Business with Charles Payne, which, by all accounts, was considerably warmer.

Now, this makes a certain kind of sense if your goal is to manage the mood of a loyal retail shareholder base who will not sell no matter what. It makes less sense if your goal is to convince the institutional investors who own the majority of eBay shares that you're capable of running a $56 billion leveraged buyout. eBay shareholders are not on Reddit; their fund managers will need to vote on this deal, and they will want to understand the financing before they do. Repeating "it's on our website" to Becky Quick three times is not the kind of capital allocation communication that typically moves institutional shareholders.

So, let's do what Cohen wouldn't and look at the math. The crude version is this: $9.4 billion of cash shown on GameStop's balance sheet, a $20 billion loan (which he may or may not be able to get from TD Bank), and $28 billion in newly issued GameStop stock. Half cash, half stock. On paper, it adds up. The reason Cohen didn't want to explain this on television is that each component is worse than it sounds.

The cash portion: GameStop says it has $9.4 billion in cash and liquid assets. According to Robin Wigglesworth at the FT, that breaks down into $6.3 billion in actual cash, $2.7 billion in unexplained liquid investments (whatever that means at a company like GameStop), and roughly $368 million in Bitcoin. So, the cash is mostly cash. Fine.

The debt portion: TD Bank has provided what is called a "highly confident letter," saying that they're highly confident that they could arrange $20 billion of financing. Now, as FT Alphaville pointed out, a highly confident letter is not a binding commitment. It is essentially a bank saying, "We think we could probably do this if we tried," which is the kind of assurance that has historically done a lot of heavy lifting in transactions of this nature. The only reason these letters ever meant anything was because in the 1980s, Drexel Burnham Lambert's letters were backed by the credibility of Mike Milken and the entire junk bond market he had created. TD Securities is a fine Canadian investment bank, but it's not Drexel Burnham Lambert in 1986. Also, and this is important, GameStop itself cannot support $20 billion of debt. Its estimated EBITDA is around $469 million, and it already has $4 billion of existing debt. This is not GameStop borrowing money; this is a leveraged buyout where the debt would be secured against eBay's cash flows. GameStop is essentially proposing to use eBay's own balance sheet to finance its acquisition.

And then there's the stock portion. This is the part that Cohen really didn't want to discuss, and it's easy to see why. GameStop's stock is trading at around $24 a share. To deliver $28 billion of stock, they would need to issue more than a billion new shares. And there's a small problem with that: GameStop's corporate charter only authorizes 1 billion shares in total, and 448 million shares are already outstanding. So, they're proposing to pay for half of this acquisition with shares that do not currently exist and they're not currently authorized to create. This is a fixable problem; shareholders could vote to authorize more shares, but this is the kind of thing that you might want to have looked into before announcing a $56 billion takeover on a Monday morning. But perhaps that level of detail was on the website.

Now, that authorization issue aside, here's where it gets interesting. As Matt Levine pointed out in his Money Stuff column, if you issue a billion new shares to buy eBay, legacy eBay shareholders would end up owning roughly twice as much of the combined company as legacy GameStop shareholders would. GameStop has 448 million shares outstanding. After issuing another billion or so, the former eBay holders would own the majority of the combined entity. So, this is not really GameStop buying eBay; it's closer to eBay accidentally acquiring GameStop, with Ryan Cohen volunteering to be the CEO of the new company, which is possibly why he preferred to say "it's on our website" rather than explain this on live television.

Now, it's worth being clear about who benefits from this structure. Cohen recently struck a new pay deal, and his options pay out if GameStop's market capitalization hits $100 billion. To get from $12 billion to $100 billion, he needs the number to go up. He does not necessarily need the value per share to go up. If you issue a billion new shares and the market cap grows accordingly, Cohen hits his target. The shareholders who own GameStop today end up with a much smaller slice of a larger pie. Whether that slice is worth more or less than what they started with depends entirely on whether Ryan Cohen is a better manager of eBay than eBay's current management, which is, at this point, an untested hypothesis.

This also incidentally explains why the interview kept circling back to Cohen's compensation package. In January, GameStop's board granted Cohen a performance-based stock option award that would pay out up to $35 billion if GameStop hits a market capitalization of $100 billion and $10 billion in cumulative EBITDA within 10 years. GameStop is currently worth around $12 billion. Getting from $12 billion to $100 billion organically is difficult. Getting from $12 billion to $60 billion by bolting on a $46 billion company and then growing 10% a year for a decade is considerably less difficult. As Matt Levine notes in the corporate governance literature, this sort of thing—CEOs pursuing size rather than return on investment—is called empire building, and it's generally considered a bad thing. On CNBC, Cohen said his compensation package was designed to align his interests with shareholders. Becky Quick noted that it might instead be designed to align his interests with a very large number. Cohen said that he didn't understand the question.

But anyhow, so what is the actual strategy to force this deal through? Well, in his letter, Cohen pointed out that GameStop had built a 5% stake in eBay, making them one of eBay's largest shareholders, which he says forces the board to take his proposal seriously. But when the FT looked at GameStop's 13D regulatory filing, they found a slight discrepancy: GameStop had only purchased 25,000 actual shares of eBay. The rest of their 5% economic exposure was a series of American-style put and call options. Now, a corporate board has a fiduciary duty to its actual shareholders. They do not have a fiduciary duty to people who bought derivatives betting on the direction of the stock price. Those are not the same thing.

Cohen also told the Wall Street Journal that if the eBay board isn't receptive to his unsolicited offer, he's prepared to run a proxy fight and take the offer directly to shareholders, which sounds very aggressive and hostile until you read eBay's proxy materials and realize that the deadline for shareholders to nominate director candidates for the upcoming annual meeting has already closed. It's generally considered poor corporate strategy to threaten a hostile board takeover a few weeks after the deadline has passed. But maybe the workaround is on their website.

So, let's set all of that aside for a moment and ask the more basic question: What's the actual business logic of combining a shrinking video game retailer with an online auction house? Well, Cohen says that GameStop's 1,600 physical US locations will give eBay a national network for authentication, intake, fulfillment, and live commerce. The idea is that instead of mailing a vintage Rolex or a rare Pokémon card to a centralized eBay authentication hub, you could just walk it into your local GameStop. This is actually not a terrible idea. The only slight issue is that GameStop is currently in the process of closing nearly 500 of those exact locations. It's a bit difficult to serve as a national logistics and authentication network for a $50 billion tech company when your windows are boarded up and your lease has been terminated. I'm also not entirely convinced that the teenagers working at GameStop are qualified to authenticate luxury goods. Though, to be fair, they probably know their way around a Pokémon card. And a vintage Rolex is really just a Pokémon card for people who wear suits. So, perhaps there's something there.

The other part of the strategy, the cost-cutting, is just killing eBay's marketing budget. Cohen proposes $2 billion in annual savings, most of which comes from slashing $1.2 billion from sales and marketing and $500 million from general and administrative costs. As FT Alphaville noted, this is the kind of thing a first-year private equity associate would propose: cut the marketing budget, fire the admin staff, make the numbers look better. It might even work for a quarter or two. The first-year associate would then leave for a better job, and someone else would deal with the consequences. Cohen, to his credit, has not indicated any plans to leave.

When you put it all together: a $56 billion bid funded with shares that don't exist, a proxy fight that missed the deadline, and a retail strategy reliant on stores that are closing, and a cost-cutting plan that amounts to slashing the marketing budget of a company that you're trying to grow—you start to understand why Michael Bur sold his entire GameStop stake this week. Sometimes the smartest trade is just leaving.

Now, it's worth looking a bit closer at Michael Bur's decision to sell his stake because his relationship with GameStop goes back quite a long way. For those who aren't familiar with him, Michael Bur is a hedge fund manager who's probably best known for successfully betting against the US housing market before the 2008 financial crisis and for being played by Christian Bale in the film *The Big Short*. But he's also one of the people who inadvertently helped start the GameStop frenzy. Back in 2019, long before Ryan Cohen arrived, Bur took a large stake in GameStop and began writing letters to the board urging them to buy back stock. Those filings drew attention from retail investors on Reddit. And while it was Keith Gill, known as Roaring Kitty, who actually lit the fuse on the 2021 short squeeze, Bur was the one who left the matches lying around. He then came back a few years later, saw the fire, and decided to warm his hands on it for a while. He's now left the building entirely, which is probably the right call.

When I say he came back to warm his hands, more recently, Bur had bought back into GameStop. His thesis was what he called "instant Berkshire." The idea that GameStop, sitting on a massive cash pile with a declining retail business, could simply stop pretending to be a video game store and instead become a holding company, making disciplined acquisitions with cash, much like Warren Buffett did with a failing textile mill called Berkshire Hathaway back in the 1960s. It's a nice theory, but Cohen is no Warren Buffett. Half of GameStop's offers are in shares of a volatile meme stock. Buffett famously and consistently signals that his shares are strongly undervalued and therefore prefers to make only cash bids, which are also easier to value. Buffett doesn't usually wade in telling the world how much better he would be at running things than the incumbent CEO. Instead, he aims to select managers he believes in and lets them get on with running their businesses. Warren Buffett has also never tried to pump the value of Berkshire Hathaway by buying Bitcoin.

The GameStop offer is trying to buy a company eight times its own size: $12 billion market cap, plus $4 billion in debt, minus $9 billion in cash, against a $56 billion offer, which works out at roughly eight times its enterprise value. Now, it's not unheard of for a smaller company to acquire a larger one. Two years ago, David Ellison and Skydance Media, a company a fraction of the size of Paramount, managed to complete exactly that kind of deal. The key difference is that David Ellison had his father, Larry Ellison, one of the world's wealthiest people, putting $6 billion of real money into the transaction. David Ellison also spent the better part of a year finding additional Middle Eastern investors to close the financing gap. The deal was binding. The money existed, and it closed. Cohen's offer is non-binding. The financing is described as "highly confident," and the shares required to complete it have not yet been authorized by shareholders. These are slightly different situations.

On Monday, Bur announced on his Substack that he had sold his entire GameStop position. He wrote that the "instant Berkshire" thesis was never compatible with greater than five times debt to EBITDA and that he was never okay with interest coverage under four times. He calculated that the eBay deal would push leverage to roughly 7.7 times earnings, a level he described as "bordering on distressed." He pointed to Wayfair and Carvana as companies that struggled under similar debt burdens, noting, "Those are the survivors. They are few." His closing line was, "Never confuse debt for creativity." That is genuinely a very good line. It's the kind of line you arrive at after spending years watching people do exactly that. It's also a fairly concise summary of the entire GameStop-eBay proposal, which is impressive efficiency for five words.

So, the man who predicted the 2008 financial crisis and who helped spark the original GameStop mania looked at a $56 billion takeover, funded with a highly confident letter from a Canadian bank and a billion shares that don't exist, and decided that the road to becoming Berkshire Hathaway probably shouldn't pass through capitalist hell.

So, with the smart money quietly heading for the exit, no authorized shares to issue, and a non-binding letter from a Canadian bank, where exactly is the missing money going to come from? The Wall Street Journal floated the idea that Cohen might tap outside investors, specifically Middle Eastern sovereign wealth funds. Now, this actually makes perfect sense. If you're looking for an investor to throw tens of billions of dollars at a structurally unsound business plan proposed by a charismatic founder, you call the people who funded WeWork. The people who gave SoftBank $45 billion for a Vision Fund that managed to lose money on technology investments during the greatest tech bull market in history. The people who have poured over $6 billion into Lucid Motors, an electric car company that loses roughly $800 million a quarter and has yet to turn a profit. The people who put a billion dollars into Magic Leap, a VR headset company whose product was so underwhelming that their own demo videos had to be faked. And of course, the people whose own 170 km long mirror city in the desert has been scaled back by 98.6% because they ran a bit low on cash. I believe the latest plan is to just use the neon port to export oil, bypassing the Strait of Hormuz, which is a slight pivot from the holographic teachers and the robot dinosaur cage fighting that was pitched a few years ago. So, asking these funds to back a used video game retailer's hostile takeover of a $50 billion auction site, it fits right into the portfolio.

Now, to be fair to Cohen, we do live in an era where making enormous M&A announcements with questionable follow-through has become fairly normal. Just two weeks ago, SpaceX announced that it had secured an option to acquire an AI coding startup called Cursor for $60 billion, or alternatively, to just pay Cursor $10 billion for a collaboration and not buy them at all. So, it's a $60 billion deal where the buyers explicitly built in the right to not do the deal for a $10 billion break fee. That's just how things work now. Acquisitions are optional, and the $10 billion is just a conversation starter.

Cohen doesn't even have that to worry about. His offer is non-binding. If this bid falls apart, which it almost certainly will, he can just walk away. In the meantime, he's generated a massive news cycle, drawn attention to GameStop stock, and positioned himself closer to the market capitalization thresholds in his $35 billion compensation package, all without having to buy anything. Some skeptics might describe this as a very innovative approach to corporate strategy. They might note that announcing that you're going to buy something to generate excitement around your stock price with no real ability to follow through is, well, it's the sort of thing the SEC used to frown on back when things like that were frowned upon. But who knows, maybe the sovereign wealth funds will come through, TD will find $20 billion dollars down the back of the sofa, and GameStop will start authenticating vintage Rolexes next to the used PlayStation controllers. We'll have to see what happens.

If you enjoyed this video, you should watch my video on prediction markets next. Don't forget to check out our sponsor, GenSpark, using the link in the description, and talk to you in the next video. Bye.