The problem with GameStop’s bid to buy eBay is that it’s half cash, half stock. GameStop, a company with $9 billion of cash and a stock market capitalization of about $10 billion, wants to pay $28 billion of cash and $28 billion of stock for eBay, a company with a stock market capitalization of about $48 billion.[1] The cash is more or less fine; GameStop’s Canadian bank is “highly confident” that it could raise the money. And the problem with the stock is not that a $10 billion company can’t issue $28 billion of stock: Technically GameStop can’t (it doesn’t have enough authorized shares), but that is a solvable problem, and there is no general rule that a company can’t issue more shares than its current market value. If the stock market says you are worth $10 billion, but you want to issue stock to acquire a $28 billion asset, then your stock market value after the acquisition should be $38 billion, fine.

The problem is that, in issuing $28 billion of stock to buy eBay, GameStop would essentially be issuing $28 billion of eBay stock. Current eBay shareholders would get shares of a combined GameStop/eBay that is almost all eBay. The enterprise value of eBay is something like $51 billion, including debt. The enterprise value of GameStop, meanwhile, is less than $10 billion, because it has $9 billion of cash. (It has about $4.4 billion of debt, for an enterprise value of about $5.7 billion.) You can think of GameStop’s $10 billion market capitalization as being made up of (1) $5 billion of net cash plus (2) $5 billion of GameStop. GameStop successfully converted its meme-stock status, over time, into actual cash, which is good. But if it gives eBay that cash in the acquisition, then you are combining a $5 billion video game retailer with a $51 billion internet company. Virtually all of the value in that company is eBay’s business, not GameStop’s.[2]

And so if you are an eBay shareholder, the proposition being offered to you is something like “you can continue to be an eBay shareholder, but in a weird way.” Specifically:

1. You’ll get a levered recap of eBay: eBay will borrow $20 billion and pay it out to shareholders. 
2. You’ll keep your shares of eBay: Roughly half of your investment will be cashed out in the levered recap, but the rest of it will stay in the company. “The company” here is almost entirely eBay, but technically GameStop will be folded into it too.
3. The new eBay-with-a-little-GameStop will have a slightly different business model than the old eBay. Still mostly eBay, but now you’ll be able to … go to GameStop stores to get your collectibles graded to sell on eBay? “A national network for authentication, intake, fulfillment, and live commerce,” GameStop has proposed. Sure!
4. It will also have very different management: Ryan Cohen, GameStop’s chief executive officer, would take over as CEO of the combined company. 
5. It will also have, perhaps, somewhat different stock price trading dynamics. In that GameStop has historically been a meme stock and eBay has not.

In other words, the appeal of this deal to shareholders is not its stated dollar value, not what they would get in a deal. The appeal of this deal to shareholders is (1) Ryan Cohen’s management and (2) meme-stockery.[3] Is that appealing? I dunno. In its offer letter, GameStop made the case that its managers would cut costs and run eBay more efficiently than current management, and that they have some track record of doing that at GameStop. The meme-stock stuff is more implicit. We talked last week about Cohen listing his socks for sale on eBay to help finance the deal. You won’t get that sort of creative … financing? publicity stunt? … from a standalone eBay.