Why the GameStop-eBay deal is already dead

GameStop just offered $56 billion to buy eBay this morning.

Read that sentence again. An $11 billion company is trying to buy a $48 billion company, half cash and half stock. The cash side alone would eat GameStop's entire $20 billion line of credit and still need a private equity rescue.

The pitch is that GameStop's CEO will turn eBay into the next Amazon. This is the same CEO who has not yet turned GameStop into a sustainable business.

Most of the financial press will spend today asking whether the deal can happen. The market already told you the answer in the first 30 minutes of trading.

Here is the framework you need.

When a real takeover offer hits the tape, an entire genre of trade kicks in called risk arbitrage. Arb traders make their money on the gap between the current stock price and the offer price.

If the deal looks credible, those traders buy until the spread tightens to within a few percent of the offer. That is them saying "we believe this closes."

Now apply it to today.

eBay opened up about 4% on the news. The market cap is around $50 billion against a $56 billion offer. That is a 12% gap.

On a credible deal you would see two or three percent. The arb traders are not closing that gap. They do not believe GameStop can finance this.

For the deal to close, GameStop would need a private equity firm willing to write the cash check. That capital exists.

Whether any PE firm wants to back the GameStop CEO on a deal this size is another question. So far the market is voting no.

Take-unders by smaller companies are real. There is a track record. But you have to read what the price action is telling you, and right now it is telling you this is a stunt.

If you are trading eBay today, fade rallies into the headlines. The spread is your tell, and if it starts tightening fast, the arb traders changed their minds and you change with them.

To your success,

Don Kaufman

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