So today we thought we'd just live see what Claude for Excel does and puts together if we ask it to build a merger model.

And which deal are we going to be building a model for, Graham? The hottest M&A, the best M&A deal in the market.

It's the ingenious GameStop acquisition of eBay.

GameStop has made a bit of a crazy offer for eBay, a company four times its size.

In a lot of cases, it's not really clear immediately if something's going to be accretive or dilutive. You actually have to run through the model math to figure it out.

The merger model allows us to see how the business would look combined, how they would look- Yeah ... and what some of the key metrics that investors look at.

GameStop cash available, $800 million.

I thought they had a ton of cash, Debs.

This step, as an analyst, would take you quite a lot of time to bring all this information together, and it's done it in just a matter of minutes.

100%.

Welcome to all of our listeners. Welcome to this week's episode of "What's the Big Deal?" where we take a look under the hood at major deals in the public and private markets and explore finance industry developments.

My name is Debs Taylor, and I'm going to use my experience from my career in investment banking to bring a public markets perspective to our discussions.

And I'm Graham Smith. I'll use my background in investment banking and private credit to bring the private market perspective here.

Excellent. I think we're going to have to draw on quite a lot of our experiences to talk about today's deal. Graham, what is the big deal this week? So today the big deal is we've been talking a lot about AI, obviously.

We've done some live modeling together. I mean, not really modeling.

We've done some deal analysis together in Excel.

So today we thought we'd just live see what Claude for Excel does and puts together if we ask it to build a merger model. So a little bit of live demo with some of the new AI Excel tools.

And which deal are we going to be building a model for, Graham? What else do you think the hottest M&A, the best M&A deal in the market that the market has ever, ever seen.

God, I sound like Donald Trump here.

Obviously, it's the ingenious GameStop acquisition of eBay.

What else could we do? It is so hot. And I cannot wait for this episode.

I think it's going to be an interesting one. We will start off with a quick summary of the deal, just in case you haven't been keeping track of what's been going on in the markets.

GameStop has made a bit of a crazy offer for eBay, a company four times its size. And actually, bizarrely, that stat isn't the craziest thing about this deal.

The second thing we'll do is, well, we'll have Graham live on air, showing us how to build a merger model using AI.

And I promise the numbers will surprise you.

They might surprise us as well, who knows.

And then thirdly, we'll have a quick look at the latest on the deal where eBay has rejected the offer from GameStop on the grounds that it's neither credible nor attractive, which really is quite brutal as a rejection. We'll find out why they've said this.

So let's kick off with a quick summary of what's been happening, what the offer on the table is from GameStop.

So we've got GameStop offering $125 per share to eBay, and it's a mix of cash and stock, 50% cash, 50% stock, valuing eBay at $56 billion.

That's almost four times GameStop's market cap, and that pretty much makes it a hostile takeover.

So, it is an interesting deal. The financing for the deal, well, GameStop, they're sitting on about $10 billion of their own cash, and they've also highlighted a commitment letter from a bank for about $20 billion of debt. But we'll see later on maybe why this is less reassuring than it sounds. There is going to be a lot of equity to finance the deal, and that's going to mean that GameStop has to issue a whole load of new shares as part of the share consideration.

So that is going to create a lot of dilution as a result of the deal if it goes ahead. And the amount of dilution, just to put it in context, well, we're going to end up with GameStop's shareholders owning roughly a quarter of the combined business, and eBay shareholders owning about three-quarters of the combined business.

So very dilutive as a deal in terms of the shares.

And in terms of strategic rationale, this is a really interesting one.

I think the main strategic rationale is to use GameStop's retail network, their physical stores, as a drop-off and fulfillment hub for eBay's transactions.

But I know their CEO also talks about expanding their market for collectibles, which both eBay and apparently GameStop also have quite a big presence in.

So there is some strategic rationale there, but the big thing really is the synergies. The CEO has talked about potentially huge synergies for the deal, about $2 billion a year, and achieved within 12 months of the deal closing. So some big numbers being bandied around. We're going to put those numbers to the test, I think.

Graham, do you want to start us off with building a merger model? And in fact, let's start off with what a merger model actually is.

Yeah. So merger model, both of us, I'm sure, have done plenty of these.

I did my fair share in my investment banking days way back in the day now. Basically, what we're trying to do is put two companies together, and in some ways it's as simple as A plus B equals C. But it's really more a matter of A plus B plus some adjustments equals CAnd when we're talking about the combined entity, we've got a bunch of different metrics that we can evaluate. The thing that we're most commonly looking at is earnings per share for a public company, and in particular, is the deal going to be accretive to earnings per share or dilutive? And all that means is are EPS going up or down? It's kind of as simple as that. So we think about some of the transaction adjustments we make. Say literally we're going to take company A net income, add company B net income, divide by pro forma shares outstanding.

We think, all right, in the numerator, in the income adjustments, we've got adjustments for things like synergies, maybe new interest expense on debt we're taking on, lost interest income on cash we're using. That kind of adjustment. And then the main adjustment we're making to the denominator is how many shares are we going to issue to finance this transaction? Now, obviously, as Debs mentioned, this proposed merger that's never going to happen has got a huge component of equity.

GameStop is issuing a ton of stock.

So we're going to see some adjustments to both the numerator and the denominator.

Because in a lot of cases, it's not really clear immediately if something's going to be accretive or dilutive.

You actually have to run through the model math to figure it out. So that's the high level. And we're not even going to get into any of the more complicated balance sheet adjustments that we talk about when Debs and I teach this in the classroom to people who are actually, say, starting to work at investment banks.

We're just going to keep it simple for today.

So Graeme, there's one thing you just said there, pro forma.

Let's just be clear on that. What do you mean when you say pro forma adjustments? Pro forma just means these are the adjustments that we are going to make when we put something together.

This is the new company. It's the new metric we're looking at. So pro forma, we use this concept or this term all the time in finance to basically just say, all right, if we're starting with something, say standalone or something that's unadjusted, by the time we make our adjustments and we're looking at the new figure analyzing, this is the pro forma number.

Okay. So you're basically saying that the merger model allows us to see how the business would look combined, so GameStop and eBay together, how they would look- Yeah ... and what some of the key metrics that investors look at, how they would look on a combined basis, taking into account all the effects of the transaction.

Exactly.

Okay, great. Well, that sounds simple.

You say we're going to do this with AI.

Tell us a bit about how we're going to start off.

Surely we need some really structured prompting.

We need lots of inputs to be provided. How are you going to go about this, Graeme? We do. Look, if we were doing this for real, then we would have a really structured prompt and say we were doing this in an actual day job in investment bank, we would put a lot of effort into engineering the prompts here, maybe collecting some data that we wanted. In this case, we're going to use Claude to put the merger model together. As kind of a case study exercise, we just want to see what happens when you tell Claude literally, "Build me a merger model for the proposed merger of GameStop and eBay," or proposed acquisition of eBay by GameStop. I just want to see what happens, because by the way, I feel like this is something these tools have come on so much in the last year or two years. Can you even imagine being able to give a prompt to GPT or Claude like this a year or two years ago? I could imagine it being semi-helpful, but not to the point where you could just prompt it and say, "Hey, go off and do it." So let's see what we get.

Absolutely, and I think this does show the differences in our personalities.

When you suggested doing this live, I was like, absolutely no way, Graeme.

I know that we use it daily, don't we, this stuff.

But actually, you don't necessarily know what you're going to get.

So let's go for it and see how it works.

You don't, and of course, I teach with this a lot now.

And a lot of what I do in the classroom is there's a lot of trial and error because we're still in the phase where things are improving, right? So you don't necessarily know what you're going to get out of a lot of these tools. Some do some things better than others.

There are some ways that I think we can kind of rely on these AI tools to do a pretty good job. But in general, what I've found is there are some pretty specific applications, and there's a decent amount of prompt engineering you've got to give these tools to get something that's actually quite usable.

So let's just see what we get. All right.

I'm going to open up Claude and wait for it to load.

My computer sucks. I'm not going to lie.

Build me a merger model for the proposed acquisition of eBay by GameStop.

I'm getting asked my first question.

Oh.

Now, I'll be honest, we did try this out before to see what we get. And by the way, it was different every time, so this is still going to be a pretty live reaction. Deal consideration mix.

This is probably the aspect of this deal that is the biggest, I don't know, meme right now just because the GameStop CEO had that crazy interview on CNBC where he basically just said 50/50 cash stock for an hour.

On repeat.

Right. Yeah, exactly. And it doesn't seem like Claude has figured this out. So I'm going to say find this from public sources and pull from my filings. That's quite boxy. I always like to give an answer. That's interesting.

You just say find your own answer.

It depends, right? For things where obviously that component of this deal is very well out in the public domain, I'm always also interested to see how good it is at finding that kind of stuff.So here we go. SEC filings, assumption and sources sheet, standalone financials, sources and uses, combined pro forma accretion and dilution sensitivity tables.

Okay.

It knows what it's talking about, doesn't it? "Something went wrong with your request.

Please try again or start a new chat." Can you continue? Okay. Maybe it's the internet here in this hotel room I'm in.

Mm.

I don't know. We'll see.

So while it's working, shall we start looking at the tabs which have been updated, or is that kind of jumping the gun slightly? Yeah. Let's just go through some of the assumptions, because you know some of the figures here, right? So let's go through and see if it's at least pulled some of that.

50/50 cash stock. Okay. It got something right.

Mm-hmm.

Okay. Share price, GameStop $22, diluted share count. I don't know if you've checked if you have any of these to hand. Let's just kind of assume that...

Well, let's see. Actually, one good thing I've noted about Claude's Excel tool, by the way, is it actually inserts comments in cells- Mm ... and tells you where it got stuff.

For things like a diluted share count, it's just grabbing this stuff from a 10-K, 10-Q. If you're doing this for real, obviously we'd do our own diluted share count calculation.

Mm-hmm.

For the sake of this just build me a merger model from scratch with no other kind of guidance, let's just kind of run with this and assume- Yeah ... this is good enough for the time being.

eBay share price.

This is share price, not offer price.

This is as of May 13th. That's yesterday. Offer price per share $125. Is that right? Yep, that's correct.

Yep. Okay. Equity purchase price, $56, $57 billion.

Just one thing to say is on the premium, it looks quite low there.

Normally we see premium of around 20, 30%.

That's because the share price has risen since the announcement.

I think the premium was closer to around 25, 27% when the deal was actually announced.

So just to flag that, normally it's kind of much higher than what we see there.

By the way, it's typical for the target share price to rise after an acquirer announces that they're going to complete a transaction.

I'm actually kind of surprised personally that eBay's share price rose hardly at all just on the basis that this offer seems so outlandish.

Mm. Yeah, because it reflects- There we go ... the probability that the deal will actually go ahead at that price.

Yeah. Exactly.

Which presumably is quite low probability at this point.

I know. Seriously.

Okay. We got the right offer price, 50/50 cash stock mix.

It's kind of run its calculation based off of eBay's market cap. Of course, we're talking market cap offer value, not enterprise value.

Mm-hmm.

So we'll see what it's done in sources and uses with eBay's net debt.

We were talking about this before we got on the phone.

Not that from a first pass accretion dilution analysis, we almost really need to have that on our sources and uses on the basis that the impact of that eBay debt is going to get netted off anyway.

Mm-hmm.

Either we've got to just assume it, or we've got to raise new financing to refinance it. In either case, it's not going to change much about our accretion dilution analysis unless we've got materially different lending costs from one to the other, which here you'd assume is probably the case, to be fair.

Mm.

Okay. Financing.

GameStop cash available, $800 million.

I thought they had a ton of cash, Debs.

I thought they did as well.

I thought they were quoting at, like, $9 billion of cash.

$9 billion. Yeah.

Which I'm not going to say I don't believe it, but it just seems crazy that GameStop has $9 billion of cash. But here we go.

I'm looking on their standalone financials, cash equivalents.

This is 11/1/25. I'm doing a double take. I'm not sure if this was in- Mm-hmm ... European or American date format for a second.

$8 billion of cash.

What's in our sources and uses? GameStop excess cash, $300 million.

New debt issued.

So this doesn't really look right, does it? It doesn't, does it? It seems a bit weird.

Right.

Yeah, I thought GameStop...

Let's assume as of November 1st, this was the right cash number, $7.8 billion.

Oh, and sorry, I'm not even looking at the line below, cash and marketable securities.

Yeah.

We got $8.8 billion of cash. There's our $9 billion of cash, right? So why in our sources and uses don't we- So do you know what the best thing I think is? You can actually ask Claude.

Have you thought about just saying- Yeah. GameStop has $9 billion of cash per your last financial statement input.

Why is this not usedOn the sources and uses.

Fixing.

Ooh.

By the way, so here, as we're kind of going through this and talking about it, and now this is looking a bit more reasonable in terms of sources and uses, right? Because we know, if you've read the news or followed this deal, you know there's basically a letter from a bank saying, "We'll fund about $20 billion of new debt if this deal happens." So there's our $19 billion of new debt in our sources and uses.

Here, this model is assuming there's $2 billion of eBay excess cash that we can use.

What's actually in eBay's...

eBay's got, what, $3.5 billion of cash, so maybe that's a reasonable assumption.

Uh-huh.

Question mark, not too crazy.

But just as a quick kind of break here, one thing about these tools right now is they're incredibly powerful.

I mean, we were talking about this before, being able to just do this based off of a quick prompt. If we'd actually taken the time to properly prompt and get something really specific, I think we'd probably get a much-- We definitely would get a much better result.

We're having to iterate a little bit more right now.

But I think a lot of people are very trusting of a lot of these tools quite quickly.

I've noticed that in the classroom recently a lot.

And I basically had to say, "Did Claude or GPT do this?" And they're like, "Yeah." I'm like, it's great for a lot of stuff, but still requires some manual intervention to make sure you know what you're actually getting.

So there's some pretty fundamental-- It hasn't taken much to get us in a better place, but pretty fundamental errors here that if you didn't know what you're looking for, you might just gloss over.

So I think this is actually, with a bit of correction and guidance from us, done a pretty good job, and this is absolutely fundamental- Yeah ... to our model, isn't it? The source and use of funds is a key starting point.

It basically says how much cash is going to be coming in to finance the deal, how's that cash being deployed? We can now see the numbers. The numbers look pretty sensible to me, and it kind of sets you up- Yeah ... for then doing the next step of the model, which this step, as an analyst, would take you quite a lot of time to bring all this information together, and it's done it in just a matter of minutes.

So that's a pretty good start, I think. 100%.

Fantastic. 100%. Yeah, I don't know about you, I found when I was an analyst, the thing that took the most time was not necessarily pulling in stuff like consensus forecasts, because there was always CapIQ and FactSet- Mm ... and that kind of stuff to automate that pretty easily.

But any kind of scrubbing of press releases- Yes ... trying to pull external sources and say, "Okay, what did they say about the funding sources, like the debt they were going to bring with them?" All of that stuff just took a long time because you had to pull it manually and copy/paste, triple-check that it was right, all that kind of stuff. Whereas this has- Yeah ... saved quite a bit of time just right off the bat.

So we're saying, all right, we've got $57 billion of cash we got to come up with. We're funding this through about $20 billion of debt.

We've got $8.3-ish billion we're saying of excess cash used. I guess it's just applied some kind of minimum cash.

It's assumed that we're going to use $2 billion of eBay's cash to fund the deal, which in essence is basically just a dividend getting paid out to eBay shareholders.

Mm-hmm.

And then the rest is getting funded through new stock issued by GameStop. So, not- Not bad ... horrible as a first pass.

All right. Okay, should we take a look at what it's done on the Pro Forma tab here? Yeah. So you mentioned earlier, pro forma is kind of showing the numbers kind of squished together as if it's already a combined business.

So let's just- Yeah ... why don't you just tell us what we're looking at here? Yeah, actually, the way it just-- Looking at this kind of really quickly in terms of the whole A plus B plus some stuff equals C, right? You got A plus B plus the stuff, the adjustments in this adjustment column is your pro forma.

So let's see.

It's actually kind of a helpful layout, and sometimes in terms of some of our teaching materials, doesn't look that dissimilar in terms of, you've got an adjustment column and what are we going to put in there? So revenue, we're basically just adding the two together, cost of sales, adding the two together, gross profit, we're saying that's the same.

It's making some adjustments here for operating expenses.

So here's one area where you compare to what I know has been put forward in the public announcements, and this just seems massively understated based on what they've said. I'll assume you realize 75% of run rate in nine-month year-to-date basis. Yeah. So it's done everything on a nine-month basis.

So I wonder if we need to go back to Claude and tell it to run it on a last 12 months basis to make the numbers- Yeah ... a bit more realistic because we want annualized numbers- Yeah ... don't we? You did the pro forma on nine months year to date, do everything on LTM.

And also, we were talking about this just kind of in the prep, just the calendarization aspect here. We'll see if it'll do this well. Basically, when we're looking at accretion dilution, we're looking at accretion dilution for GameStop shareholders.

So we're going to take earnings per share for GameStop as of their fiscal yearGameStop and eBay don't report on the same fiscal year, so we've got to calendarize.

We need to get on the same basis. LTLC, do everything on an LTM basis and calendarize eBay to GameStop.

So, and that calendarization actually is not a complicated calculation, is it? Because you're just basically saying, let's take, so X percent of eBay's numbers from one year, remaining percentage from another year, just so that it's as if they had an end of January year-end.

The calculations- Yeah ... aren't complicated, but it's just another thing that you used to have to build the calculations for.

Whereas now, as we've just seen, you've just done that by prompting Claude, can you adjust eBay's numbers to GameStop's year-end? Done.

Yeah.

It'll do all the heavy lifting for you.

Exactly.

Amazing.

So while it's doing this, the synergy number they talked about is nuts, right? Was it $2 billion or something like that? Within 12 months. Don't forget that fact, which is pretty incredible.

Normally, when we're looking at deals, we're thinking three years for most synergies, sometimes out to five years.

And in fact, we used to always assume no synergies in the first 12 months, just costs for that initial kind of integration process.

Yeah, exactly.

So I was a bit flabbergasted, I think is the word, to see that- ... suggestion that they're going to get all of those synergies within 12 months.

It's completely outlandish. And let's see, this is all still on nine-month. Do you know off the top of your head what, let's say, operating profit and EBITDA for GameStop were last year? So that EBITDA was 148 million, and I've got their revenues of 3.6 billion on an annual basis. So- 150 million, right. So synergy target on a company that size of $2 billion. And its revenue is only about 3.6 billion.

I know.

Crazy.

It's wild. Welcome to the crazy world of the deal.

I know. And by the way, one thing I talk about a lot in the classroom when I'm kind of teeing up a discussion around synergies is I'll ask students to think about merger announcements or press announcements that they've read and say, "Can you ever tell me a time where you've seen a public M&A announcement where the acquirer has said in their press release that this is going to be dilutive to our earnings per share?" No.

Right? No, right? And one of the main reasons is because the synergy number is basically up to that acquirer company just to almost make up $2 billion of synergies on a company that does 3.6 billion of revenue and 150 million of EBITDA sounds pretty made up to me.

Having said that, I actually know a synergy- And of course, the deal's going to be wildly accretive.

I know a synergy consultant. I can't believe that's a job.

But they basically advise companies going through M&A on the sorts of synergies they can expect. And they're usually pretty careful about saying, "Well, whatever you think you can achieve, take a good haircut and include that reduced number in the press release, because you do not want to disappoint on those synergies." So usually, the number that you see in the public is actually lower than they think they can achieve.

So is that really the case for this deal? Who knows? Real questions on did they even go through that kind of process for a deal like this, where I don't think anyone ever expected this to be a real transaction.

Mm.

I don't know. Do you have to? I don't think so. I don't know, actually. If anyone knows the answer to that question, let us know.

Right.

But my guess knowing what the high-level terms of this deal are is that GameStop did not go through that whole process or found someone that was very flexible, for lack of a better word.

Yeah.

Okay, so now we've got LTMs. So we've got GameStop revenue, okay, 3.8 billion. I think you quoted 3.6, so we're not like a million- Michael Scott ... million miles apart.

Yeah.

All right, so pro forma revenue, $14.5 billion. All right, so we've now got a $300 million synergy target. Okay, this says run rate synergies full year, so obviously this is not right per the announcement. Now let's see where it grabbed this from.

One thing I do-- Oh, illustrative management has not disclosed synergy estimate. Well, they have.

Hmm. Except I think it was in an interview, so I wonder if that doesn't count. It's not necessarily a reliable source, but who knows? Well, yeah.

Okay. We'll continue ticking through these adjustments- Yeah ... then we'll get onto the actual accretion dilution.

Okay. So intangible amortization.

Ooh, has this done kind of purchase price allocation- Hmm ... and like an asset value step-up? So this is like a really- Yeah, okay, we've got- ... super keen analyst, isn't it? It's kind of going a bit- It is, right? ... above and beyond, because normally we wouldn't bother including that in our EPS. In fact, we used to refer to it as cash EPS, because it- Yeah ... would be EPS excluding accounting adjustments that arise as a result of M&A. Yeah.

So I would almost be tempted to zero this out, but hey, that's just me.

Done. All right, well, he's good.

Oh, look, it looks like a better deal now.

Yeah, right. It's great.

We'll make it blue so we can go back and change it later.

Okay-ish modeling practice.Okay.

Then interest expense.

So that's an interesting one. This is going to be- That's a big adjustment. What's that? ... this is going to be a big one, right? So this should be, in theory, the new interest expense on the additional or incremental debt raise, which we know there's going to be about $20 billion.

Mm-hmm.

Right? So let's just audit and see how this is being calculated.

So we've got new debt issued, 18, 18.6 billion, 7% interest rate on new debt.

Okay.

What is this excess cash? Oh, and then, okay, what it's doing is this is a net interest income calculation, so what we're saying is you're both increasing your interest expense from the new debt you're raising, and you're also losing out on cash interest income on- Fairly ... the cash you're using. All right.

So some okay things, and also some pretty horrific modeling practices here, in which you would never have this times .04 in the cell here, just saying that's my cash interest income assumption.

Okay.

And helpfully it put the 4% in the comment there.

So thanks, Claude, but also don't do that again.

What is this? We're just subtotal here, income tax.

This should be, we expect this to be at the acquirer tax rate. I don't know if we even have a distinction here.

Oh. So I think they've just assumed the US tax rate as the marginal tax rate for everything. Okay.

For the sake of this analysis, fine.

Yeah.

Fine, I would say. For the sake of a deal, it's not going to happen.

Right. Exactly.

So okay, so now our main thing, obviously...

This is our numerator adjustment, right? We're taking, in essence, the two net incomes and adding the two together with the adjustments.

The main adjustments really here being the synergies and the interest expense on the new debt.

Now let's get to the denominator. So we've got our diluted shares for GameStop, our diluted share count for eBay, and then we've got the shares issued as part of the equity issuance that GameStop is making. So let's see how this is being calculated here. We've got stock consideration divided by, I'm assuming, GameStop's current share price.

Not bad as a first pass. Let's just check the model's actually adding up the right stuff.

Yeah.

Because, of course, we're not- So why is it not having eBay's numbers? I want to know that.

Of course. Right.

We're now acquiring all eBay shares in exchange for either GameStop shares or cash. But in essence now eBay is no longer a thing.

The combined entity is now just GameStop or GameStop eBay- Okay ... or whatever it's going to be called.

So all the shareholders are holding GameStop shares. So eBay shares just simply go away.

Okay.

So diluted earnings per share, pro forma net income, combined net income with adjustments divided by our new diluted share count.

We're going to compare to GameStop standalone EPS.

Now, I feel like I remember having a discussion with you, Debs, that this number doesn't look right. I feel like GameStop's EPS was, what, 90-something cents? I think it was more like... I've got $1.18, actually, in my notes. 1.18, okay.

So there are two different measures for EPS.

There are reported numbers, that's what the companies report in their actual financial results, and then there's adjusted ones, which are kind of scrubbed or cleaned for things that maybe distort the number that's being reported.

So my number, $1.18, is higher probably because it's the scrubbed number rather than the reported number.

This isn't even taking any kind of reported EPS...

I was going to say estimate any kind of reported EPS figure.

This is just simply dividing net income by the diluted share count- Okay ... from the 10-K.

So very much unadjusted from that perspective.

We're saying, okay, standalone EPS, 80 cents or so. Pro forma EPS, 80 cents.

So we're basically breakeven on this basis, right? 70, 90, 80. Now, of course, if we go through and we tinker with some of these assumptions...

Let's go back to our, where's our synergy target. Did Claude put that up in our assumption page here? We zero that out.

We're now at 16% dilution.

And again, I don't even know if we're working off definitely the right EPS figure here. If the Street is really working off the 90 something, 1.18, whatever it is, then this is going to look pretty dilutive without a material synergy number.

Hmm.

So this is why that synergy number is really the focus of a lot of analysts, I feel like, when these kind of deals get announced just because there's a lot of scope for that to be managed. Subject to your- Yeah ... synergy expert comment from earlier.

So Graham, I think it's kind of intuitive that if synergies go up or down, the consolidated net income goes up or down, and therefore the EPS goes up or down.

So I guess we could say that's a key lever in our model. Are there any other numbers we can change that would affect the outcome of that EPS accretion or dilution calculation? In terms of checking these numbers here, let's see. These diluted share counts, would we go through and do our own diluted share count, especially for eBay, on the basis that eBay's getting acquired above its current market price, and figure out, say, what options are going to vest that might not be in this diluted share count and come up with a better view? Maybe. To really get a view of what we're having to- Hmm ... buy here. That could change a little bit.

Would we- I was thinking more about the levers in your model.

So when I think about any model- Hmm ... we're trying to say, one of the key outputs here is EPS accretion and dilution.

So we can see that synergies are a key lever, because if they go up or down, the output goes up or down.

What other things- Yeah ... could we play around with? We are in kind of a crazy world where, if Ryan Cohen can say, "We're going to do a deal on these crazy terms," let's see how crazy we can get to increase- Yeah ... that accretion number. So what are the other levers? Yeah, the other is really consideration mix here, right? Mm.

Generally speaking, well, not generally speaking, the old investment banking 101 interview question is if you're looking at an all-stock deal, if a company with a high P/E buys a company with a lower P/E, that's going to be accretive to earnings per share. So generally, you can get a view on accretion dilution just looking at relative P/E multiples if the consideration mix is going to be all stock.

Here, we've got a few more things going on because in the cash portion of this deal, most of the cash is funded with debt, so we have the interest expense that we need to account for in our accretion dilution math.

Okay, but we're trying to be crazy now, right? So we're going to say we- We're trying to be Ryan Cohen. Let's go for it.

We're... So we're- Let's put the cash consideration up to 90%.

90%? Oh, so we think- Yeah ... we're going to be able to raise that much debt? I guess- Let's do it ... why not? Why not? Let's just see what happens.

Let's see. Cash consideration, 90.

Also, we wouldn't be paying 7% on that debt, right? I think 3.5 feels more realistic for that kind of figure.

Hey.

Way. This is looking an amazing deal.

Okay, so that's quite an interesting thing.

I think it's quite a subtle point, isn't it, that if you change your financing mix, because you have debt as a cheaper source of financing than equity, that it actually makes the numbers... It flatters them, doesn't it? That we end up with a higher accretion figure.

But is that the- Well, yeah. We'll flip the consideration mix back to 50/50 in a second here.

Mm.

I'm going to Control + Z and get back to 7% interest. Right.

We're still at this 258 share count adjustment. We've gone all the way down to 146% accretive. So obviously, that interest expense is still very material, especially when, in this case, we're at a 90/10 cash-stock consideration mix.

But now, if I go back and flip to 50/50, this 258 million shares issued is going to go up quite a bit.

Right? Which is going to increase our denominator by quite a bit. Right? We're still now at 94% accretion. Of course, we've still got this crazy synergy target running through.

Mm-hmm.

So again, let's go back. Let's just make this, I don't know, remotely realistic.

Okay, let's say there's some synergies, but they don't get to 2 billion. They get to, I don't know, 300 million. Something like that.

We're back at breakeven.

Hmm. Yeah.

So I think those are the high-level levers you think about pulling, at least in an early-stage model like this.

What do we think about this result based on the prompting we gave? Yeah, I think it's... If you had to start off with a blank Excel file like we did, it's done the job much more quickly than we could've done it.

Yeah.

Is it more accurate than we would've done it? Probably not.

You need somebody who's at the helm who knows a little bit what they're doing.

And I personally take the view that AI is very dangerous in the wrong hands because it can give false confidence. So it isn't a- Yeah ... substitute for knowing the fundamentals.

No, definitely not.

But it has found information quite quickly.

You just need to be prepared to sense-check and validate those outputs quite rigorously to make sure that you understand.

If you were going to put that, God forbid, in front of a client, then it would be very embarrassing because the numbers-- There's still quite a lot that needs to be improved. There are some technicalities which aren't quite there.

But ultimately, anyone can type in those words that you did, "Build me a merger model," and you're away. And then you just kind of- Yeah ... you're just basically improving what's been given to you.

And that's the reality- Yeah ... even at your desk, you were never really going to start with a blank Excel file. We always used to start with preexisting older templates, just update them for a new deal.

But what they have done here, what Broad has done, has saved a lot of time, is sourcing a lot of that information, as you said.

Analysts spend a huge amount of time trying to source particularly the factual information. As you say- Yeah ... the estimates are usually quite easy to find, because you can automatically suck those out of other data providers.

But the factual data, the stuff that comes from the press release, that comes from actual reports, financial reportsThat's the stuff that used to take a lot of time, trying to find the correct figure, and now it's very automated. Claude has done all of that work.

We just need to be happy with the outputs, I guess.

Yeah. I think it's super-- The fact that we gave it the most simple prompt we could think of, and then we made a few quick adjustments, what, two or three, really not that many, and got to this point is pretty phenomenal. There's some pretty horrible modeling best practices in here.

It's not all awful. You look at it and you're like, all right, we've got the green for links to different workbooks, blue for hard-coded inputs, and black for formulas, general methodology in here.

But then when you start to dig in a little bit and you see things like that 4% cash interest income rate baked right into the sell formula, you would never do that- Mm-hmm ... in the real world. I do also feel like one reason whenever I'm in the classroom, I get people to do a lot of stuff, either step by step or if it's something kind of simple, maybe like this from scratch, is doing something from scratch teaches you how things are wired up and how things are supposed to work.

I think you would be, at this point right now, you would be in a pretty bad spot if you took this model and used it as your blueprint for this is how you build a merger model, or this is best practice modeling in Excel. So I don't think we're to the point where we can use it for that level of fidelity yet. We'll probably get there at some point.

Uh-huh.

We probably will.

Yeah.

But that's still a little ways off.

Yeah.

I guess the final step really, though, as I said, is to make sure you kind of sense check and validate, but then identify the key takeaways. We kind of gave the spoiler right at the start of the episode that this is a bit of a crazy deal.

So I think- Yeah ... we should kind of follow this up with why is this such a bad deal that the bid was rejected within two weeks by eBay? That is a pretty swift rejection.

As we said, it was a pretty stinging rejection as well.

It's not credible or attractive. I can't get that phrase out of my head.

And the rejection listed not just one or two concerns, but I think there are about six concerns to do with the deal.

Yeah.

Graham, from your perspective, what is it that makes this-- What would your key concerns be about this transaction? Is it the numbers that we're looking at in the model, or is it something more qualitative? I think in some ways, if you believe-- Okay, let's assume this is right for a second and that we're believing $300 million of synergies and not $2 billion. By the way, I still think $300 million is probably a pretty big number in the context that that's basically, we don't have it on this page, that's basically GameStop's EBITDA.

That still even at that level seems a bit punchy. I just don't think anything here is particularly credible. Because we're saying 50-50 cash stock mix.

Can GameStop issue a bunch of equity to fund this transaction? In theory, they could. It means eBay shareholders would have to be willing to accept 50-50 cash stock mix and hold cash in a combined GameStop, eBay conglomerate.

The cash portion of this offer, GameStop has $9 billion of cash in their bank account, which is real.

But most of the financing here is from a bank letter that's not committed.

Nothing's really real yet.

And then you got their CEO going on CNBC just kind of looking like an idiot, not even really knowing what he's talking about or how to back himself up.

And he's saying, "Yeah, eBay's going to be much better if I'm running it." And I think you've just got to take a step back and say, "What are we doing here?" So I think very much in agreement with eBay's board from my perspective, anyway.

Yeah, it's interesting because some people think that Cohen is a visionary.

He has massive support in the retail investor community, but it's quite telling that one of their biggest shareholders sold, exited. That's Michael Burry, exited after the deal was announced, so clearly he's not a fan.

But yeah, I think the financing side, as you said, is pretty scary.

They've got this letter that has been touted as a letter of commitment, but it seems a lot less tight than that, and it's been made publicly available, this letter.

And one of the conditions is that as part of the financing, they'd have to maintain an investment-grade credit rating.

But the amount of debt that would have to be taken on to do the deal, Moody's have already come forward and said that it would be a negative credit event if this deal- Yeah ... went ahead. So it seems like a catch-22.

There's no way they would be able to maintain that rating, and that's what's needed to do the deal. So that seems bizarre.

And I think another thing that I read, which is really quite astounding, is to do with the incentive structure for Ryan Cohen, is that he is basically-- His compensation has been renegotiated at the start of this year.

So he gets no salary, no cash bonus, all stock options based on hurdles. The hurdles are that if GameStop has EBITDA of $10 billion and a market cap of $100 billion, then the stock options would be worth an astounding $34 billion.

That is just a crazy number. It'd be a third of the market cap of the business. So- All he's got to do is increase EBITDA by what? 20 times.

That's easy.

Well, it's just basically- He's a visionary ... Well, he's a visionary who's clearly on the hunt for a deal because the only way you're going to meet those criteria is by buying a much bigger company, which is what he's trying to do.

Exactly. Oh, no.

It does seem-- Yeah.

Normally, stock options are used to align management with the interests of shareholders, and it feels like that is not what is happening here, and that was flagged in the letter rejection.

The governance and the incentive structure was flagged, and that's quite a targeted or pointed attack on the incentives- Yeah ... structure for the CEO. So- Yeah ... I think lots to be concerned about.

I think the big question is, what's next? What do you think? Another offer? He's going to do something, right? I can't think this has any legs whatsoever, really. I feel like this is just going to die a pretty quick death.

But knowing that about his comp structure, will he try to find something else? I'd be shocked if he didn't.

Yeah. Hey, that's just going to give us so much to talk about there, isn't it? We can only congratulate- I know. More- ... everyone doing cloud support ... cloud merger modeling, crazy assumptions and all that.

Yeah.

I know.

Fantastic. Okay. Well, definitely we'll watch this space.

And I hope that- Indeed ... everyone that's been listening has learnt a little bit about how you use AI, how you analyze mergers.

So I think it's been an education for us all, shall we say.

So thanks very much for tuning in for this week's episode.

Tune in again next week for a new deal, some fresh insights from myself and Graham. Thanks for listening.