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M&A monitor

The GameStop effect

Does the GameStop phenomenon – the chatboard-driven battle between retail investors and short sellers – have an M&A angle? 

video game package

GameStop's stock has been caught in a "short squeeze" driven by retail investors

If a fund is shorting a company’s stock it’s because the shares are perceived to be overvalued, which in turn may be a sign of an underlying issue with the business (or that the stock has simply traded too high). If the bet proves right and the shares start to fall, it can be a trigger for activists to come in and potentially push for a sale.

Some companies try to fight back against short sellers by soliciting takeover bids (as was the case with Concordia Healthcare a few years back). Such tactics threaten the short-sellers’ position (if an offer, or rumors of one, push the shares up), but also present risks for potential bidders (if the short sellers' thesis wins out).

However, if, like GameStop, the company’s stock soars after being caught in a "short squeeze", it makes any deal extremely unlikely. Instead the company (assuming the capital markets will support further equity fundraising) can use its newfound valuation to tap public investors to raise cash, buying time for its management team to execute that turnaround/repositioning/portfolio optimization. While it could, in theory, use its stock as M&A currency, that would typically require a longer open window (for deal talks and proxy/prospectus review periods) than an equity issuance for a public company. It also requires the target’s board to believe the buyer’s higher valuation.

There are other consequences for the company’s balance sheet – the "Reddit army" have sent shares in AMC Cinemas soaring, so much so that Silver Lake has swapped $600m of AMC convertible bonds for equity, wiping out a huge chunk of its debt at a stroke.

As far as GameStop itself is concerned, there is speculation the company’s board (recently refreshed following a fierce proxy battle) can transform its fortunes, potentially by pivoting towards a new model built around social gaming rather than sales of physical products. At points over recent months, GameStop’s market cap has been so high it would have entered the S&P 500 had it had a net-positive income. If it gets there, ETFs and other index funds will be obliged to buy in whatever the price, providing some insulation from the stock falling back to its pre-squeeze levels. And if the equity remains elevated, it could provide GameStop with the financial power to execute its own transformation.