Why GameStop had to early convert the convertible bonds.

**The setup** GameStop wants to buy eBay for $125 a share, about $55.5 billion, half cash half stock. eBay’s board said no. GameStop bought 9.7% of eBay anyway and is pushing. **Why eBay’s cash matters to GameStop** When you buy a company, you also get whatever cash is in its bank account. That cash comes right back to you the day the deal closes. So it works like a rebate on the price. **What buying Depop did** On July 30 eBay spent $1.4 billion of that cash on Depop. GameStop’s price stays $125 a share, but the rebate just shrank by $1.4 billion. eBay handed GameStop goodwill instead, which is the accounting label for paying more than the stuff is worth on paper. You can’t spend goodwill and no bank will lend against it. Cash is worth a dollar. Goodwill is worth zero to a lender. So eBay quietly made the deal $1.4 billion more expensive without GameStop’s price changing at all. That’s a classic defense: spend the money the buyer was counting on. **Why that was nearly fatal** GameStop’s funding, from its own offer letter: its cash, plus outside financing, with a bank letter for up to $20 billion. My math on the rest. The cash half is about $27.75 billion, minus the 9.7% GameStop already owns and doesn’t pay itself, so roughly $25.1 billion actually goes out. GameStop’s cash is about $5.35 billion after spending $4.35 billion buying eBay shares in June and July. Add the $20 billion cap: $25.35 billion available against $25.1 billion needed. The whole deal clears by under $300 million. At that margin, a $1.4 billion hole doesn’t strain the financing. It kills it. **GameStop’s fix** Banks size loans off total debt minus cash. eBay’s move added $1.4 billion to that number. GameStop had two ways to cut its own debt: Pay off $1.4 billion of bonds with cash. Debt drops, cash drops the same. The ratio doesn’t budge and the money for the purchase is gone. Pointless. Hand bondholders stock instead. Debt drops $1.4 billion, cash untouched. The ratio recovers fully and the war chest survives. That’s what it did on August 2, three days after Depop closed. About $1.4 billion of bonds swapped for shares, no cash involved. **The point** eBay took $1.4 billion off one side of the combined balance sheet. GameStop took $1.4 billion off the other side. They cancel. On paper the deal looks exactly like it did the week before, which is what the bank needs to see. Two business days, because the bank recalculates the moment the target’s balance sheet changes, and GameStop’s own quarter closed August 1. Better to have the fix already signed. GameStop took a calls/put position in eBay and only a week later a deal was signed for eBay to acquire Depop. Someone almost certainly handed eBay insider information and they did an acquisition to remove their own cash that GameStop was planning to use to finance the deal. It’s very likely GameStop made a deal with a friendly to deleverage the bonds to keep the financing math working. Since the Depop deal was public, they knew this was coming, and they responded accordingly.