By the start of 2000, I was already a veteran writer for Fortune warning our readers that the dot.com craze had lifted Nasdaq valuations to unsustainable highs. All of the time-honored metrics pointed to the same outcome—crash ahead! Then, AOL and Time Warner, Fortune‘s parent as owner of magazine-maker Time Inc., issued a shocker for the ages that, as it turned out, confirmed my worst fears: The tiny internet hotshot, its brand barely a decade old, was purchasing the fabled media colossus multiple times its size. For the announcement at Time Warner’s Manhattan headquarters, the news and entertainment empire’s CEO Jerry Levin, appearing digital-era hip sans tie or jacket, took the stage alongside AOL chief Steve Case, and avowed his delight at taking Case’s offer, allowing that though dot.com valuations looked exorbitant, “I accept them.”
Today, that transaction is generally cited as epitomizing arguably the craziest interlude in the annals of U.S. equity markets, and vilified as the worst big deal ever. So bad that no transaction based on similar terms, where minnow swallows the whale for a king’s ransom, could happen again, or even be floated, right? Not so. When this journalist saw news of GameStop’s bid for eBay on Sunday, May 3, I instantly thought of all the offer’s parallels to AOL-Time Warner. Most of all, the buyers’ motives match in that both are now (in GameStop’s case relatively) riding high, but face dim prospects ahead. Their solution: Using their inflated stock to land a sound money-maker that via the combo, will retain a lot more value for their shareholders than going it alone, and promising moonshot synergies to sell the deal. Predictably, GameStop’s claims for the tie-up’s benefits echo the fantasy forecasts for AOL-Time Warner.
Hence, it’s worth examining how the GameStop-eBay math resembles the AOL-Time Warner numbers. And how fundamentals like those for the both the 2000 wonder and its 2026 cousin, promise to doom any union from the start.
GameStop would pay a giant premium for a high-flying stock, and multiply its share count to clinch a deal
GameStop offered $55.5 billion, or $125 a share for eBay; the video game and collectibles purveyor’s CEO, Ryan Cohen, stated that the deal provides for half cash and half stock. GameStop had already secretly bought 5% of eBay shares before the announcement, starting on February 4th. Measured from that date, it’s offering a towering premium of 46%. Those purchases likely contributed to a recent spike in eBay stock. At the close on Friday, May, 1, the last day of trading before the news broke, its shares fetched $104, near its all-time high, following a gain of around 20% so far this year.
It’s unlikely, however, that eBay would agree to this initial overture of $55.5 billion. Michael Burry, the famed hedge fund manager and hero of The Big Short book and film, bases his predictions on a follow-up bid of $65 billion, and found that scenario so terrifying that he sold all his GameStop holdings. So I’ll go with the higher, more probable figure. At $65 billion, GameStop would be paying $148 a share. That’s a 42% premium versus eBay’s pre-announcement price, and 71% over where the internet marketplace was selling when GameStop started accumulating its 5% holding. As we’ll see, this is an epic, AOL-Time Warner-style markup.
Put simply, GameStop would be paying a huge premium on an already sizzling stock selling at pricey PE of 24 before the offer. But here’s the primary problem: GameStop’s market cap, pre-bid, was just $11.9 billion, one fourth of eBay’s $46.2 billion valuation. As a result of that mismatch, the buyer must issue an enormous slug of new stock to score. The equity portion would come to $32.5 billion (half our $65 billion purchase price). Raising that much would require selling an incredible 1.23 billion new shares at GameStop’s pre-deal price of $26.5. Today, GameStop has 448 million shares outstanding. That count would swell to 1.68 billion, multiplying the current total 3.8 fold or 280%. We’re talking fearsome, seldom-explored dilution territory.
In reality, eBay is “buying” GameStop. Its shareholders would own 60% of the stock if a deal closes. Cohen would be the tie-up’s CEO.
That’s just the stock part. GameStop’s pledging to fund the rest, in our formula the remaining $37.5 billion, via fresh borrowings. Cohen says that he’s secured a commitment from TD Securities for $20 billion in loans. As of January 31, the close of its 2026 fiscal year, GameStop held $9 billion in cash. Assuming it puts that total into the transaction (it would probably be less since GameStop would need cash for working capital purposes), GameStop would need to borrow the difference of $28.5 billion, comprising TD’s $20 billion plus an additional $8.5 billion from TD or other lenders. What interest rate would GameStop pay? It hasn’t disclosed the TD terms, but we’re looking at a pretty near-junk credit. Still, we’ll take the optimistic view that GameStop secures a highly-favorable number, say 6.0%. That puts its additional annual interest expense, after-tax, at around $1.3 billion.
At the end of its fiscal year, GameStop had earned $418 million, and over its past four quarters, eBay booked $2 billion, for a total of $2.418 billion. The new carrying charge of $1.3 billion from all the new debt would take that pro forma number down to $1.1 billion. To ensure that GameStop shares just maintain the pre-offer price, the combination would need a market cap of around $45 billion. Sounds low, given GameStop’s paying in our example $65 billion for eBay. But keep in mind that this is a highly-leveraged transaction resembling an LBO. GameStop assuming $28.5 billion in new debt, and also emptying its cash coffers, greatly lifting its risk profile.
In our pro-forma analysis, the new GameStop would launch earning around $1.1 billion a year. So at a $45 billion valuation, it would be sporting a multiple of over 41. For context, that’s 24% above Amazon’s multiple of 33 and about equals Nvidia at 42. Cohen claims that combining the enterprises will get profits soaring as he installs an “entrepreneurial mindset” on the eBay side, and re-deploys GameStop’s 1,600 stores as fulfillment centers for eBay orders, slashing overall costs. The goal, he avows, is creating “a legit competitor to Amazon.”
In fact, Cohen’s hinting at a different thought process. He’s done a fantastic job slashing expenses at GameStop in a campaign that’s stabilized it stock price after crashing from the meme-frenzy’s heights in 2021. But in a CNBC interview the day of the announcement, he admitted that “GameStop’s in a difficult position, it should have gone bankrupt many times over.” In fact, GameStop’s revenues are declining fast. Even big-time cost-slashing can’t save it forever.
Teaming with eBay adds a highly-reliable profit spinner, the opposite of GameStop’s status. In theory, the gambit should secure more value of GameStop’s shareholders than going solo, even if the combination’s shares decline. But the lesson from AOL-Time Warner holds that promised big synergies can sour into integration problems that drive up expenses instead, so that the combination of paying a huge price, and getting negative savings, tanks the stock.
Deja-vu: AOL set the template where the little guy lands the giant, via gigantic dilution
The AOL-Time Warner transaction differed from GameStop-eBay in one important respect: It was an all-stock deal. AOL was an early internet service provider (ISP) that relied on dial-up connections heralded by the famed alert, “You’ve got mail!” It’s unclear why the AOL leadership, headed by CEO and co-founder Steve Case, made the offer heard round the world. But AOL’s stock price exploded in the dot.com phenomenon, and appeared hugely overvalued, and Case seemed to know it. If competitors leapfrogged AOL’s technology, its share price would tumble. But Case had a remedy at hand. He could marshal his super-rich currency to buy a much bigger company featuring far more durable earnings. That move would protect his own investors against a potential sharp fall in his own shares, and leave them a lot of value even if the stock of the combined company fell.
Time Warner fit the profile: It was a collection of time-tested media properties comprising magazines such as Time, Fortune, Sports Illustrated and People, networks CNN and Turner Broadcasting, and cable and music properties, not to mention the legendary Warner movie studios.
Time Warner secretly agreed to the AOL purchase, and the two parties unveiled the merger in January of 2000. At the time, the target harbored four times the revenues of the acquirer. AOL’s edge: Despite its puny size, it carried an outrageous valuation of $192 billion, twice Time Warner’s market cap. Case’s bait: Paying a 70% or $64 billion premium. In effect, the Time Warner shareholders got AOL stock at a then-value that looked like windfall. Despite its inflated stock price, AOL still had to increase its shares outstanding by 120% to make the buy, again mirroring the huge dilution in GameStop-eBay.
Interestingly, the 70% premium is about the same as GameStop would shoulder if it pays $65 billion for eBay. Another common feature was starting at a Big PE, though AOL-Time Warner’s was bigger. The day Case and Time Warner CEO Jerry Levin took the stage, AOL-Time Warner had a pro-forma market cap of $253 billion. In the previous 12 months, Time Warner had earned $1.9 billion and AOL $1.0 billion for a total of $2.9 billion. Therein lay the problem. AOL Time Warner began life at 82-times earnings. It was mathematically impossible for the NewCo to grow profits fast enough to ever justify a $250 billion-plus valuation to start, let alone expand it from there. To her immense credit, the great Fortune journalist Carol Loomis wrote a negative critique of the transaction in our pages. It opened by noting that the deal featured gigantic numbers getting wows in the media, but the real wonder was what was so “small” about the matchup, and that was those meagre earnings.
GameStop-eBay would launch a much lower PE of 41. But it’s still gives shareholders a scant $2.40 in profits for every $100 they pay for the stock. And keep in mind that unlike AOL Time Warner, it’s also carrying an immense debt load. As Burry cautions, the new GameStop’s cash flow would provide only a narrow margin of safety over its big interest payments.
Vastly overpaying for such slim (and in AOL’s case, falling) profits cratered the combo at warp speed. By the time the merger closed a year later, AOL Time Warner stock price had dropped by a third. In January 2003, angry former Time Warner shareholders booted Case as chairman, and that September, the board dropped the AOL name. When Time Warner finally dumped AOL for $3.3 billion in 2009, the media icon’s valuation had fallen from $253 billion at the unveiling to $61 billion, a collapse of 76%.
EBay’s board is now pondering GameStop’s offer. The directors might examine AOL-Time Warner as a primer on how what looks like a fabulous gift for your shareholders is really a poison chalice.
