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Wall Street eyes GameStop as a takeover candidate
Wall Street eyes GameStop as a takeover candidate Exclusive
August 16, 2012 | By Chris Morris

Video game consumers have something of a love-hate relationship with GameStop. So do publishers.

For that matter, so do investors. And over the past couple of days, Wall Street insiders (and the financial blogosphere) have been whispering furiously about the possibility that GameStop could find itself on the receiving end of a buyout offer at some point in the future.

From Barron's to the Motley Fool to Seeking Alpha, analysts and observers have debated the likelihood of a buyout. (The company, as you might guess, has nothing to say about the chatter, noting that it doesn't comment on market speculation or rumors.)

It's a so-so argument for the theory (and, fair warning, it gets into wonky financial territory -- if it helps, imagine I'm Olivia Munn's Sloan Sabbith from The Newsroom). GameStop's stock trades in the $17-$18 range these days. (Barron's estimates a buyout offer could fetch $25 or more per share.) That's more than five times the company's projected per-share profits, which is ok, but not as high as it could be. The company's also debt-free, has a tremendous retail footprint (with 6,600 stores) and pays a good dividend to shareholders.

In short, the stock is cheap -- all things considered. Add in the assumption that the age of digital downloads is looming (and will devour all physical media sales) and poof! The rumors arise.

The thing is: GameStop is a fiercely independent company -- and it's diversifying to stay relevant in the changing market. (You can debate how successful that diversification is amongst yourselves, but the company is trying.)

It's also suffering the same fate as a lot of video game publishers these days, as investors punish the company for a perceived overly long console cycle. The stock is likely to rebound as next generation system hit store shelves.

So... what does this mean for game makers?

Ok, financial lesson over. The bigger question for everyone who doesn't hold GameStop shares in its portfolio is: What the heck does this mean if it does happen? Short answer, it likely wouldn't be a positive for the industry.

Whatever your feelings about the digital distribution future, GameStop remains a key component of the video game biosphere. While core gamers are open to downloading a full title, the rest of the U.S. isn't quite ready to make that leap yet -- and that's a huge audience. Even EA, which is loudly beating the drum for digital, admits it gets 60 percent of its sales from physical software.

The company is one of the top retailers of games. It's a critical partner of publishers, which is why they grind their teeth and allow used game sales without throwing too much of a fit.

There are, of course, plenty of potential candidates for who could acquire GameStop. It could be a big box retailer, particularly one that already has a large presence nationally (and, let's face it, that's a small pool -- and with its ongoing problems, Best Buy is automatically out of the running). It could be a company looking to expand its reach. Or it could be a private equity firm that believes in the video game sector.

Big box retailers are the obvious candidates, though. And a purchase of GameStop by another retailer would put added pressure on game makers.

Big publishers, like EA and Activision, could potentially have to stomach lower wholesale costs, as the number of outlets shrinks. More importantly, they would have less leverage to promote games that aren't guaranteed blockbusters. (Retailers, like any other company, are interested in their bottom line. If a game doesn't have 'hit' written over it, it's not going to get the push of a Call of Duty).

Smaller publishers, meanwhile, would find it even harder to secure shelf space and ads in weekly circulars, which could further push them to the edges of the industry.

In the long run, that retail pressure for known blockbusters could extend the sequel-itis that we're all hoping lessens in the next couple of years. (Less shelf space and marketing for risky IP, after all, makes them less likely to succeed, which discourages publishers from taking chances on them.)

From a consumer standpoint, it likely wouldn't have an immediate impact -- on their wallets, at least. Publishers set the suggested retail price -- and even if a retail giant were to buy GameStop, there's still competition in the market that would ensure lower sale prices are a regular occurrence, as they are today.

And it could even expand the sale of used games, though we'll have to see how next generation systems handle that particular hot potato. Assuming used games aren't locked out of consoles, as some rumors have suggested, any retailer in its right mind would lovingly embrace the system GameStop has built. Many, of course, have tried to copy it.

Again, this is all likely a moot exercise. Any offer on GameStop would have to be a substantial one -- one that's so big that management can't argue the new console rebound will get it to that level soon. Given the company's current level, $25 might not be high enough.

And finding someone who's willing to go much higher than that is going to be tricky. Even retail giants have felt the sting of slumping video game sales lately -- and though they might believe in GameStop's long-term strength, that's a hard sell to make to their investors.

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Rob Wright
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Given 1) the resistance from the console makers to used game sales, 2) that GameStop's PC gaming business/presence is virtually non-existent, 3) the company was late to the digital download market and doesn't have a competitive offering, and 4) actual boxed games (console/PC/handheld) can routinely be purchased at lower prices on Amazon, then GameStop's market seems greatly diminished.

I could see the retailer surviving as more of a niche player, acting more like a knowledge center for parents who want to buy games for their kids (that aren't old enough to have an Amazon Prime account) but aren't sure what the ratings mean or which games are truly violent or adult-themed. I've always wondered, given the misinformation out there in the mainstream news, why retailers like GameStop didn't offer more "services" like that -- a sort of "family hour" where parents can come in with their kids and try a game out to see if it's fun, age appropriate, etc. Hell, you could turn some of these retail locations into small, makeshift arcades for an afternoon. At this point, I think GameStop needs to focus on what it can give customers -- customer service, personal interaction, and value-add "services" -- and build that up.

Rob Wright
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Kongregate is okay, but GameStop has owned it now for two years and it doesn't feel like its achieving critical mass. And as far as being a platform for free Web-based games, well...Facebook probably isn't threatened. Ditto for Apple. That could change, of course, but I don't see Kongregate being much of a selling point just yet.

k s
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The problem with gamestop being a knowledge center is their staff are extremely ignorant, I've been fed disinformation by them quite a few times now. I generally catch it because I'm deeply involved in the whole video games scene but many others aren't as knowledgeable as me.

Cory Olson
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I do agree that from a certain point of view GameStop's market would look as if it were diminishing. I also think you have to look at other reasons why people go to GameStop. GameStop has midnight releases of major titles. Most average gamers take part in these midnight releases. Like you had mentioned before they help people who don't know about the industry but are trying to enter it figure out what they are looking for, and help gaming parents find out which games there kid should be playing. Also they provide a huge base for the buying and selling of used games. They provide a service to people who are uncomfortable with there technology. The average gamer is around 30 years old which means that they are starting a family, getting settled into a career, and looking at buying a house. These are people who are content with the way things are and are stressing about all of the change that is going on in there life. GameStop provides a nonessential essential service for the gaming industry. While we can get our gaming supplies in better, cheaper, and sometimes faster ways the majority of gamers still think that a hard copy from a well known distributor is better.

Rob Wright
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You make a good point, k s. But that can be easily remedied. Fire the staff that sucks, and hire good, knowledgeable young gamers to take their place. There's plenty of them out there, right? Make it a company policy to be helpful, courteous and engaging -- and the rest will take care of itself because genuine gamers aren't going to practice bullshitting people. I would have killed to work in a video store or arcade when I was in high school. The trick would be making the GameStop work environment more fun and personal rather than just standing around, checking pre-orders and rejecting 10-year-olds that try to buy M-rated games.