Motley Fool Hidden Gems Investing - Forget Earnings Season. It’s Takeover Season.

Starting point is 00:00:00 You can forget earnings season. It's suddenly takeover season. You're listening to Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm John Quast, and I'm joined by Fool contributors Rachel Warren, and filling in for us today is Travis Hoyum. Today we have a show that is going to center around mergers and acquisitions, even though we're in the throes of earnings season. But the weekend news flow about acquisitions was just too juicy to pass up. We're going to try to be true to our hidden gems theme here. We're going to try to look at some hidden things that might make an acquisition better than others, make it break it. But let's start with the lead here. And it's the big headline over the weekend.

Starting point is 00:00:46 And that's that GameStop is entering the conversation. Let me frame this. Back in January, GameStop CEO Ryan Cohen said he was looking for an acquisition. And he said the acquisition needed to be big. In fact, he said it needed to be very, very, very big. He was looking for a resilient business. He was looking for an undervalued, publicly traded company, and specifically looking for sleepy management, in his words. And now we know what the company is. They are targeting eBay. So over the weekend, GameStop, a company with a market cap of about 11 billion, offered to acquire eBay for nearly 56 billion. And it's a complete takeover. Ryan Cohen is proposing himself as the new CEO of the combined company. And it's just a crazy deal.

Starting point is 00:01:33 Have we ever seen anything like this? And is it even possible? Yeah, I mean, there's definitely historical precedent for this. I mean, you have a famous example back in the 1980s, right? With Capital Cities, they're a relatively small media company. They acquired ABC. That was a company that was nearly four times its size at the time. And of course, back then, that deal was very much financed by famous investor Warren Buffett, Oracle of Omaha himself. He provided about $500 million in exchange for up to a 25% share in the combined company. And that deal was one of many, I think, that proved that you could have a smaller, more aggressive firm swallow a corporate giant if they had the right financial backing. Now, you talk about this GameStop and eBay proposed deal to

Starting point is 00:02:13 fund the cash portion of this deal. Ryan Cohen, he secured a $20 billion debt financing commitment from TD Securities. That's the investment banking arm of TD Bank. And the idea is this would act as a bridge between GameStop's existing cash pile and the total offer. It's a risky maneuver. GameStop's offered $125 a share in a 50-50 cash and stock deal that actually represented about a 20% premium over eBay's Friday share price close. But I think you also see a situation where Cohen has to convince the market this combined entity would be more valuable than the two companies standalone. And if the board were to refuse the offer, if the board of eBay refuses the offer, I think maybe the only path forward is some kind of a hostile proxy fight. So this

Starting point is 00:02:55 will be really interesting to see play out. Yeah, it's definitely happened before. This isn't completely new. We could go back to Norwest buying Wells Fargo in 1988, essentially just took over the name Wells Fargo. Kmart bought Sears. Remember that was when Eddie Lampert kind of made his name known. Don't know that that's necessarily worked out over the past 20 years or so. Yeah. I don't know if GameStop wants to be Kmart. Yeah. That's not necessarily a great omen for them. I've been following gaming for 20 years and Eldorado, which was a company that most of us had never heard of a couple of years before that, bought Caesars Entertainment. So this has happened before. It is kind of a situation where GameStop's got to figure out

Starting point is 00:03:36 where in the world they go next. Their business isn't exactly doing great. So might as well buy something. And I guess eBay's for sale. And I feel like it's worth pointing out here that GameStop has quietly acquired a 5% stake in eBay, according to Cohen. Now, this is not pure shares here. There's some derivatives involved here, but it's essentially following the same playbook that Cohen ran. If you remember, Cohen is not the founder of GameStop. He's not the longtime executive. He actually acquired enough of the company to essentially take it over a couple of years ago, put himself in the CEO chair. And it's worth pointing out that his pay package is tied to GameStop's market cap reaching a hundred billion. It's not tied to an operating

Starting point is 00:04:18 metric. It is tied to the market cap of the company. So certainly incentive here to grow the business. Yeah. That incentive structure is an interesting one to note. I mean, you look back, right? I mean, Cohen used this very methodical multi-step campaign to gain control of GameStop. He began with a 9% stake that he boosted eventually to 13%. And he used his position, you know, back in the day, he penned this blistering public letter to the board. He was criticizing their lack of vision. He labeled them as outdated. He sort of pressured and forced the company to give him three board seats. And, you know, obviously GameStop has seen some significant turnaround under his leadership. But once he was inside the boardroom, he pushed out the legacy

Starting point is 00:04:55 CEO. He was very successful to that end. Now, his current move on eBay follows something of a similar pattern, but the scale of the target is really different here, right? I mean, you had GameStop, very much a struggling retailer that he could fix with a few hundred million dollars injected into the business. eBay is this established e-commerce giant. It's worth tens of billions, requires a level of outside financing and market cooperation that he didn't need the first time. So it's certainly not a one-to-one comparison, even though some of his strategy is definitely similar. Yeah. And let's keep in mind that part of the strategy is keeping the meme going. GameStop, not exactly a thriving business today. I think that's putting it mildly over the

Starting point is 00:05:36 past 10 years. Their compound annual revenue growth rate is negative 8%. The company has shrunk under Cohen. So it isn't like he's some sort of operational mastermind who turned around GameStop from being a struggling retailer to now a thriving retailer. They're still a struggling retailer. And that's going to be fundamentally the question here is, can he convince the market that the story is worth buying? And I think that's really the biggest question for investors going forward. This isn't the kind of acquisition that I'm a huge fan of as an investor because it is not, as you mentioned, really fundamentally driven. It's really more meme or story driven. And that's something he's got a lot of work to convince people that he's going to be able to

Starting point is 00:06:18 build a $100 billion business. I think in fairness, you're talking about the top line, And GameStop is certainly still struggling there. And there is questions on the long-term viability of that business, given all the changes that is happening in the gaming space, a lot more not a physical product anymore. And so that is certainly playing into it. But you do have, under Cohen's leadership, going from losses to net income, trailing 12-month of $400 million. And to that point, definitely to Rachel's point of blistering letters, writing here

Starting point is 00:06:50 that basically he can increase eBay's earnings per share 80% in the first year by cutting waste. Travis, do you think that he has a point here? There's maybe a little bit of a point, but at the end of the day, yes, you're right. GameStop is probably a more efficiently run company today. They are making an operating profit. They do have a little bit of operating leverage, but how valuable is operating leverage when your top line is still in decline, when you're still fundamentally not in a growth business long-term, I think that's really the challenge. Is this going to be a cigarette butt company? If we go back to the old Warren Buffett days, hey, there's still a little bit of cashflow to generate here and we're just going to

Starting point is 00:07:29 suck everything we can out of it and then let the business die. I don't think that's the story that he's trying to give to the market, but that's what you get if you have declining revenue business and increasing operating profits. You're getting operating leverage at the cost of actually growing in the business. So it's a little bit of a tough position for them to be in. I just want to acknowledge one thing as we close this segment. I feel like this is that domino meme. If you've seen the little tiny domino and it finally knocks over a huge domino, it's just crazy to me that if we rewind the clock, it all started with a guy named Roaring Kitty on Reddit saying that he liked the stock. Next thing you know, you have the co-founder of Chewy

Starting point is 00:08:07 buying GameStop. And now we have a potential takeover, the 10th largest e-commerce platform in the world. So you never know what one little domino is going to knock over. We'll keep an eye on this because this is potentially something that would disrupt the e-commerce space. So we'll just keep an eye on it. After the break, we are talking about another potential acquisition from AI giant Anthropic. You're listening to Motley Fool Hidden Gems Investing. Welcome back to Motley Fool Hidden Gems Investing. On this second segment, I want to be extremely clear upfront. We are about to talk about a rumor. In our last segment, we talked about a real proposal. You can go to GameStop's website. The proposal is there. You can read the documents, see the numbers. That proposal is real.

Starting point is 00:08:51 This segment, we are talking about a rumor that is floating around out there, but it is so fascinating that I really feel like we need to touch it. And here's the rumor. The rumor is that AI giant Anthropic, the maker of Claude, is interested in acquiring enterprise software company Atlassian. Now, what's fascinating about this rumor to me is that we've been talking about how AI is going to kill software, or at least that's the prevailing narrative. But if this rumor is true, then somehow an AI company would want to buy a downtrodden software company. In light of that narrative, I mean, how possible do you think it is that this is true, Travis? It's very possible that it's true. And we got to think about this strategically first.

Starting point is 00:09:38 If you are anthropic, you're dealing with a competitive market in the model space. We know that they were the hottest thing in the market in early 2026. It seems like even just over the past few weeks, they've kind of been overtaken again by Codex from OpenAI. So in this kind of back and forth market, how do you build a durable business that's actually going to be worth the however many hundreds of billions or trillions of dollars these companies think they're going to IPO for? at some point in the near future. And one of the ways that you're going to do that is you're going

Starting point is 00:10:13 to get distribution and data within your ecosystem. Atlassian has distribution, they have products, they have data that companies put into Atlassian's products. That's going to create something of a flywheel for Anthropic potentially if they bought this company, and it would make them a little bit stickier in some of the enterprise businesses. And I think the interesting thing here, we saw the deal between XAI and Cursor a week or two ago. So that was Cursor proposed being acquired by XAI, SpaceX, whatever it's going to be after they actually go public. And I think the idea there was Cursor was actually in a fairly weak strategic position because they were being replaced by Claude and Codex actually kind of pulling their customers away from Cursor as the place that they

Starting point is 00:11:03 are actually doing their coding. So things are changing so quickly in artificial intelligence that even though Anthropic and Claude are arguably one of the fastest growing companies we've ever seen at this scale, it is still a tenuous position. They don't have a huge moat around the business. And this would potentially start to build that moat. I think that's the way to think about it. Okay. And so basically what you're saying here is that perhaps Claude could build better products. But the real deal here is that Atlassian has customers that it already has in the hopper. It's got this huge distribution, and that would be the competitive advantage if it could get its hand on that. That's one thing it doesn't have. Rachel, do you think that

Starting point is 00:11:44 Anthropics Cloud could make Atlassian's products better? Oh, I absolutely think that's the case. We've been having this discussion for months now about how these types of models like Anthropix, Claude could potentially replace some of these software businesses. That's obviously been the concern we've seen permeating the markets impacting a lot of software stocks. I don't think they replace the software businesses. I think we could very much see a dynamic where some of these larger AI companies see the value in these software platforms and try to integrate them into their own ecosystem. You think about how Anthropix has the brains of AI with Claude, right? Well, Atlassian has the territory of millions of

Starting point is 00:12:20 developers, project managers already live inside platforms like Jira and Confluence every day. And so by acquiring them, if this rumor is to be believed, Anthropic wouldn't just be a service that developers call upon. They could become brilliant infrastructure where work actually happens. And from a strategic standpoint, an AI giant would want a software developer like Atlassian for that data and distribution advantage. I mean, Atlassian sits on a gold mine of proprietary data, decades of how teams collaborate, how bugs are fixed, how products are shipped. And so I do think that this could turn Claude from a helpful assistant to more of an autonomous worker that has access to the levers of a company's operation. So it makes sense from

Starting point is 00:12:59 that perspective. Yeah. John, let's also tie this back to the GameStop acquisition. GameStop is using a very highly valued stock to buy a company that is theoretically a value company. So you combine those two companies and you get a maybe more reasonably valued company when it's all said and done. You could look at it the same way with something like Atlassian if this deal does go through. Anthropic is not cashflow positive. Atlassian is. If you look at their market cap, currently $24 billion. Let's say they have to pay a bit of a premium. Maybe they sell for $30 billion. You're also bringing in $1.2 billion worth of free cashflow. So you're acquiring customers, you're acquiring data, and you're acquiring a business that's actually generating

Starting point is 00:13:41 cash. You combine your cash losses with their free cashflow. Maybe you have a little bit less cash needs. And all it costs you was a fraction of the shares that you have outstanding. So that's where it could potentially make sense both strategically and within this financial game that all these companies are playing. And that's the thing about investing that I just love. There are so many angles to look at. And often the most simple narrative is not the right narrative. So we'll be keeping an eye on AI and software in the weeks and months ahead. When we come back from the break, we're talking mergers and acquisitions and pulling some hidden gems lessons from huge company Berkshire Hathaway. You're listening to Motley Fool

Starting point is 00:14:22 Hidden Gems Investing. Welcome back to Motley Fool Hidden Gems Investing. We want to make you part of the conversation here. So if you have a stock or investing question for Travis, Rachel, myself, anyone else on the show, you can email us at podcastatfool.com. And we would love to have mailbag segments. We're not doing one today, but we do like to have them quite often. Just send on your questions. Remember to keep them Foolish. Keep them short so we can read them on air. That email again is podcastatfool.com, podcastatfool.com. And we want to close here with Berkshire Hathaway. New CEO Greg Abel just completed his first running of the annual meeting in Omaha over the weekend. And of course, questions came up about

Starting point is 00:15:02 his vision and strategy. Questions is a huge conglomerate. Are you going to break it up? Are you going to sell some of the assets? Essentially, Abel said, no, we're not going to do that. It doesn't have layers of management, so it believes it's a very efficient conglomerate and then it wants to hang on to what it has. But as we think about this whole topic of takeovers, mergers, acquisitions, what is some hidden traits, some hidden takeaways that we can take away? Mergers and acquisitions happen all the time on the stock market. What should our listeners be looking for what is the DNA of a good deal. And let's use Berkshire Hathaway here to kind of frame the narrative because it has made so many good deals over the years. So I'm going to

Starting point is 00:15:44 throw here to you first, Rachel, what's a good deal that Berkshire has made in the past? And then we're going to talk about maybe what the hidden takeaway is. Yeah. I mean, this is kind of an easy one, but one of the most famous and arguably one of the best was Geico, right? And I mean, this is an interesting one too, because Buffett first invested in Geico back in the 1950s. he had gradually increased his stake over several decades. And then Berkshire acquired Geico by purchasing about the remaining 49% of the company they didn't already own for about $2.3 billion back in the 90s. But one of the things that I think made this deal such a masterpiece was not just the brand of Geico, it was the insurance float, the pool of money collected from premiums

Starting point is 00:16:21 that have not been paid out in claims yet. And Buffett had realized that Geico provided this massive ongoing pile of low to no cost capital that he could use to buy other companies. So the genius wasn't really just in the insurance business. It was in using that business as a funding engine for everything else. And sort of the Berkshire gold standard for a merger is one that pays for itself through its own cashflow without diluting the original owners. I think Geico is a great example of that. I think Rachel, one of the points here would be that Geico was just so big and established at the time. And Buffett knew it extremely well. He was in love with Geico when Berkshire acquired it. And you see it so often with a merger and acquisition

Starting point is 00:17:03 on the stock market. Often it's very speculative. Yeah, absolutely. And I think one of the things that we've seen Buffett stress over the many decades is the importance of staying within one circle of competence. And this is a business he knew extremely well before it came into the Berkshire fold. And I think that that probably underscores his strategy through the decades better than many of the other companies even currently in their portfolio. Okay. So maybe if our listeners are looking at a merger and acquisition that's happening out there, let's see if it's an established business or one that's a lot more speculative. And let's see if management even knows that business that it's buying. Oftentimes there's desperation grasping

Starting point is 00:17:42 at something that it doesn't know well. So one thing to look for, for sure. Travis, let's go to you now. What was a Berkshire deal that stood out to you? I think you could easily make a case for Apple that was in, you know, about a decade ago, they started building that position. See's Candy has a lot of, you know, attention, especially in their sort of lore. I look back at Nebraska Furniture Mart and we don't know exactly what is historically true and what's the legend of Buffett and building Berkshire Hathaway. But I read that he didn't even do due diligence on the acquisition because he trusted Rose Blumpkin so much. She was the one that started and ran Nebraska Furniture Mart. Bought a 90% stake in the company for $60 million. That was a company doing $100 million

Starting point is 00:18:23 worth of sales. Reportedly, the business is doing about $1.6 billion in sales today. So it's not a massive growth business. They bought this in 1983, but it's a solid growth business. It's generating positive free cash flow. And I think this just falls into Buffett's wheelhouse because it was a price that we often don't see in markets today. And it was a deal with somebody that he was very familiar with. I remember Munger in an interview saying something like, hey, we did a lot of deals with the same people for decades. And the only reason that people remember us is because we're still alive. And so it's just sort of classic Buffett. I think even Rose Blumpkin should be part of the myth of Berkshire Hathaway. Buffett joked that he would have to make mandatory

Starting point is 00:19:09 retirement age, 103, because she worked until 103. Tried retiring at 95, but she got bored. So it's just kind of classic Buffett in all kinds of different ways, but more legacy Buffett from the 60s, 70s, 80s, picking up these companies for what we would see as incredibly cheap prices today because he did the work that no one else was willing to do at the time. Yeah, and that's such a good point. There have been many, particularly in the software space, many acquisitions that have gone sideways because they're paying just an exorbitant amount of money for these companies that have very unproven track records are to have, you know, really questionable financials. Not always the case. Serial Acquire United Rentals, I've seen it get

Starting point is 00:19:53 deals for like 10 times earnings before, right? That's a great deal and it's additive to the business, but that's not always the case. But there does need to be value when you acquire another company. Yeah, absolutely. And the other thing is the durability of the business. I'm here in the Midwest and there is something about some of these family-run businesses. Nebraska Furniture Mart doesn't do anything crazy. They don't do anything sexy. They sell furniture, but people go there because they've been going there for years or for decades. That's the way that a lot of businesses run, especially maybe in the Midwest. And I'm more familiar with that being here, but you know, probably every part of the country and every part of the world is there are just these

Starting point is 00:20:34 rock solid businesses that are going to exist forever because they sell something that people need. And Buffett was happy to scoop them up if the price was right. Well, listeners, if takeover season does start to really ramp up, we hope that our discussion today has provided enough context to hopefully help you keep your head as you evaluate these deals. Unfortunately, that's all the time we have for today. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers.

Starting point is 00:21:11 Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to our producer, Christy Waterworth and the rest of the Motley Fool team. For Travis, Rachel, and myself, thank you so much for listening to our show and we'll see you again tomorrow.

Motley Fool Hidden Gems Investing - Forget Earnings Season. It’s Takeover Season.

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