In the world of finance, there tends to be written rules and they apply to business whatever the industry is. The rules in general apply to individuals for major purchases, such as if you need a bank loan to buy, the lender will examine what are the high possibilities you will repay the loan on time and consistently, so the bank will not end up with the asset. The better the credit risk you are, the more likely you will receive the loan. Most people understand the rules.

In an article by Gus Carlson of Globe and Mail, it seems Ryan Cohen does not. Mr. Cohen is a billionaire and one of his major investments is GameStop. GameStop bid $56 billion for eBay.

GameStop is worth about $10 billion and eBay’s valuation is $48 billion.

In the past, smaller companies have bought larger companies, so it is not a impossible idea and some of Mr. Cohen’s fans are for the proposal, some believe Mr. Cohen is not a good idea.

eBay’s Board examined the proposal and said the uncertainty, the operational risk, the back-breaking debt would not be good for eBay’s existing shareholders.

GameStop has $9 billion cash or cash equivalents on its balance sheet.

GameStop has a letter from their investment bank TD Securities for $20 billion in financing. However, the letter says the bank will only raise that number if the rating agencies keep an investment grade credit profile from at least 2 of the 3 rating agencies. Problem Moody’s Rating came out and said the proposal would be credit negative.

Mr. Cohen says the deal for $56 billion will be half cash, half stock. (56-9-20 = 27) The company has the ability to issue stock in order to get the deal done. The market value of GameStop is 10 or 27 – 10 =17. Where is the other money coming from was asked by CNBC’s Squawk Box anchors? No answer was given or issue of $17 billion in stock?

The Squawk Box anchor said Mr. Cohen does not actually own 5% of eBay’s shares, most of it is the options market which means he may not have the voting ability of the shares.

Would eBay shareholders want GameStop stock? would existing GameStop shareholders like their holdings be diluted as millions of shares are issued? Can the combined company generate more cash to pay down the debt?

Mr. Cohen pledged savings through efficiencies and marketing cuts and the use of GameStop stores as eBay fulfillment stores. Since Mr. Cohen has said the existing management of eBay has not done a good job, one would expect a managerial change which can or cannot be a good thing. Is there a strong upside to increase the size of combined firms.

Linking to dividend paying stocks, there tends to be a checklist for any transaction that involves debt – either at the individual level or the corporate level, if the check list is not going to be followed, then somebody must have really good reasons. If they are lacking, the likelihood of having access to the credit is limited.

There are more questions than answers, till the next time – to raising questions.