2 Reasons GameStop Should Buy eBay, 1 Reason It Won't

Are rumors of GameStop (NYSE: GME) going big game hunting finally coming true? The Wall Street Journal is reporting that the video game retailer is preparing an offer to acquire eBay (NASDAQ: EBAY). The story broke shortly after the final closing bell of the trading week, but shares of both companies moved higher in after-hours trading.

You don't see that very often. It's even more rare to see a company make a play to buy a much larger one. There are still a couple of good reasons this can happen. There is also one big reason why it might not.

Image source: Getty Images.

1. They are better together

GameStop on its own has been rudderless in recent years. Revenue has declined for four consecutive fiscal years. It has returned to profitability with its high-margin, small-box format, but the future for physical video game software is bleak.

eBay, on the other hand, is now knee deep in what should be its fourth straight year of top-line growth. It's a much larger -- and far more profitable -- enterprise. If GameStop can transform its premium valuation as a meme stock into buyout currency, it could find a larger lifeboat in eBay.

Just consider GameStop's revenue growth relative to what it would look like on a pro forma basis if combined with eBay's. It easily cleans up a problematic trend.

Source: Yahoo! Finance. Revenue in billions. YOY = year-over-year.

Having eBay on its books would have increased revenue last year. It also would have eased the sting of GameStop's back-to-back years of double-digit top-line declines in the two previous years. When GameStop announced that it was eyeing a needle-moving acquisition, I mentioned eBay as one of three deals that made the most sense for GameStop.

2. It will make eBay better

Yes, eBay is still massive. It had 135 million active buyers on its platform at the end of March. It was a mere 1% increase over the past year, but gross merchandise volume on the platform surged 18% (with a heartier 27% jump in domestic sales volume). It has momentum. GameStop can bring more.

GameStop CEO Ryan Cohen was dealt a bad hand with the video game stock's legacy business. He played it well, raising money during the company's meme stock ascent. GameStop shares are now down almost 80% from their all-time high, but you can't take a profitable GameStop's $9 billion in cash away.

There's no need to knock eBay's management. It's rolling. It's growing. Now imagine Cohen and his army of GameStop investors working on a platform that's already thriving. They can make eBay even trendier and more popular. Let's go one step further. If Cohen can use GameStop's network of stores as physical outposts for eBay logistics and fulfillment, isn't the united company better than the sum of today's two parts?

Running out of cheat codes

Bears will offer plenty of dealbreakers. Set aside the knock that GameStop -- with its $12 billion market cap -- is too small to land $46 billion. David swallows Goliath every now and then. Time Warner Cable, MCI, Sears, and Anheuser-Busch are just some of the targets gobbled up by less valuable players. Warner Bros. Discovery is currently on the shortlist. These "shoot your shot" deals don't typically work out, but it does happen.

Clearing antitrust hurdles should be a breeze. With GameStop reportedly already building up a stake in eBay, it will have stocked the shareholder pond with some votes in its favor.

The real reason GameStop might come up empty is that eBay could be unattainable. The shares are beating the market, up more than 50% over the past year and doubling over the past three years. eBay stock hit an all-time high earlier this earnings season.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Warner Bros. Discovery and eBay. The Motley Fool has a disclosure policy.