Wall Street eyes GameStop as a takeover candidate

There's been plenty of new chatter indicating that leading video game retailer GameStop is a prime buyout target. How likely is that scenario, and if it happened, what would it mean for publishers?
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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