AMC Raised $1 Billion From Meme Stock Mania. Why Didn’t GameStop Even Try?
The struggling video game retailer chose not to exploit an irrational market. Bad move.
With the stocks of GameStop, AMC, Nokia and others tumbling back to reality — down some 65% from their recent highs — it probably won’t be long before the Great Meme Stock War is over. But regardless, we already know who the big winner was: struggling theater chain AMC, which six weeks ago looked like it might be headed out of business and now has a realistic chance of making it until the pandemic ends. By contrast, GameStop — the true darling of meme stock investors — seems to be in little better shape than it was at the start of the year, despite having its stock jump from about $19 a share at the end of 2020 to as high as $480 a share last week. And the reason for this is simple: AMC cashed in on meme stock mania. GameStop, mysteriously, did not.
The math here isn’t that complicated: When a company’s stock price soars, it effectively means that investors are throwing free money at it. AMC, quite sensibly, decided to take that money, by doing what’s called an at-the-market offering of shares in the company. That meant it issued 50 million new shares of stock, and told its bankers to sell them on the open market (rather than placing them privately with big buyers). That allowed AMC to act quickly, and in combination with an earlier share offering that hadn’t been completed, it raised more than $300 million in January from share sales.
On top of that, AMC also effectively had $600 million of its debt wiped out when one of its biggest convertible-debt holders, Silver Lake, converted all that debt into AMC shares and then quickly sold them, clearing more than $100 million for itself in the process. Put all that together, and add in some new debt that AMC was able to sell to big investors, and the company has raised more than $1 billion in cash over the past few weeks. And it did so without even doing an especially good job of timing its trades; the average sale price for the shares it sold was $4.81 a share, nowhere near the $20.36 a share it hit at the peak of the meme stock frenzy last month.
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GameStop, by contrast, has taken a very different tack. It made no public statement during the run-up (and then run-down) of its stock. It did not issue more shares. It hasn’t used its still-inflated shares as currency to buy another company — like, perhaps, a gaming company. We don’t know if GameStop has done nothing at all; back in December, it did file to sell $100 million of shares “from time to time.” If that sale hadn’t been completed before meme stock mania, it’s possible it did sell at least some shares into the frenzy. But given that, at its peak, it was being valued by the market at more than $20 billion, that’s a pretty small reward. Lots and lots of people — and institutions — got rich as GameStop’s stock soared. The company didn’t.
The interesting question, of course, is why — particularly given the speed with which AMC took advantage of the situation. It may have something to do with urgency. AMC has been selling shares to raise cash for a while now. It’s been facing a legitimate threat of bankruptcy because of the pandemic, which has shuttered its theaters almost everywhere, so it desperately needed to raise money in order to increase its chance of survival. In that sense, the alacrity with which it acted was a great illustration of what Samuel Johnson once said about the prospect of being hanged: It “concentrates [the] mind wonderfully.”
A GameStop share offering might also have risked a lawsuit from shareholders who bought shares near the top and then found themselves sitting on massive losses when the stock inevitably fell.
GameStop, by contrast, does have a struggling business — in part thanks to the pandemic, which has driven down traffic at retail stores, and in part due to the fact that its former customers are now more likely to download games than buy physical disks. But it doesn’t seem to be at risk of going out of business any time soon, and it doesn’t actually have a lot of debt on its books. So it wasn’t facing the kind of pressure AMC was.
Given that GameStop’s stock was also the center of meme stock mania (while AMC followed in its path), a GameStop share offering might also have risked a lawsuit from shareholders who bought shares near the top and then found themselves sitting on massive losses when the stock inevitably fell. And it’s possible the SEC might have stepped in to stop the offering — as it did when Hertz, despite being bankrupt, tried to sell shares last summer. It’s not clear the SEC would have been justified in doing so, given that GameStop has a real business and is in no danger of going bankrupt. But an abundance of caution might have led GameStop execs to be wary of pulling the trigger, particularly given that if it had issued shares, that would have probably helped drive down the stock price.
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We also shouldn’t downplay the weirdness of what GameStock executives were facing. A company’s stock price is supposed to say something about its underlying business prospects. But in the case of GameStop, those two things — the stock price and the underlying business — became completely disconnected. And that created an odd situation where doing what was right for the business could well have been bad for the company’s shareholders, at least at the moment. So you can see how that could have created some analysis paralysis on the executives’ part.
In 2019, GameStop bought back a ton of stock (a full third of its outstanding shares), at an average price just above $5 a share. If it had then sold some of those shares for 20 or 30 times the price it paid, it would have been one of the great corporate investments of all time.
Even so, it’s hard not to see the failure to raise a big chunk of cash from investors who were flinging money at the company as a major unforced error. If it didn’t have any obvious use for the cash, GameStop could have shrunk its debt load, something it already started doing last year. Or it could have just put the money in the bank, to help it fund its planned pivot into e-commerce. If it was worried about diluting existing shareholders, it could have issued new shares, sold them at $200, and then bought them back once the price fell down into the double digits. In 2019, GameStop bought back a ton of stock (a full third of its outstanding shares), at an average price just above $5 a share. If it had then sold some of those shares for 20 or 30 times the price it paid, it would have been one of the great corporate investments of all time.
In the end, the decision here shouldn’t have been that difficult. Corporate executives are paid to allocate capital as efficiently as possible, meaning they should always be looking for the highest return possible on any project the company does. And nothing GameStop is going to do any time soon was going to have a higher return on investment than, say, selling 5 million shares at $200 (or even $100) a pop. GameStop could have walked away from all this with an extra $1 billion in cash. Instead, all it ended up with was a Diamond Hands T-shirt.