GameStop

The simple model of GameStop Corp.’s proposal to acquire eBay Inc. is:

• Ryan Cohen, the chief executive officer of GameStop, thinks he should be the CEO of eBay.
• That is not a job that you can apply for by filling out an application on the website. For one thing, eBay is a $50 billion public company, and public companies rarely hire new CEOs through cold outreach. For another thing, eBay has a CEO already and was not, prior to Cohen’s outreach, looking to replace him.
• If you are an ambitious and energetic person, and you want your dream job, but the hiring manager is not returning your calls, you could always try stunts. You print your resume on a cake and send it to the company. You stand outside the hiring manager’s house singing a song you wrote about your qualifications. Or, in Cohen’s case, you (1) lob in a vague acquisition offer, (2) lay out how you’d cut costs and make eBay more valuable if you were in charge and (3) also auction your socks on eBay to pay for it. It’s that combination of demonstrating your commitment and qualifications, while also doing some viral nonsense to get noticed.

In the case where your dream job is being the CEO of a particular public company, and the company already has a CEO and is not returning your calls, there are two standard sorts of stunt you can pull:

• You can do activism. You can buy some stock and send a letter to the board saying “I am a shareholder, I think current management is all wrong, and I would like to talk to you about my ideas.” (Your first idea is “make me CEO,” so you can implement your other ideas.) And then if the board says no, you run an activist campaign: You go out to other shareholders and try to get them on board with your ideas; if necessary, you run a proxy fight to vote out the existing board of directors and put your nominees in charge. And then your nominees make you CEO and you implement your plans. This requires a certain amount of money: You’ll be more credible if you own 5% of the stock than if you own 0.05%, though sometimes activists win campaigns with tiny stakes. But it mostly requires persuasiveness; it requires the ability to convince other shareholders that your plans for the company are better than management’s plans.
• You can do a hostile takeover. You can go to the shareholders and offer to buy all their stock for more than the going price. If the stock is trading at $50, and you offer $70, and most of the shareholders don’t think current management can make the company worth more than $70, then they will sell to you. Then you will own the company, and you can fire the board and the CEO and put yourself in charge. This requires much less persuasiveness than the first option: The other shareholders don’t really care if your plans are any good, as long as you pay them $70 in cash. “This idiot is going to run the company into the ground but that won’t be my problem,” they might think. On the other hand, this requires much more money than the first option. You gotta pay everyone for their stock.

Elon Musk wanted to run Twitter, so he bought it. David Ellison wanted to run Warner Bros., so he bought it. In each case, the company’s board or shareholders or outside commentators might have thought “man I don’t know about this guy’s business plan,” but it didn’t matter: They offered cash, and the cash they were offering was more than the company was otherwise worth, so they got the company. But if they hadn’t offered cash, they would have had to offer a good business plan: They would have had to persuade the existing investors in those companies that their plans were better than existing management’s plans.

Cohen does not have anywhere close to enough money to buy eBay. That would cost $56 billion or so1; GameStop has perhaps $9 billion, and Cohen’s bankers might lend him $20 billion more.

That leaves him with activism. He has to send eBay’s board a letter saying “I am a 5% shareholder of eBay and would like to talk to you about my management ideas, including replacing your CEO with me.” And then eBay’s board has to say “no thanks,” because they think that the current management and strategy are good (they picked them!) and they are skeptical of Cohen’s out-of-nowhere proposal. And then Cohen has to go around making his case to eBay’s shareholders that he would be a better CEO than the current CEO. Which involves:

• Laying out his plans for cutting costs and improving eBay’s business,
• Pointing to his own experience — turning around GameStop, and before that building <a href="http://Chewy.com" rel="nofollow">Chewy.com</a> — as proof that he is qualified to lead eBay, and
• Attention-getting stunts.

I should say that wacky stunts are not traditionally a big part of the activist playbook, but (1) Cohen is the CEO of GameStop, a meme-stock company with a lot of retail investors, so he arguably has some fiduciary obligation to his existing shareholders to do wacky stunts and (2) actually stunts are becoming a bigger part of activist investing. “You need social media and memes and zingers,” I wrote a while back about activist hedge fund Elliott Management getting into podcasting; “you need to fight for attention in a crowded media landscape.” I do not expect Paul Singer to auction his socks to call attention to an activist campaign, but there is a continuum.

Anyway, because everyone is mildly confused, and because he wanted to maximize attention, Cohen announced in his activist proposal in the form of an acquisition proposal, which was sort of hopelessly ill-formed. (He proposed an acquisition for cash he doesn’t have and stock he also doesn’t have.) And then this week eBay said “no thanks,” turning down the ill-formed acquisition proposal but also hinting that Cohen’s ideas for what to do as CEO of GameStop are bad. So now we are in the third phase, where Cohen gets to go around making his case to shareholders. The Financial Times reports:

Cohen wrote to eBay’s board chair Paul Pressler on Wednesday complaining that the company dismissed his $125-a-share unsolicited offer to buy the company “without engaging on its substance”, in an email seen by the FT. Cohen said while his request to meet eBay’s board of directors had been rejected, he planned to put the offer to shareholders. “[Ebay’s directors] should not dismiss a $125 per share proposal without engaging on its substance. The economics are clear and they are public. Ebay’s own shareholders deserve the opportunity to evaluate them,” Cohen wrote. … In his email to eBay, Cohen raised his own concerns about the reseller’s governance and executive pay packages, saying its CEO Jamie Iannone was paid $144mn over his six-year tenure despite overseeing a decline in eBay’s active buyer base. Cohen also noted Iannone had not purchased any eBay shares in the open market during his time as chief executive. By contrast, Cohen said he stemmed losses at GameStop — in large part because he has so much of his own money locked up in the company. “Ebay’s directors do not own eBay,” wrote Cohen. “They have presided over five years of net user decline.”

Right, no, the stuff about “a $125 per share proposal” and “the economics are clear” is a distraction; this is not actually about GameStop acquiring eBay. This is about Cohen becoming CEO of eBay, and he is making that case in normal activist terms: He owns more stock than current management does, current management has presided over decline, etc.

Cohen also did an interview with crypto influencer Anthony Pompliano laying out his thinking, which is pretty explicitly what I said above: This is not really an acquisition proposal, but rather a proposal to change the CEO (and also do a leveraged recap). Cohen says:

You can look at it as basically we’re giving them a special dividend for half … and then the other half they’re rolling into equity of the combined business that is going to be a lot more profitable. Because we’re going to focus on efficiency in the short term and in the long term and we’re going to focus on on revenue growth and I don’t get paid unless I build a much larger business and I want to turn eBay into something much larger. So, it’s the difference between a professional management team and board of directors versus an owner / operator leading it that doesn’t believe at all in work-life balance. ... They’re rolling into equity in a new business, or a combination between GameStop and eBay, that would be run by me. … So, it’s EPS accretive to both GameStop and eBay shareholders, and eBay shareholders continue to own the majority of a business that their earnings are coming from eBay except it’s run by someone frankly that gives a s***. Like that’s the big difference is I give a s*** and I’m going to do whatever it’s going to take.

And here he is on his personal ambitions (to be eBay CEO):

Cohen: I have always long admired eBay’s business and I didn’t want to be the CEO of GameStop. Actually when I sold Chewy, I didn’t really want to do anything for the most part and then I lasted like a few months and retirement wasn’t for me. But I’m very — eBay’s business is, I mean… Pompliano: That’s your white whale. Cohen: It’s eBay, it’s the one.

The Financial Times calls this “one of the most bizarre takeover sagas in years,” and I have called it a “fake takeover,” but now I think we might be looking at it wrong. This is a bizarre job application, a way to force eBay’s board and shareholders to consider Cohen’s desire to run eBay. Not even that bizarre, really: It is settling into a normal shareholder activist campaign, making the case that current management is misaligned and has presided over a decline in value, and that Cohen’s skills and experience and incentives and ideas would make him a better CEO. Sure it started with a nutty fake takeover offer, but you have to do something to stand out in a crowded attention environment.

Adani

In November 2024, the US Department of Justice and the Securities and Exchange Commission brought a weird fraud case against the Indian billionaire Gautam Adani. Basically the charges were that Adani Group executives paid some bribes to Indian state governments to buy solar power from Adani Green Energy Ltd., one of Adani’s companies. We talked about it at the time, and I pointed to three problems with the case:

• From the charging documents, it was not even clear to me that anyone paid bribes. They paid “incentives,” which sounds like “bribes,” but there did not seem to be smoking-gun evidence that the incentives were paid to government officials (bad, bribes) as opposed to the governments (fine, rebates). An “incentive” like “we will pay your state utility company a rebate on the price it pays for power” is much better than an incentive like “we will give you a bag of cash if you sign this above-market power contract,” and the evidence seemed ambiguous about which was happening.
• In any case, all of this stuff happened in India: Adani Green was an Indian company allegedly paying bribes to Indian officials for power contracts in India. The links to the US were tenuous, consisting mostly of the fact that Adani Green sold some dollar-denominated bonds in 2021, some of which were bought by US investors. The bonds were repaid in full before the charges were brought, so no US investors lost money.
• The actual theory of how US investors were defrauded — the thing that made this a criminal case in the US — was that they were looking for good environmental, social and governance (ESG) investments, they thought Adani Green was a good ESG investment (it had “Green” in its name), and they were deceived (bribery is not good ESG). “Back in 2021,” I wrote, “this was a real thing. Investors wanted to be ESG. ... Pretending to be very ESG, while in fact (allegedly) being a solar power company that paid bribes, really was a way to defraud investors. But the fraud was less ‘you took their money and didn’t give it back’ and more ‘you took their money and didn’t give them what they really wanted, which was good ESG performance.’ That is the crime here.”

Again, I wrote that in November 2024, shortly after Donald Trump won the US presidential election. Back in 2021, ESG fraud was a thing; back in November 2024, it was a crime. I continued:

Not for long, though, maybe. … The Trump administration will presumably be anti-ESG and will sue companies for doing ESG stuff, not for falsely pretending to do ESG stuff. ... But for now, it’s illegal in the US for Indian companies to pay bribes in India.

Anyway! The New York Times reports:

Now, according to several people with knowledge of the case, the Justice Department is planning to drop the charges altogether. The reversal came after the Indian billionaire, Gautam Adani, hired a new legal team led by Robert J. Giuffra Jr., one of President Trump’s personal lawyers. Mr. Giuffra’s efforts on Mr. Adani’s behalf culminated in a previously unreported meeting last month at the Justice Department’s headquarters in Washington, according to people familiar with the meeting. Mr. Giuffra ticked through about 100 slides outlining why prosecutors lacked basic evidence, as well as the jurisdiction even to bring the case, one of the people said. Another slide also offered the government a sweetener: If prosecutors dropped the charges, Mr. Adani would be willing to invest $10 billion in the American economy and create 15,000 jobs, echoing a pledge he made in the wake of Mr. Trump’s election.

See, that’s an “incentive”!

Fund formation

One way to think of a private equity fund is that it is a sort of a company, owned by its investors (the limited partners in the fund) and managed by its managers (the private equity firm that sponsors the fund), which goes out and buys other companies. The company has expenses, and the limited partners — as the owners of the company — ultimately pay the expenses. (Who else would?) One of the biggest expenses is the fee that the fund pays to the managers (the sponsor) for managing the fund and finding the companies to buy, but there are others. The fund has to pay for lawyers and investment bankers to do the deals to buy companies. It has to pay for, like, photocopying to send out quarterly account statements to the investors. This stuff all costs money, and the fund pays for it.

Another way to think of a private equity fund is that the sponsor — the private equity firm, Apollo or KKR or Blackstone or whoever — is a company that goes out and buys companies, and the fund is just a bucket of capital that the sponsor uses to pay for the companies. The fund — the pool of money owned by the limited partners — is a sort of service provider to the sponsor; it offers the sponsor a product (money) that it can use for certain purposes. If the sponsor wants to spend $1 billion buying a company, that’s what the fund is for. If the sponsor wants to, like, take the limited partners out to a nice dinner, surely the sponsor should pay for that! The sponsor is the host; the LPs are the guests. The sponsor is making plenty of money (from its management fees); it can pay for dinner. The LPs provide financing for use in the sponsor’s business, but the sponsor runs its own business. The LPs are not going to pay for all of the expenses of the sponsor’s business.

That is: One view is that the private equity fund is a business and the sponsor is a provider of management services to that business; the other view is that the private equity sponsor is a business and the fund is a provider of financing to that business. Intuitively, the ordinary expenses of the business should be paid for by whoever’s business it is.

There is a similar sort of tension in hedge funds: Are the LPs in a hedge fund owners of a business who pay all of the business’s expenses, or are they investors in a pool that pays only fixed fees to the manager? Broadly speaking, the norm in hedge funds used to be that the LPs mostly paid fixed fees (classically 2% of assets and 20% of returns) and the hedge fund manager was responsible for its own costs, but in modern multi-strategy multimanager “pod shop” hedge funds, the norm is that the manager bills all of its costs — including notably salaries and bonuses but also, like, private jets and office art — to the LPs, who keep (80% of) whatever’s left over. This norm is still evolving, and there are occasional conflicts when hedge fund managers bill LPs for stuff they don’t think they should pay for.

And broadly speaking the private equity industry has had the reverse evolution: It used to be the norm that, of course, whatever money the private equity firm spent was billed to the LPs, because a “private equity firm” was like three guys with a Rolodex and the only money they could spend was the LPs’ money. But now a “private equity firm” is a gigantic institutional alternative investment manager with fancy offices and trillions of dollars under management, and it seems sort of churlish to bill the clients for dinner.

Or for negotiating the fund documents. The Financial Times reports:

The Institutional Limited Partners Association has taken aim at a protocol whereby investors in private equity funds pay the legal costs of buyout group managers as well as their own in negotiations over setting up the vehicles. “I challenge you to find an industry or an analogue where the . . . client or the customer is paying the cost of legal counsel negotiating against them,” said Jennifer Choi, chief executive of the ILPA, which represents pension and sovereign wealth funds. “[It] simply doesn’t make sense.” ... Private equity’s backers have paid for fund-related legal costs since the dawn of the industry, when fledgling buyout managers could not afford to contribute. But private equity has grown from managing less than $550bn in 2000 to around $8tn in 2022, the ILPA said in a new paper, meaning today’s large buyout groups “simply do not face the same financial obstacles that existed when the market was new”. ... The association pointed to the “fundamental inequity” whereby buyout firms selected counsel to the fund, which was “also typically outside counsel to the [private equity firm] itself”, but usually did not share that law firm’s rates with investors paying the bill. It said the “most equitable solution” would be for managers of multibillion-dollar vehicles to bear the costs of fund counsel, while fund backers paid for their own lawyers. But it called instead for capping a fund’s legal, administrative and compliance costs at whichever was lower of $10mn or 0.05 per cent of its target size, where fund backers were paying.

Here are the ILPA announcement and guidance paper. This is a pretty modest ask, not “the sponsor should pay all of the fund’s expenses out of its management fees” but rather “the sponsor should pay half of the fund’s formation expenses above $10 million.” If your model is “the sponsor runs a giant business and is asking investors for money,” it does seem weird to charge the investors for the lawyers who are asking them for money. But if your model is “the sponsor is a service provider advising the fund, which is owned by the investors,” then of course the owners of the fund should pay for the fund’s lawyers.

Incidentally, I want to take up that challenge “to find an industry or an analogue where the ... client or the customer is paying the cost of legal counsel negotiating against them.” The classic answer is public-company sell-side mergers and acquisitions, where (1) the target hires lawyers, (2) they negotiate against the buyer, (3) the buyer agrees to buy the target at a fixed price, often with only a vague idea of how much the lawyers cost and (4) the target sends cash out the door to its lawyers one microsecond before the deal closes, reducing the amount of cash that the buyer gets in the target. Effectively the buyer pays for the target’s lawyers, which means that the target’s lawyers bill a lot, the target has no incentive to constrain their costs and sometimes the buyer grumbles about it.

Things happen

Kushner Disappoints Mideast Clients Who Spent Millions Seeking Sway. Bessent Says US, China Discussing ‘Board of Investment.’ How to Build a Data Center in Space. Hedge Funds Are Making a Killing in the ‘Golden Age’ of AI Hardware. Revolut prepares to launch private bank as it woos wealthy. Volatility Hedge Fund QVR to Close After Losing 30% This Year. Davidson Kempner CIO Has ‘Uncontrolled Power,’ Ex-Partner Claims. Citadel tells key researchers to relocate from Hong Kong or quit. Private Credit, Retail Fraud Top SEC’s Enforcement Priority List. Dozens of Polymarket Bets Show Signs of Insider Trading, The Times Finds. Self-report fraud and walk free, New York prosecutors tell Wall Street. OpenAI Brings Its Ass to Court.

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Federal regulations permit the drug to be dispensed by mail without a doctor's visit, but after an appeals court rules against that policy, Justice Samuel Alito halts any change until the Supreme Court can consider it. Plus, does mifepristone by mail present concerns that women might be privately coerced into taking it? Photo: Christopher Arbisi

Health Secretary Robert F. Kennedy Jr. announced an initiative last week to reduce the overprescribing of psychiatric medications, especially among children. In what’s being called a national mental-health crisis, psychiatric diagnoses in almost every category are reaching all-time highs. The Centers for Disease Control and Prevention reports that autism now appears in 1 in 31 children, a 381% increase since 2000. Childhood attention-deficit/hyperactivity disorder diagnoses nearly doubled between 1997 and 2022. Childhood anxiety diagnoses rose 54% between 2016 and 2022. Past-year prevalence of any mental illness among adults reached 23.1% in 2022, with young adults at 36.2%.

But much of the supposed surge in mental illness can be explained by a broadening of the American Psychiatric Association’s diagnostic criteria in recent decades and financial incentives for diagnosing more. The Mental Health Parity and Addiction Equity Act of 2008, extended by the Affordable Care Act in 2010, required health plans to cover mental-health services at parity with medical and surgical care. That addressed a genuine inequity in coverage, but made it so clinicians are paid more when they diagnose more cases.

The result is what economists call supplier-induced demand. Ideally, increased spending on mental-health care would yield better mental-health outcomes. Instead we have seen the opposite. Between 2000 and 2021, mental-health care spending in the U.S. more than tripled, from $40 billion to $140 billion, while mental-illness rates grew almost as dramatically.

Defenders of mental-health parity argue that spending and diagnoses are rising to meet previously unmet needs. But psychiatry is more subjective than other branches of medicine. No objective cutoff distinguishes ordinary worry from clinical anxiety, or grief from clinical depression. Findings are prone to distortion under the influence of nonpsychiatric factors.

When the National Institute of Mental Health says that half of all American adolescents have experienced mental illness, that isn’t psychiatry advancing as a field. It’s the result of various incentives for pathologizing ordinary struggle.

Wasteful spending and panic over a possibly nonexistent mental-health crisis would be bad enough. But psychiatric overdiagnosis creates an even more serious problem: overmedication. Roughly 1 in 6 American adults, an estimated 44 million people, are now on antidepressants. In young adults, those numbers are even higher. Thirty percent of college students take psychiatric medication, up from 9% in 2007.

For adults with mental conditions resistant to therapy, psychiatric medication can be effective. But we don’t understand the long-term consequences of many psychiatric drugs, particularly on young brains. We are running a large uncontrolled experiment on the developing brains of millions of young people, and we won’t know the full results for decades.

Meanwhile, the reimbursement architecture makes overmedication practically inevitable. Once a patient is on a drug, side effects are often addressed with a second drug rather than with a reassessment of the first. Clinicians call this the “prescribing cascade”: An antidepressant causes insomnia, so a sleep aid is added; a stimulant causes irritability, so a mood stabilizer follows. Each new prescription generates a billable visit, while tapering a patient off an ineffective drug takes time, monitoring and follow-up, which the billing system frequently doesn’t reimburse. Adding a prescription is the fastest, most reimbursable response at every stage of care.

The new HHS initiative rightly recognizes the harms of overprescription and the potential for negative side effects from long-term psychiatric medication in young people. It includes new reimbursement for clinicians who help patients taper off drugs, a “Dear Colleague” letter urging informed consent and regular reassessment, and a technical expert panel to develop formal tapering guidelines this summer.

These are sensible steps, but they don’t address the root cause. The fundamental problem is that federal law created an incentive structure that makes psychiatric medication the default for tens of millions of Americans who might be better served by therapy, lifestyle intervention or no clinical intervention at all.

To get physicians to stop overprescribing, the institutions that shape their choices should offer a greater reward for prescribing sparingly. In addition to new billing codes for deprescribing, what’s needed is a serious examination of whether the coverage mandates and reimbursement structures the ACA put in place are producing the outcomes they promised.

The mental-health system has improved over the past half-century. Effective treatments are more widely available, and people are more willing than ever to seek help. But the same mandates that have increased access to mental-health care have made overdiagnosis and overmedication the path of least resistance for a generation of clinicians and patients.

Mr. Omary is a psychologist and a research fellow at the Cato Institute’s Center for Global Liberty and Prosperity.

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Sam Altman, CEO of OpenAI Manuel Orbegozo/Reuters

OpenAI Chief Executive Sam Altman has taken the stand in the third and likely final week of Elon Musk’s blockbuster trial that could shape the future of artificial intelligence. 

Altman kicked off his testimony by addressing Musk’s bold declaration at the start of the trial that Altman “stole” a charity.

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Elon Musk says orbital data centers are the next frontier for his rocket company.  Matt Rourke/Associated Press

Google GOOGL -0.83%decrease; red down pointing triangle is in talks with SpaceX for a rocket-launch deal as the search giant expands its own efforts to put orbital data centers in space, according to people familiar with the discussions. 

A launch deal would put the two companies in partnership as they gear up to compete on orbital data centers, an unproven technology that SpaceX Chief Executive Elon Musk has said is the next frontier for his rocket company. 

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