M&A Watch: eBay & GSI Commerce, A Home Run Buyout (EBAY, GSIC)

eBay Inc. (NASDAQ: EBAY) is trading south on news that it is going to acquire GSI Commerce Inc. (NASDAQ: GSIC).  Most acquirers see their shares getting hit when they make acquisitions. Our take in this acquisition is that the deal that makes much more than simple sense for eBay. 

GSI is offers e-commerce and interactive marketing services to businesses and it is one of the better companies out there in its segment.  The buyout is a cash buyout valued at $29.25 per share, which comes to a value of about $2.4 billion after cash spent and debt assumption. 

eBay is paying roughly a 50% premium in this deal and it is still subject to GSI holder approval.  eBay is going to get to combine GSI with its Marketplaces and PayPal operations and it is probably safe to assume that eBay can almost instantly leverage this business up at a value more than GSI could have all on its own independently.

GSI currently has over 180 customers that are leading retailers and brands which are in 14 merchandise categories and its contracts are generally long-term commerce services relationships.  eBay said that it will divest 100 percent of GSI’s licensed sports merchandise business and 70 percent of ShopRunner and Rue La La and that unit will be run by GSI’s existing CEO and founder.  As part of the divestiture, eBay said that it will loan the new holding company some $467 million and retain a 30 percent stake in Rue La La and ShopRunner; and Michael Rubin will invest additional cash of $31 million in the holding company.

We feel that the benefits and potential gains here may be understated by eBay.  eBay noted that it expects this transaction to show about $60 million in synergies by 2013 and said it sees the deal to be neutral to earnings per share in 2011 and accretive to earnings per share in 2012.  It sees the impact being $0.30 to $0.34 off of 2011 GAAP earnings.  GSI gets a 40-day go-shop provision, but eBay has the right to match any offers.

What eBay sort of skimmed over it that it will almost instantly be able to leverage this platform to many smaller and larger customers inside eBay.  The company will also get additional insight into more online business operations and gain an ability to see more sales forecasting capabilities than it has today.  If PayPal and Marketplaces were not a part of eBay then there may not be as large of a benefit to this acquisition.  It would seem a shoe-in to believe that eBay can instantly turn this process on with many of its existing Tier-1 merchants and auction-running clients.

eBay has a monopoly in many online auction segments for consumers and small to mid-sized businesses.  This acquisition of GSI is just one more step to incremental growth.  The only real surprise we see with this is that the deal was done in cash rather than with stock.

eBay shares have fallen by more 3% to $30.66 in late-morning trading.  GSI Commerce shares are up almost 51% at $29.25 and its 52-week trading range is $17.77 to $31.35.  Thomson Reuters even had a consensus 12-month consensus analyst target of $30.12 for GSI Commerce.  If eBay has to pay up for this deal, we may reconsider our stance.  All in all, eBay seems to be getting a better deal than it is getting credit for.

JON C. OGG