Ebay’s Acquisition of Gsi

eBay’s Acquisition of GSI^[1]*

In early 2010, GSI and its CEO, Michael Rubin, faced a challenge.  GSI’s share price was in decline due to a series of earnings reports that missed expectations.  In addition, management thought the market misunderstood the company.  GSI’s main business was to provide e-commerce services to brick and mortar retailers, including many top brand names.  Its services included order management, customer relations management, order fulfillment, web design and hosting, and online marketing.  In recent years, the company had acquired or launched four subsidiaries—RueLaLa, a members-only shopping site, ShopRunner, a site that provides members free shipping from participating online retailers, TeamStore, a sports apparel business, and Fanatics, a licensed sports merchandise business.  These businesses operated outside GSI’s core business and three carried their own inventory, something GSI had not done in the past.  The market responded poorly to the addition of these businesses, and in the opinion of GSI management, underpriced the company’s shares.

Michael Rubin, GSI’s founder and CEO, was also growing tired of managing a public company.  Rubin, an entrepreneur by nature, missed the start-up environment and the challenge of growing a small company.  In 1995, he had dropped out of college to start a sports equipment business, which since grew into GSI, a billion dollar company.  Only after GSI went public did Rubin discover how challenging, and perhaps counterproductive, it was to live up to analysts’ expectations every quarter.  As a result, Rubin wanted to sell GSI.

        eBay was a natural buyer of GSI—most of it, that is.  Both eBay and GSI conduct online business as intermediaries between sellers and buyers.  eBay primarily serves small and medium businesses, which sell through its website.  GSI, on the other hand, serves national brands.  Its strength in providing e-commerce services to large retailers across many retail sectors would complement eBay’s core online auction business and potentially put eBay in a position to compete with Amazon.  Also, like GSI in its core business, eBay does not carry inventory.  eBay had been aware of these synergies with GSI for some time and in fact considered purchasing a stake in GSI early in 2007.  eBay, however, was not interested in RueLaLa, ShopRunner, TeamStore and Fanatics.^[2]

        From an economic perspective, there were the makings of a deal here.  Rubin was interested in selling GSI, and eBay was willing to buy the company.  But eBay did not want GSI’s four subsidiaries.  Rubin was interested in running a smaller non-public company, however, and these subsidiaries could fit what Rubin wanted.  He could grow them as private companies and eventually sell them or take them public, perhaps bringing in a professional CEO at that time.

        As a legal matter, however, such a deal would be a challenge and could result in lengthy and expensive litigation and SEC review. A lawsuit challenging the transaction was certain to occur—in 2010, plaintiffs’ lawyers acting on behalf of shareholders challenged 93% of all mergers valued at over $100 million, and the value of GSI would be well over $2 billion.