May 21 2019 - GameStop: Activists May Swarm
The GameStop Board of Directors did not repurchase a single share since the last quarterly earnings report which may encourage activism.
Shareholder votes “Against” the Board of Directors would further embolden activists.
The probability of a future proxy battle has increased astronomically.
I recently wrote Time For GameStop To Use The 'Konami Code' detailing how GameStop (GME) needed to repurchase as many shares as possible and issue a Rule 10b5-1 trading plan to complete the 0 million share authorization during the quiet period that began at the beginning of May. The article was extremely detailed and provides readers of this article any background that is necessary to the following discussion.
This article is informational only. As a shareholder, I will not be publicly stating how I intend to vote; however, I do intend to vote as should every other GameStop shareholder. This article is not intended to encourage shareholders to vote a certain way. As a Seeking Alpha Contributor, the article is simply meant as a brief hypothesis of why activists may soon be taking large stakes in GameStop.
Board of Directors: Enticing Activist Investors
GameStop did not issue a Rule 10b5-1 trading plan and with the release of the proxy statement we now know that GameStop did not repurchase a single share of stock since the last earnings report. On page 29 of the proxy statement the total shares outstanding as of May 3, 2019 was 102,268,940 compared to the 102,267,435 shares outstanding as of March 21, 2019 as stated on page 1 of GameStop's last 10-K.
The decision by the Board of Directors to not repurchase any shares is certain to attract the notice of a multitude of activist investors due to the extremely high net cash position combined with the large operating cash flow that was detailed in my previous article.
Shareholders: Potential to Further Embolden Activists
It's possible that shareholders may be upset with the decision by the Board of Directors to not repurchase shares.
On the other hand, it's also possible that shareholders may be thrilled that GameStop is hoarding cash instead of repurchasing shares which may allow them to more effectively execute their strategy.
While I can't predict how shareholders will vote, one thing is certain.
If shareholders were to vote "Against" Jerome Davis, Daniel DeMatteo, Thomas Kelly, Steven Koonin, Gerald Szcezpanski, Carrie Teffner, Kathy Vrabeck, and Lawrence Zilavy while voting "For" Lizabeth Dunn and Raul Fernandez it would most certainly embolden activists.
Lizabeth Dunn and Raul Fernandez are independent board members that were recently added due to a settlement with other GameStop shareholders. Prior to the settlement, the GameStop shareholders were pressing the company to use up to 0M to repurchase shares. Therefore, a vote "For" those candidates and "Against" the remaining candidates would signal to activist investors that shareholders are unhappy with the current direction of the Board of Directors.
In conclusion, the decision by the GameStop Board of Directors to not repurchase a single share combined with the potential for shareholders to express their displeasure at the upcoming annual meeting on June 25, 2019 have significantly increased the probability that one or more activist investors may take action.
However, shareholders may not want to embolden activists and may agree with the current direction of the Board of Directors. The involvement of activist investors would result in great disruption to the current direction of the Board of Directors and would likely lead to faster share repurchases, immediate SG&A cuts, and would place tremendous pressure on short sellers. On the other hand, activist involvement would make it more difficult for the Board of Directors to execute their desired strategy.
Proxy statements are out and the results will be known to all in approximately one month.
Disclosure: I am/we are long GME. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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