Benevolent Takeovers

The recent GME run-up is an example of what we could think of as a benevolent take over.

What is a Benevolent Takeover?

A hostile takeover is an approach where shareholders purchase enough shares to gain control of the company, usually with an eye toward reducing headcount, liquidating assets that will improve the company’s value in the short-term, but often destroys it over the long term.

In contrast, a Benevolent Takeover is where an army of individuals get fed up with hedge funds pushing companies they like into bankruptcy, collectively decide that a firm should exist, and begin purchasing shares. This effects a [Short Squeeze] which often results in profits for the investors and benefits the company at the expense of the Wall Street short-sellers.

How does it work?

It punishes greedy Wall Street interests who seek to profit by pushing struggling companies into receivership as their stock prices becomes too low. It doesn’t stop them from doing so, but it imposes a cost in the form of a potential risk that the company will find altruistic activist investment.

As the share of short float in GameStop approached 150%, the hedge funds had shorted 99 Million shares of a stock that only trades 20 million shares per day. It would take at least five days or one stock market week to unwind the shares.

And what would it cost to collectively unwind those over leveraged shorts?

50% Short x 66 Million Shares x $300/share = $9.9 Billion

What’s Next?

With the surging share price, GME can issue new shares to pay down debt and “right the ship”, all financed by the losses of the hedge funds. The horde of activist investors can pocket a tidy profit and search for their next target.