Once upon a time, GameStop was the place to go to buy a video game in the United States. Long before the days of easy digital storefronts and online retailers like Amazon, GameStop enjoyed its reign as the powerhouse gaming retailer for years. Now, with its kingdom in decline, it’s best known for its poor handling of the COVID-19 pandemic and, more recently, a short selling spree that sent the company’s stock into the stratosphere as Wall Street experts scrambled to understand how Reddit worked.
But as easy as it is to joke that GameStop will soon be six feet under, a few people with money tied up in its fate aren’t ready to give up just yet. And these aren’t WallStreetBets investors, as interested in the memes as they are the money – these are figures on the inside of GameStop’s future. Over the last two years, a pair of “activist shareholders” — or investors who aggressively exercise their stakes in the company to influence its direction — have waged a battle in boardrooms with angry letters and blistering, 85-slide-long complaint presentations for control of the company.
Settle in, and let me tell you the tale of how in 2020, a small group of GameStop shareholders staged and won what is effectively the business version of a coup in an attempt to save the former giant — and what their victory means for GameStop’s future.
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Hestia and Permit: “Activist” Investors
To understand the possible future of GameStop, we need to travel back to February of 2019 when one of GameStop’s shareholders, investment fund Hestia Capital Partners, wrote a letter to the GameStop board of directors to share its thoughts on the company’s current path forward.
To put it bluntly: Hestia thought it stunk.
At this point, the numbers already looked pretty grim for GameStop, and had for several years. It was in the midst of a leadership shake-up, having seen a total of four CEOs in just two years, and was in the process of trying to find a fifth. GameStop had been bleeding sales for years due to the encroachment of online retail giants like Amazon, and things were looking even sadder due to the wind-down of the PS4 and Xbox One console generation. Its annual income the prior year had been down by over $300 million due to asset impairment — meaning essentially that a lot of GameStop’s owned stock was no longer worth nearly as much as what it had been worth before, and its share value was plummeting too. And to put a cap on it all, GameStop had recently tried to save itself by selling the company off but leadership eventually gave up because no one seemed to want it.
It was in this environment that Hestia showed up with a fight to pick, writing a letter to the board that suggested it cut costs, overhaul how much its bosses were paid, repurchase shares to help the dropping stock price go back up, and focus more on being a video game store rather than spending energy on unrelated activities (such as, for example, running mobile phone stores).
What the GameStop board’s exact reaction to this letter was isn’t clear, but it wasn’t enough to satisfy Hestia. The following month, Hestia joined up with another shareholder, Permit Capital (together with whom it owned 1.3% of all GameStop stock at the time) for a far more formal throw-down than just a strongly-worded letter. The two shareholders announced their intention to file what’s called a proxy: essentially saying they would bring new, independent candidates up for all GameStop shareholders to vote on for membership on the company’s Board of Directors at the next annual meeting. Basically, since GameStop leadership didn’t want to play ball with Hestia and Permit, they would just oust some of GameStop’s existing leaders and take matters into their own hands.
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Hestia and Permit weren’t mincing words. Their proxy announcement was sharp, blaming the company’s underperformance on a “stale” board of directors. They criticized the board’s leadership, adding that its members were clearly not invested in the future of the company since collectively they didn’t own a lot of stock in it. They pointed out continued stock price declines, and said they “struggle to identify any significant steps the Company has taken – besides the introduction of collectibles – to adapt to disruptive dynamics in its core business.”
Hestia and Permit seemed fully prepared to move forward with their proxy, even going so far as to name a number of candidates in a filing later that month, but on April 1 GameStop called a truce. It announced that GameStop, Hestia, and Permit had entered into a cooperation agreement following the appointment of current CEO George Sherman. The company would placate Hestia and Permit by appointing two new independent directors with their input, and over the course of the next year the company did try to enact a few of their suggested changes — including a share buyback to help the stock prices, and the sale of its phone business. In return, Hestia and Permit would stop complaining and drop the proxy.
For the time being, this seemed to spell the end of Hestia and Permit’s proxy fight, and the conversation went quiet. Would GameStop’s two new board members, new CEO, and a handful of changes be enough to turn the company around in 2019?
Reboot or Restore?
We now of course know they did not. 2019 passed, and GameStop continued to struggle. That April, GameStop’s full year results for 2018 saw the biggest loss in the company’s history. In June, it closed its ThinkGeek brand. In August, it kicked off a “Reboot” plan intended to save the business, but at least in terms of front-facing changes, that reboot involved a wave of store closures that initially would number between 180 and 200 and are now anticipated to number over 1,000 by March of this year. It also involved laying off 14% of GameStop’s total staff at the time, including a number of employees of Game Informer magazine.
In the short-term, none of this seemed to help. By December, the company was still losing money, and holiday 2019 didn’t paint a much prettier picture, though GameStop leaders continued to rally its shareholders around the banner of cost-cutting measures as the way forward.
In this climate, a year after its initial clash with management, Hestia and Permit reappeared on the scene. On March 12, 2020, the two shareholders (who now owned 7.5% of the company’s total shares, a considerable amount more than last time) once again threw down a gauntlet. They complained that their truce with GameStop the previous year had “effectively muted” their voices and that the handful of changes GameStop had already undergone didn’t go far enough, and more, had only been done because Hestia and Permit pressured them. The two groups announced their intent once again to file a proxy statement to solicit votes for their own nominees to the board of directors at the upcoming annual meeting of stockholders in June.
The impetus of their move was GameStop’s announcement that it would add three new board members in June, and retire six of its former directors in the coming 16 months — meaning that the decision-makers controlling the company were about to get an overhaul anyway.
While they acknowledged that the changes to the board last year had been a step in the right direction, Hestia and Permit claimed that if GameStop’s plans for new directors were realized, they would still be in a situation where no member of the board had a “meaningful stake” in the company.
A few weeks later, Hestia and Permit announced their nominees for the board: Hestia general manager Kurt Wolf, and CFO of construction company Sevan Multi-Site Solutions Paul J. Evans. They also formally announced their counter to GameStop Reboot, called Restore GameStop, in a scathing 85-slide-long presentation to shareholders outlining everything they saw wrong with the company in the last several years.
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In the lengthy presentation, Hestia and Permit went off. They hit some obvious highlights of GameStop’s years of failures: the falling stock prices, the fact that the company was struggling to make money, the board of directors having no real financial reason to care about its future, and management’s sky-high pay. They emphasized that they felt the company had plenty of potential, but was being led by leadership with “irrelevant skillsets” and had been too slow to react to changes in the technology and retail environments over the last decade.
Hestia and Permit did not stop at the numbers and the board, though. They lambasted GameStop’s COVID-19 response, citing numerous critical articles from games and mainstream press about how the company had fought to be classified as essential retail and put its workers in danger. They mentioned negative Glassdoor reviews, including multiple slides of comments from employees putting the company on blast for how it treated them, going so far as to incorporate an entire slide of Reddit comments allegedly posted by angry employees. GameStop shareholders and management were forced to confront comments from individuals under aliases such as “iBleedGameStop” and “Dzuraismyhomeboy” saying how they felt unsafe going to work, or were risking infecting immunocompromised family members with the deadly pandemic. And they took shots at GameStop over its layoffs as well, pointing out how GameStop resorted to getting rid of people who worked for them before it sold its expensive corporate jet — with GameStop HQ seven minutes away from a major airport.
The presentation was also oddly prescient in ways that wouldn’t fully become apparent until months later. For one, it referenced the company’s “Tulsa experiment,” a project GameStop had begun in Tulsa, Oklahoma where it was trialing new stores based around “experiences” on top of the business of buying and selling. These concept stores were designed to be hands-on, featuring tabletop sections where groups could schedule time to play games, dozens of set-ups for console or PC game demos, and events like group play sessions and parties. There was even a retro concept, where customers could play with a handful of old arcade machines and pick up used games from multiple generations back. The presentation accused this experiment of not resulting in any “actionable intelligence” — not that any more would be forthcoming at the time, since COVID-19 had rendered such a plan completely unfeasible.
Even more interesting, in retrospect, are the multiple slides that point out the company’s growing short interest versus its dropping stock prices. Though there’s no way Hestia and Permit could have reasonably predicted that a group of Redditors would end up driving a massive short squeeze on GameStop stock in early 2021, they clearly knew something wasn’t working. They pointed out that the growing short interest suggested shareholders were becoming more and more pessimistic with the current plan, and that markets were betting against the company.
Ultimately, Hestia and Permit’s point was pretty simple: everyone, including customers, employees, shareholders, and vendors, thought GameStop was going to fail. To save the company, drastic changes needed to be made, and they were the ones in a position to make them.
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Faced with an effective 99 Theses of no-holds-barred critique on its strategy, leadership, and decision-making, GameStop decided that rather than address most of it, it would simply try puff up its own image. Its rebuttal was about half the length of Hestia and Permit’s presentation, and focused on emphasizing its efforts in 2019 to work together with the shareholders, sharing positive metrics that made the business situation look far less dire, reiterating its Reboot plan, and promoting its own board candidate’s resumes. It also attempted to give Hestia and Permit the slightest taste of their own medicine by pointing out neither Evans nor Wolf had any retail, video game, or public company management experience — essentially a massive, “No you,” to Hestia and Permit calling the GameStop board unqualified.
Of course, Hestia and Permit clapped back again, as had become the norm at this point, accusing GameStop of manipulating its performance analysis and using misleading comparisons in its rebuttal to puff itself up. What’s odder, Hestia and Permit pointed out that one of the board candidates in 2019 had been added without their consultation — which had originally been part of the deal for Hestia and Permit quieting down for a year.
The slide decks paint an ugly fight, with multiple letters to shareholders sent back and forth for months encouraging them to vote on one proxy card or the other, but Hestia and Permit’s refusal to pull punches and bold layout of the company’s situation won out. On June 12, 2020, shareholders elected both Wolf and Evans to the GameStop board of directors, replacing former directors Jerome Davis and Thomas Kelly.
What Comes Next
Given the fierce fight that had taken place to get them on the board, one might have expected some kind of immediate action — either a brand new plan for its future, or some meaningful changes to the current one at least, especially given the growing awareness that the COVID-19 pandemic would be impacting the company’s bottom line for longer than perhaps had been initially thought.
Instead, GameStop has been oddly silent since it added two new leaders to its ranks. It’s had two quarterly financial reports since then, both heavy on the losses and light on any indication of what the company would be doing to change its fortunes. In its Q3 financials, Sherman insisted he expected the company’s fourth quarter to include year-on-year growth “for the first time in many quarters” thanks to the new console releases, and while cost-cutting measures may ultimately render his statement true by the time its results drop next month, its holiday sales were disappointing due to a lack of new console supply.
In fact, the biggest changes on the company-level that have happened since the new board appointments are that it sold a few buildings: namely, its corporate headquarters in Texas, as well as its Canadian and Australian headquarters. Then, in the same transaction, it leased the same spaces back from the buyers. It amounts effectively to a net gain for the company unless both facilities are still being rented in 17 years or so — which does admittedly beg the question of whether leadership expects to still be there in that amount of time.
The question of what happens to GameStop now is difficult to answer. The company has a long road ahead to recovery, beginning with surviving the pandemic, but most of those measures are behind the scenes and related to cost-cutting. And neither GameStop nor representatives of Hestia or Permit responded to our request for comment or interview in time for publication — though there may be good reason for that at least. With the company’s full-year financials for 2020 coming up in March, it’s possible they legally can’t speak about the company direction any time soon due to rules about company quiet periods. Or, perhaps, as often happens in a new financial year, the board is preparing to make some kind of formal statement about the company’s direction one way or another.
One place we can look for ideas on GameStop’s future is in Hestia and Permit’s slide presentations, which did take some time away from tearing into GameStop to outline a vision for what the company could be. Back in the spring and summer of 2020, the two shareholders were suggesting more than just the aforementioned cost-cutting measures and salary cuts, and their ideas hint at a vision for GameStop that may ultimately transform how we as customers experience the stores day-to-day.
For one, they seemed positive on GameStop’s ability to be a social space, rather than just a place people go to buy games. Their presentations praised store employees, calling for more investment into “training, job satisfaction and career development.” They described employees as knowledgeable, passionate “gaming experts and effective influencers” who were critical to customers having positive experiences in stores.
That direction appears to be in line with the Tulsa experiment, which Hestia and Permit criticized for not having any clear learnings. But they also seemed to genuinely want those learnings, pointing out that CCO Frank Hamlin had pitched the idea for social gaming hub stores way back in 2014, and criticizing how long it took the board to adopt the proposal in the first place.
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This means it’s possible we do see GameStop adopt the models it was using in Tulsa down the line, transforming its stores into social centers where visitors go with the intent of playing games together, making connections with the games community, or trying new games for the first time. Rather than a chain focused simply on selling items, GameStop would sell experiences. Hamlin’s pitch for the stores in early 2020 was this: GameStop was struggling to sell games because it was having trouble competing with Amazon to get customers in the door in the first place — why not, then, give them a different reason to show up? With customers in the door, he posited, sales would follow — a philosophy that Hestia and Permit seem to share, based on their slide decks.
Hestia and Permit were also interested in potential elements of the business they felt were underused. For instance, Game Informer magazine, which they saw as having the ability to “build additional value” for GameStop, even as the company had just laid off a good chunk of the publication’s staff. They also were interested in overhauling the PowerUp Rewards program in some way to leverage its existing community, though exactly what that would entail is unclear.
One change Hestia and Permit had once seemed adamant on making that may no longer be so feasible is their interest in buying back stock. Throughout their activism, the two were adamant that GameStop’s wildly low stock price could be helped by the company buying back stock, both reducing the amount of stock to go around (and therefore upping the price ideally) as well as displaying confidence in the company’s direction. GameStop took their advice a few times over the years, but it didn’t seem to do much — and with the recent short squeeze’s effects still lingering, a stock buyback now seems an unlikely tactic.
That does leave Hestia and Permit in the driver’s seat for deciding what to do in response the short squeeze, though, and no one at GameStop has thus far betrayed what it might do with this strange windfall of attention the company’s stock has received. It seems likely that due to the volatility of the pricing (and the fact that it was instigated by Reddit gamblers rather than people with a vested interest in the company) GameStop will simply do nothing about the situation for the time being, and wait to see the long-term implications. But again — it’s another question that may or may not be answered at the company’s full-year financials next month.
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Finally, the shareholders had called out issues with GameStop’s trade-in business, suggesting it needed major change as well. The company’s program has been the butt of jokes for years due to GameStop offering relatively low dollar amounts in store credit for even the most recent of games, especially if those returning the game aren’t in the PowerUp program and want cash instead of store credit. What’s more, used games frequently are then sold for only a few dollars cheaper than brand new copies. Hestia and Permit again didn’t specify what precisely they would change about the trade-in system, but pointed out that GameStop wasn’t fully realizing its potential, and that customers were mistrustful of the program in general — both problems it felt it needed to fix.
Hestia and Permit’s proxy victory is a fascinating story that sets up real potential not just for GameStop’s fortunes to change, but for a total overhaul to what we think of as GameStop. Though they’re only two board members among many, the pending retirement of six more board members this year and the support of the third board member appointed in 2019 with Hestia and Permit’s input means within a few months, those who support their ideals will hold even more sway.
And that’s not to mention the fact that GameStop must now reckon with the fact that a majority of its shareholders voted for this change to happen in the first place, indicating dissatisfaction with the company’s direction. Mock the phrase “bring value to our shareholders” all you want, but it remains a critical goal of any publicly-traded company, and it’s one GameStop has failed to deliver on. And whether you like GameStop or not, its demise would have serious ramifications for games retail in the US and worldwide.
2021 will be a critical year for GameStop. With a refreshed board, the end of the pandemic potentially in sight, and a renewed focus (for good or ill) on its stock, it will be up to its new leaders to determine whether or not they will maintain the status quo the company has held onto for years, or make major changes to restore (or reboot) the biggest dedicated video game retailer in North America.