Less Competition for the Game

In retrospect, we all should have seen this coming. I mean, given this year's rash of mergers and buyouts, how long would it take for someone to try and snap up fast-growing, profitable game retailer Electronics Boutique (Nasdaq: ELBO  ) ?

Today, we found out that competitor GameStop (NYSE: GME  ) will pay $55.18 per share for the Motley Fool Stock Advisor pick, in a cash 'n' stock deal to squeeze the two entities into a single gaming behemoth. Investors bid Electronics Boutiques' share up to $56.50 this morning, perhaps thinking that someone else will come along and up that offer. Given that owners of 47% of Electronics Boutique stock have already given their nod, this doesn't seem too likely, but hey, there's always hope.

Although the merger makes all kinds of sense if the promised synergies work out, it's also an example of one of those little Wall Street ironies, where a fish dislocates its jaw to swallow an even bigger fish: Electronics Boutique has more stores, higher sales, and an established international presence, and it's been expanding the top line more quickly over the past months to boot. On the other hand, GameStop has better margins and a substantial edge in cash conversion.

Although a 35% pop is an enticing wake-up call, Fool co-founder David Gardner, who made Electronics Boutique a Stock Advisor pick, told me this morning that he sees no reason to sell the shares now. Contrary to popular wisdom, major retailers such as Wal-Mart (NYSE: WMT  ) or even Best Buy (NYSE: BBY  ) do not offer killer competition to game specialists. The latter get their cool stuff in the day it's released and, I would add, can go to extraordinary lengths -- putting an emphasis on preorders, scheduling special hours for major game events, and doing a brisk business in used games -- to keep avid gamers happy.

If the $1.4 billion deal is consummated, the surviving entity, GameStop, will be the largest video-game chain in the world, with about 3,800 stores. Given the brisk pace of game sales (reportedly up 32% in March) and other reports that show adult men spending more money on games than on music ($33 per month), GameStop shareholders should see many happy returns.

• Is gaming coming into lean times?
• Most industries would kill for this kind of slowdown.
• GameStop's comps were less than exciting last month.

Seth Jayson knows the cost of video-game addiction. At the time of publication, he had credit stubs for too much game spending, but no positions in any stock mentioned. View his stock holdings and Fool profile here. Fool rules are here.