What happened

Shares of video game retailer GameStop (NYSE:GME) leapt more than 10% in early trading Monday before settling down to about a 6.5% gain as of 11:45 a.m. EDT. The buying frenzy began when GameStop announced  this morning that it will be holding a "modified Dutch auction" tender offer to repurchase 12 million shares of its own stock, the price of which has been sliding as the popularity of physical game disks evaporates.

Hands holding up bid signs at an auction

Image source: Getty Images.

So what

So what is a "modified Dutch auction," anyway?

It works like this. GameStop says it wants to buy back 12 million shares -- just under 12% of all shares outstanding. To incentivize owners to sell it these shares, the company is offering to pay anywhere from $5.20 to $6 per share -- however much it needs to pay to get those 12 million shares, but no more than it needs to pay to hit that total.

Seeing as GameStop stock closed at $5.02 per share last week, this should be a popular offer. Bidders will tell GameStop how many shares they want to sell it, and at what price. GameStop will review the bids and then accept the ones for which the math works, and in a manner that provides all of those sellers the same price.

Now what

In other words, if GameStop receives exactly 12 million shares worth of offers from willing sellers at prices ranging from $5.20 to $5.50, and a bunch more offers to sell at $5.51 to $6, the company will reject all offers at $5.51 and above, accept all offers at $5.20 to $5.50, and pay all these lucky sellers $5.50 -- even the ones who they offered to sell for $5.20.

GameStop will be entertaining offers to sell beginning Tuesday, and running through at least 5 p.m. on July 10.