Message to Best Buy’s Board: Take the Schulze Deal
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The Fiscal Times
August 21, 2012

On Monday, Best Buy named a new CEO to lead its turnaround strategy. On Tuesday, the electronics retailer showed how Herculean his task will be.

By almost every standard, Best Buy’s second-quarter results were disastrous. Profits plunged 91 percent, to only 4 cents a share; analysts surveyed by Thomson Reuters had expected that figure would be closer to 31 cents a share. Same store sales? Down 3.2 percent overall, while its most important segment, consumer electronics, saw a 9.6 percent plunge in sales.

Unsurprisingly, the company’s shares, which had plunged 10 percent on Monday, dropped another 10 percent early Tuesday before rebounding some. Still, it’s quite a welcome for Best Buy’s new CEO, Hubert Joly, a restaurant executive with relatively little experience in this kind of retailing.

Even if Joly brought tremendous skills to the table, it’s hard to see his hiring as anything more than too little, too late. The days when Best Buy’s showrooms were a novelty; a place that shoppers visited to survey the hottest new consumer electronics offerings, are long gone.

Today, the same showrooms are just as likely to cost Best Buy money than generate fresh sales – shoppers still show up to see what a new giant plasma-screen looks like in reality and check it out to see if it fits their needs, but then whip out their smartphones to comparison shop. Too often for Best Buy, it can’t compete on price with online retailers that don’t have more than a thousand stores and don’t have to pay hefty rents plus employee salaries.

It’s like watching a slow-moving train wreck. Once consumers have decided that value is their single most important criterion when shopping for a new laptop or digital camera, Best Buy is likely to lose out. Their choice is bleak – compete with the discounters and erode their margins, or lose the sale.

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True, the company has tried to hop on the Internet bandwagon by opening up its own Internet sales division, with products that aren’t stocked in its stores, and offering customers the ability to pick up those items they purchase in person at the store nearest them, saving on delivery fees. Clearly, the second-quarter results show that that strategy hasn’t been enough to stem the bloodshed.

For Best Buy to thrive, two other robust businesses would have to stumble badly in the coming months. Amazon has been a major beneficiary of the broader trend of using the Internet to hunt for value; offering products from its own warehouses and access to another host of “Amazon vendors” who showcase their own products on its website. At the other end of the spectrum is Apple, whose customers are willing to pay a hefty price tag for its iconic laptops, iPhones and iPads, acknowledging the additional value of the design and perceived higher quality.

Best Buy is stuck in the middle, unable to offer shoppers either the same kind of cachet or the same kind of values.

It’s time for Best Buy’s board to stop stalling and acknowledge that the best outcome for the shareholders they represent is the somewhat ill-defined buyout offer it received from Richard Schulze, the company’s founder and largest shareholder. If Schulze wants to invest some $9 billion of his own money and that of “smart” investors in buying out those public market shareholders and trying to turn around the company – well, good luck to him.

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Indeed, it seems clear that this is the kind of company for which the concept of the leveraged buyout was invented. Schulze clearly sees some kind of value in the business that eludes general investors who have been dumping Best Buy’s stock at a steady clip of late. If he can line up the financing for his vision from those who can afford to lose it, that’s the best possible scenario. It certainly seems better to have someone at the helm of the company who knows it inside and out (and who still has a nearly 20 percent stake in the business) than a recently recruited outsider with little background in the consumer electronics business.

And yet, Best Buy’s directors appear to be stalling, perhaps in hopes that the company, under new leadership, will somehow turn its fortunes around in the holiday shopping season. According to a statement released by Schulze on Sunday, Best Buy wanted him to agree to an 18-month standstill agreement that would give him access to inside information about the company (of the kind needed for his group to do its due diligence) but bar him from acting on that information by increasing his stake. (He would have 60 days to present a “fully financed” proposal to the board.) That was amended to a standstill that would expire in January, after the holiday shopping period ends; an earlier statement from Best Buy claimed that Schulze walked away from the deal, something Schulze’s own statement appears to contradict. “I am disappointed and surprised by the Best Buy Board’s abrupt termination of our discussions," Schulze said in his statement.

Leaving aside the "he said; they said" battle between two sides, any delay is likely to cost shareholders and work to the benefit of Schulze, eroding value and – critically – the perception of future value in Best Buy’s operations. Perhaps Best Buy can’t survive in the new world of retailing that is being shaped by the Internet and smartphone technology. But if it collapses, it would seem that the best strategy for a board trying to do the best by its current shareholders is to extract maximum value from Schulze, not risk further deterioration in their negotiating position (eroding shareholder value in the process) by stalling in a way that seems to serve no one well.

True, Schulze’s recent track record hasn’t been stellar. He chaired Best Buy’s board until June, when he resigned after it became apparent he had been aware of an “inappropriate” relationship between former CEO Brian Dunn and an employee. (Dunn himself left the company in April.) Leaving aside questions of morality, he isn’t without any responsibility for the company’s slow slide, and he probably will need to bring some fresh ideas to the table if he is to convince skeptical financiers to back his plan. But that will be his problem, and it’s hard to see how Best Buy employees, creditors and other stakeholders will be any worse off.

Certainly, after today’s atrocious quarterly earnings report, shareholders would be justified in believing they will be better off.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.