Here at the Hoover’s office, we have TVs all over the building tuned to CNBC, so it’s not uncommon for editors to see the big business news story of the day before we even fire up our computers in the morning. Often the news isn’t too surprising, but sometimes you’re forced to go, “Huh?” (The AOL purchase of Time Warner was my biggest “Huh?” moment on the media beat, and, considering how it turned out, I shouldn’t have been the only one.) I had another “Huh?” moment yesterday when it was reported that aging video rental firm Blockbuster had made a $1.3 billion hostile bid for struggling retailer Circuit City.
Coincidentally, I had a discussion just last week with a co-worker centering around a very good question: Why doesn’t Blockbuster see the writing on the wall and just shutter its physical retail locations? In the wake of Netflix — and video-on-demand and streaming movie services — a traditional bricks and mortar video renter has nowhere to go but down. Sure, Blockbuster’s tried to respond to the changing home video business many times, the wisest move being the launch of its own mail order rental business, but it still has plenty of stores (7,800 worldwide) faced with a future of little but decreasing foot traffic and revenue. (And that mail rental business has no doubt ticked off more than one customer since Blockbuster raised prices while Netflix cut them.)
This isn’t to say that Blockbuster hasn’t made some good moves lately, it has. New CEO James Keyes is closing under-performing and non-North American stores, bought online download service Movielink, and wants to find a way to digitally deliver movies directly to household televisions through a set-top box. But it might be all for naught, because Keyes still believes the bricks and mortar operations are key to Blockbuster’s success. Sorry, dude, but there’s no happy ending in that movie.
Now it wants to buy Circuit City, a very troubled retailer that’s already getting its lunch eaten by Best Buy and Wal-Mart? In 2007 the company gave thousands of veteran staff members the boot in favor of lower-payed new hires, which hurt sales and morale. It’s also embroiled in a proxy war with a major investor who wants to oust current management. The share price has plunged and Circuit City posted a $300 million loss for 2007.
Why would Blockbuster want to hook up with such a dog? While Blockbuster could broaden its customer base by turning itself into a one-stop entertainment shop that rents movies and sells the electronics to play them, the headaches seem to outweigh the benefits. Initial reaction to the deal on Wall Street was pretty tepid.
The whole deal might be moot anyway. Circuit City is reportedly not taking the bid seriously because it doesn’t see how Blockbuster can finance a $1.3 billion purchase when its market capitalization is only $656 million. The offer’s been on the table since mid-February and Blockbuster finally went public because Circuit City wouldn’t hand over its books for due diligence. (I always find hostile takeovers amusing. It’s like someone knocking on your door and asking to buy your house. When you refuse, they demand to see your checkbook and stock portfolio to prove you really need the money.)
So what does it boil down to? Blockbuster wants to buy a hobbled company it can’t afford, and Circuit City wants to stay independent and struggle all by itself. Shareholders of Circuit City could always approve the deal if it comes to a vote, like a parent forcing an arranged marriage. Not much of a recipe for wedded bliss if you ask me.
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