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It seems that lately, activist investing has become the cool thing to do. If a company isn't working out, someone swoops in and gives it a makeover in hopes of driving up their investment. Usually, this action comes from a veteran hedge fund or private equity manager who believes he or she has the management capabilities, or knows someone who has them, to complete a turnaround of an ailing business. For one particular troubled retailer, though, the activist is someone much closer to the heart of the company.
Once-beloved electronics retailer Best Buy (NYSE: BBY ) has gone from the top of its game to bottoming out in less time than it takes for CBS to put out a new show and cancel it.
The company, already suffering from the window-shopping phenomenon that came about with the emergence of Amazon.com (Nasdaq: AMZN ) , over the last year has experienced major internal conflicts setting off a series of resignations and firings. The stock price reacted accordingly. From July of 2011 to the end of the same month this year, the stock lost over 40% of its value. That loss occurred while Amazon returned a respectable 10% -- not bad for a $100 billion company.
Investors had turned their backs on the company for the most part, calling it a dying business with quickly eroding fundamentals. I have to say, with the exception of the mobile business and perhaps its high-margin appliance sector, I agree that the company is participating in a business akin to print media. Luckily for Best Buy, though, my opinion doesn't matter. As of this week, the founder of the company made it known he would like to buy his company back -- at a near-25% premium.
Daddy comes home
Richard Schulze, the billionaire entrepreneur responsible for the retailer, announced on Monday an offer to buy Best Buy for up to $28 per share. As of last week, the company was trading barely over $17.50.
So, why such a big premium? Does Schulze just want his baby back, or does he believe there is more to the company than meets the eye?
It's unclear, but Schulze seems very willing to put serious skin in the game. The founder offered $1 billion of his personal cash, with the remainder (around $7.5 billion) coming from private equity and debt financing. What's interesting is that the founder left the company not even a year ago on a sour note -- admitting he knew of former CEO Brian Dunn's professional indiscretions and chose to do nothing about it. Were Dunn's issues to blame for the fall of Best Buy? Certainly not, but clearly his attention was at least a little divided.
Best Buy is the latest retailer due for an overhaul. Companies like RadioShack (NYSE: RSH ) and J.C. Penney (NYSE: JCP ) have long been targets of investors and activists looking to buck the downward trend for brick-and-mortar retail operations and reinvent the wheel.
Ron Johnson (of Apple Store fame) is now head of J.C. Penney and desperately trying to bail water out of the ship. Sales continue to dwindle while Johnson and his team completely reorganize the business -- from eliminating cash registers (a la Apple store) to creating mini-malls within the stores themselves. Activist investor Bill Ackman owns roughly 20% of the company and has played a major role in positioning new management.
RadioShack hasn't been quite as lucky. Jim Gooch, CEO of RadioShack, continues to chase the dying business model while investors beg for new management and a fresh strategy. The company recently reported dismal earnings, sending the stock down to near-record lows.
Will Schulze's bet pay off? Well, first, the board would have to approve his offer to take the company off the table. After his announcement of the offer, the stock skyrocketed 22% -- the biggest one-day gain the stock has seen since 2002.
If the deal goes through, the big question is -- will he be able to turn the business around? How will he compete with the Amazons and eBays of the world? I believe that any company, with the right people at the helm and serious dose of creativity, can turn around. Though this story, at least for now, remains up in the air.
For a look at a retail operation that isn't getting battered to pieces, take a look at what our analysts are calling "The Real Cash Kings of Retail." Read the free report here.