Aug, 27 may turn out to be a landmark day for Best Buy
A quick recap
The article we posted on Aug. 22 discussing the four reasons Best Buy share prices would decline even further didn't paint a pretty picture. First, the electronics retailer had just announced an absolutely horrendous quarter. Adding to the problems facing Best Buy was the timing of new CEO Hubert Joly's appointment; it was a disaster.
Then there was the ending to the much-ballyhooed butting of heads between Best Buy Schulze and current management. Shareholders were left without a much-needed white knight, or so we thought.
Best Buy's press release announcing full access for Schulze to conduct due diligence, with the intention of securing adequate financing for a takeover, includes a few provisions worth noting. Effective immediately, Schulze and his advisors have 60 days to review non-public information. At the end of that time frame, a fully financed buyout proposal must be provided to existing Best Buy management. If that doesn't happen, Schulze will need to wait until January to give it another go.
The agreement also stipulates a waiver of Minnesota law allowing the due-diligence review before securing adequate financing. You'll recall this was a sticking point the last go-around between the two parties. For Schulze, this is a no-lose proposition. Assuming he follows the agreed-upon procedures, he'll receive two voting seats on the existing eight-person Board of Directors, regardless of how the takeover bid ends up.
Desperate times call for desperate measures
After all that's happened, inviting Schulze back into the picture amounts to having the board say "what else can we do?" And if the trading activity on Aug. 27 is any indication, shareholders agree. But the 3.24% jump in Best Buy's share price on Monday, not to mention the likelihood of another buying spree or two before it's all said and done, is a short-term situation.
The fundamental problems haven't changed, nor will they with Schulze at the helm. Online electronic retailers such as Amazon.com
And even traditional retailers -- including Wal-Mart
Whether you compare it with online or traditional big-box stores, it seems everyone is outperforming Best Buy. And that's why the Board of Directors is swallowing its pride -- bitter as it may be -- and inviting the family black sheep back to the party.
Though an act of desperation, Best Buy's reversal allowing Schulze a peek under the financial covers is the right one. But for long-term investors, the fundamental problems at Best Buy haven't changed. It remains a troubled electronics retailer with short-term upside, and that's based solely on takeover talk -- a scary proposition at best.
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