Say Goodbye to Hollywood

Do companies always act in the best interests of their shareholders? Hollywood Entertainment's (Nasdaq: HLYW  ) board is advising its investors to refuse a buyout offer from rival Blockbuster (NYSE: BBI  ) in order to accept a lower offer from Movie Gallery (Nasdaq: MOVI  ) .

Why would any sane board urge its shareholders to take Movie Gallery's $13.25-a-share offer over Blockbuster's $14.50? Could it be because the Blockbuster bid was hostile? You'd be warm if your head was nodding.

Hollywood Entertainment is pointing to the fact that a Blockbuster merger may not cut the mustard with the Federal Trade Commission. With the sorry state of video store rentals these days, can anyone really see this happening? An elephant's graveyard is no place for the FTC.

The popularity of mail-delivered DVD rentals by companies such as Netflix (Nasdaq: NFLX  ) , Blockbuster, and Wal-Mart (NYSE: WMT  ) is where the real growth is, and Hollywood isn't making any kind of headway on that front. Netflix, with 2.6 million subscribers, grew its revenue by 86% last year, while Hollywood's rental product revenue is actually off a bit through the first nine months of 2004. Amazon.com (Nasdaq: AMZN  ) has launched its online store in the United Kingdom, and a stateside rollout appears imminent.

Ten years ago, Blockbuster and Hollywood hooking up would have been a dicey regulatory proposition. These days it's like getting in the way of the two biggest vinyl record traders in the era of the compact disc. If that's the only card in Hollywood's anti-Blockbuster hand, it's better off folding.

Nudging its shareholders toward a lower offer isn't just bad business -- it's also ripe with bad karma. Back in March the company was set to be taken private for $14 a share before the deal fell apart over the summer. Accepting a deal greater than the original sum would be the best way to reward shareholders who held through the company's recent travails. Unless Movie Gallery is willing to sweeten its offer -- if only to force Blockbuster to raise the ante to the point where it overpays (no, wait -- it's willing to overpay already) -- Hollywood better give its shareholders a better reason not to make it a Blockbuster night.

Want to rewind back to your favorite scenes?

Longtime Fool contributor Rick Munarriz thinks that video rental companies battling for one another is like watching kids fight over piñata remnants. He owns shares in Netflix.The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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