It's a measure of just how far Home Depot (NYSE: HD ) has fallen that the stock is up 2% today on the news that it is getting shafted on the sale of its Supply business. Sure, it seems a deal has been done, but at what price to shareholders? I always thought it was a good idea to get rid of Supply -- if it meant Home Depot would concentrate on its core business. But it looks to me like Home Depot has given away its (recent) growth engine (flawed as it was) for a song.
The Street's relief is understandable, since, as of late last week, word was that the deal was falling apart, as the bankers, JPMorgan Chase (NYSE: JPM ) , Lehman Brothers (NYSE: LEH ) , and Merrill Lynch (NYSE: MER ) were said to be balking. So today, we hear of an $8.5 billion sale price for Supply -- a long, long way from the $10.3 billion that was originally proposed. Sure, it hangs onto a 12.5% slice in this iteration of the deal, but it's still a price cut, and it doesn't get the Supply monkey off Home Depot's back.
If you're wondering why things turned out this way, look no further than the Home Depot board's palpable desperation. It's hard for me to imagine a more ham-fisted sales plan than that executed by the Home Depot Board. Shall we recap?
- Step one, finally toss out reprehensible CEO Bob Nardelli, ushering in a Stalinesque need to purge his works from memory.
- Step two, identify (years too late) Home Depot Supply as a distraction from the core business.
- Step three, make it widely known that you can't wait to unload this asset -- and do it just as housing begins to crash like a rock.
- Step four, announce an OMG-gigantic-bazillion-dollar share repurchase that could only be funded by completing the deal.
- Step five, negotiate price and terms with Bain Capital, Carlyle Group, et al.
Now, if you were sitting across the table from the Home Depot board, wouldn't you have held out for a better price? Given Home Depot's egregious flopsweat, I'm surprised that "magic beans" weren't offered.
Allow me to be blunt: Home Depot's board seems to be among the worst on Wall Street. These are, remember, the same yahoos who got shareholders (and I'm one of them) into this mess in the first place by rubber-stamping ex-CEO Nardelli's delusions of grandeur. Nardelli's empire-building, unfortunately, didn't extend to building an empire of fine customer service, with the result that Lowe's (NYSE: LOW ) found it very easy to eat Home Depot's lunch. For a while, a booming housing market hid the problems -- especially since Nardelli was juicing returns via acquisition. (His compensation incentives didn't reward decisions that improved Home Depot, only those that improved earnings, at whatever short-term cost.)
Now, we see that the Home Depot board isn't even capable of cleaning up its own mess, at least not very well. According to The Journal's tally, Home Depot will be dumping the entire smear onto the private buyers for about the same price it paid to put it together. The lost time and money required to staple together, and now unstitch, this mess will, of course, be borne by shareholders. Lord knows how big that was.
As I look back, it becomes more and more clear that at Home Depot, hard-headed Nardelli was only a symptom of the problem. Home Depot's board has failed shareholders time and time again by conducting a short-sighted, entirely reactive business plan. There's little worth bragging about when you do the right thing only after you've exhausted every other possibility. Where's the vision and leadership? I don't see it. Hopefully, come proxy-time, other stakeholders will vote their shares accordingly. I'm for the "throw the bums out" slate.
Home Depot is a Motley Fool Inside Value recommendation. JPMorgan is a Motley Fool Income Investor selection.
At the time of publication, Seth Jayson, a Top 10 CAPS player, had shares of Home Depot, but no positions in any other company mentioned here. See his latest CAPS blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.