"Unbelievable cast. Unbelievable story. Unbelievable price."
That was the email I got from Blockbuster (NYSE: BBI) yesterday, shortly after the video-rental giant went public with its unsolicited offer to buy Circuit City (NYSE: CC).
Blockbuster wasn't trying to sway my support for its offer. It simply wanted me to buy a previously viewed DVD copy of American Gangster for $12.99. Then again, Blockbuster's offer for Circuit City was approximately twice the price the electronics superstore was trading at before Monday's disclosure, and that's certainly the bold kind of Machiavellian move that would have done Denzel Washington's character proud in the movie.
Most of yesterday's opinions about the potential pairing, however, were negative. "What's Blockbuster thinking?" asks Herb Greenberg. One CNET columnist compared the offer to a pair of garbage trucks backing into one another in slow motion, and another dismissed it as laughable.
The companies even got an earful from us at the Fool. "How can two ailing businesses come together to eventually form a successful growth opportunity?" asks fellow Fool Rich Duprey.
I disagree. In fact, aren't these the same questions and arguments that came up when Microsoft (Nasdaq: MSFT) went hostile in its attempt to procure Yahoo! (Nasdaq: YHOO) nearly three months ago?
Sure, the hurdles are higher in this case:
- Microsoft could at least afford the cash portion of its buyout offer.
- Circuit City has a history of foolishly rebuffing bids.
- The realized synergies aren't as apparent as in the potential Microhoo pairing.
- Blockbuster is no Microsoft.
- Even though Circuit City may resemble Yahoo!, in that it's a fading runner-up in its field, it's still no Yahoo!
Still, doesn't this move boil down to two struggling companies trying to take on an even more powerful one in tandem? Isn't that the Microhoo rationale?
Defending Blockbuster City ... or is it CircuitBuster?
Blockbuster and Circuit City would be more than just symbiotic dump trucks. They each fill a strategic void. Blockbuster knows how to draw repeat low-ticket traffic, while Circuit City thrives on infrequent big-ticket purchases.
"Blockbuster still rents movies, but that's just a small fraction of its business," I suggested a few months ago in guessing what Blockbuster may look like in 2010. "The chain has become more like a RadioShack (NYSE: RSH), making the most of its small-box footprint as a Jack of all trades that specializes in media entertainment."
I didn't foresee a beefy acquisition to become more like a consumer-electronics company coming this quickly, but I'll take it. Ultimately, Blockbuster will have to be more about retailing entertainment than about renting flicks. Blu-ray's arrival will buy renters like Blockbuster a few more years under the old model, but digital delivery is eventually going to flatten the field. At that point, will the studios even care about the middlemen?
Digital delivery is coming.
Plan B on tap
Circuit City is a tease. It walked away from buyout offers at $8 a share in 2003 and $17 in 2005. Its arrogance has costs it shareholders plenty. And now, without giving Blockbuster free access to perform its due diligence -- firming up whether the actual per-share offer should be closer to $6 or $8 -- it is cheating its investors again.
I don't know why Blockbuster singled out Circuit City. It could have picked up the pieces of a bankruptcy-filing deadweight like Sharper Image or Tweeter to work out this plan on a smaller level, yet it could still get a recognized brand. It could have made a play for smaller yet healthier players such as Hastings (Nasdaq: HAST) or Conn's (Nasdaq: CONN).
Instead, it chose a juggernaut that's still paying the price for letting go of thousands of its most seasoned sales associates. Perhaps Blockbuster also saw that Circuit City still has an iconic brand and its growing Firedog service business.
So why is everyone so upset that Blockbuster is trying to take advantage of the bargains in the consumer-electronics retailing space? Isn't this the same thing Microsoft did when it moved in after Yahoo!'s stock had hit a multiyear low?
Aren't Blockbuster and Microsoft surprisingly similar, in that both companies' flagship products may not even exist in a few years? Aren't they both smart to be branching out before the rest of the world realizes this?
I like the way you're thinking, Blockbuster, but start calling elsewhere. Circuit City's high expectations make it a likely candidate to die as an old maid before it accepts your hand as an exit strategy.
