The squabbling between Best Buy and its founder and principal stockholder, Richard M. Schulze, appears about as mature as sibling teenagers fighting over the only car.
Behind all the rhetoric, however, is a mystery. What exactly is Mr. Schulze's strategy? And why are both parties fighting so publicly?
On Sunday, Best Buy issued a statement announcing that it had offered a plan for Mr. Schulze to perform due diligence on the company if he agreed to certain restrictions. When Mr. Schulze did not agree, Best Buy issued a release stating that “Mr. Schulze declined to participate†in the sale-vetting process Best Buy had proposed.
On Wednesday,
DealBook's Michael J. de la Merced fleshed out the give and take leading up to this announcement. Best Buy had asked for a standstill of 18 months, and then a one-year standstill. Both proposals were rebuffed. According to people close to Best Buy, the company had originally mooted a 60-day period during whi ch Mr. Schulze would have to put up a definitive proposal.
Best Buy modified this by requesting that if Mr. Schulze did not put up a proposal during that time, he would be barred from making a proposal for a year. If he did come up with a proposal and the Best Buy board rejected it, Mr. Schulze would be barred from doing anything until after the holiday shopping season. Thereafter, Mr. Schulze could run a proxy contest to unseat the board, but it would have to be backed by a fully financed bid. In other words, Mr. Schulze could not simply seek to oust the board in order to change the direction of Best Buy or because of unhappiness with management.
People on Mr. Schulze's side say they were blindsided by the announcement and thought they were still in negotiations. And the announcement was unusual. Typically, targets are quite skittish about publicly talking about negotiations. The reason is that this type of back and forth is unsettling for the company's employee s and operations.
So why would Best Buy take this route? Additionally, what is really behind a dispute over something that appears so minor as a time period to make a buyout proposal?
The answers are intertwined.
Best Buy is pushing strongly to take this fight to a very public arena because the bid Mr. Schulze has put on the table is not a firm one. Right now, he lacks a necessary partner to bid and even his debt financing is uncertain. Faced with an uncertain proposal and a person who may be very motivated to start a proxy contest to unseat the board, Best Buy's best strategy right now may be to paint Mr. Schulze as unreasonable and lacking credibility. This would particularly aid the company if Mr. Schulze eventually does wage a proxy battle. The fact that his bid is half-baked may be a major reason for Best Buy's public announcement.
From Mr. Schulze's perspective, Best Buy is a struggling company that until this week was leaderless. To the extent that he can shake things up and keep Best Buy's board members on their toes, this may move him toward his ultimate goal. Of course, the true nature of Mr. Schulze's ultimate goal is really unknown at this point.
On its face, the proposal from Mr. Schulze envisions the purchase of Best Buy, but frankly that will be an uphill battle. Best Buy is struggling, and the purchase would be the biggest retail buyout since Toys “R†Us in 2005. Analysts have been skeptical that private equity firms and lenders would want to take on such risk in this economy.
So why is Mr. Schulze bidding?
I have a guess, but it is only that. He may be acting at face value. He may truly see Best Buy as an opportunity to turn around the company and profit tremendously. If he runs a proxy contest, it will take time, and if he succeeds it raises complicated legal issues for a sale to him at a later date. But by pushing the board publicly in an announcement last week, Mr. Schulze was not just trying to avoid the pitfalls of Minnesota law, but seeking to push Best Buy to run an open sale process, one that he can help steer and participate in with a buyer. This would be much easier for him that doing the hard work of lining up a semi-hostile bid, something private equity firms avoid.
If the Best Buy directors are on board with a sale. Mr. Schulze probably believes there is a greater chance he can put together a consortium. The public back and forth then, is just to cow the Best Buy board into not only letting Mr. Schulze contact other parties but to cooperate in such a process. All in all, it means that Mr. Schulze thinks that even though the market disagrees, a successful bid is possible if the Best Buy board cooperates.
In its weakened state, Best Buy appears eager to play the good guy, so I expect its board will eventually accede to some arrangement that allows Mr. Schulze to pursue his bid. Indeed, the company is on shaky grounds in seekin g a lengthy standstill period, a rather unusual restriction and something Mr. Schulze is unlikely to accept. This is particularly true since Best Buy knows he can initiate a proxy contest to try to unseat its director, making the board even more likely to cave in to his demands.
At the moment, Mr. Schulze's bid appears to be a public relations attempt to pressure the Best Buy board into cooperating. Seen in this light, Best Buy's public responses seem to be aimed at deflecting that pressure.
If Mr. Schulze fails to gain the cooperation of Best Buy's board, this may all be a prelude to an attempt to shake up management and the board. For that reason, Mr. Schulze is most unlikely to agree to a standstill, which would deprive him of the right to run a general proxy contest.
No doubt, he wants to keep the possibility of a proxy fight in his pocket as a threat. In any event, he needs that threat not only to pressure the board to allow him to make a proposal but also to cooperate with him on the bid so it appears friendly.
And while this is speculation, Best Buy will probably acquiesce to Mr. Shulze's stated wish. Only then will we learn whether he can actually put together such a bid. In the interim, Best Buy will continue to be buffeted by this fight.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
