Breakout

Best Buy-Out? Company Founder Bids for BBY

Jeff Macke
Breakout

Today's news of Best Buy (BBY) founder and former CEO Richard Schulze's bid to take the company private goes well beyond Wall Street and could mean big changes to the customer experience. If Schulze hopes to make the company he founded a successful turnaround story he'll have to do at least that much. By taking Best Buy private he can tear down and then recreate the company without being judged by Wall Street and shareholders at every turn. Best Buy's efforts will be adjudged by shoppers in the stores, just the way any merchant wants it.

In a letter announcing his intent to purchase BBY, Schulze wrote:

"There is no question that now is the moment of truth for Best Buy and that immediate and substantial changes are needed for the company to return to its market-leading ways."

As it stands now Best Buy is dying. Without a more streamlined operation the company will slowly dwindle and go the way of Circuit City. Though Schulze is playing coy on what needs to be done, what almost certainly will happen is a closing of BBY stores, a loss of jobs, and other "cost reduction" efforts.

So what does all this mean for Best Buy customers? Here's what you need to know:

A Loss for Best Buy Would be Another Blow Against Bricks and Mortars

The story line of Best Buy only existing as a "showplace" for customers who will later shop on-line is wildly overdone. WalMart (WMT), Target (TGT) and a fistful of enormous retailers doing the vast majority of their businesses from physical stores are selling a ton of merchandise.

There is still a place for stores, in general, but only the best of breed. If Best Buy fails, and make no mistake, it's current model is failing, yet another specialty chain will have been divided up between Amazon.com (AMZN) and the merchandising generalists.

So Long, Sales People

Consumer electronics used to be a category of retail thought unassailable to both mass merchants and on-line stores. Televisions, stereos and computers were simply too complicated for shoppers to buy on their own.

In the current environment Best Buy can't afford to pay their workers enough to explain whatever difference there might actually be between different products. Best Buy employs more than 150,000 people, many of them seasonal. Unlike Apple's (AAPL) Geniuses who often know a great deal about the products, Best Buy's "Geek Squad" is expected to have a command of everything from televisions, to wi-fi speakers to cell-phones.

If customers aren't willing to pay more for personal attention at an electronics store they aren't going to pay for it anywhere else, either.

This is what Private Equity Looks like

Wealthy though he is, Schulze isn't going to purchase Best Buy without some help. According to Bloomberg.com and other sources, the money for BBY would come from Schulze, current or former company executives, and Private Equity funds.

Despite all the debate around presumptive Republican Presidential Candidate Mitt Romney and Private Equity, most people don't really understand how PE works. Best Buy will serve as a decent example.

If the turnaround works, Best Buy will emerge as a viable public company able to grow and start hiring again. If the turnaround fails, the chain will end up where it's going anyway, which is to say Best Buy will disappear. It's that simple.

NOTE: Best Buy's stock is over 15% higher on today's news but, at just over $20, well below the listed bid. Even with today's run-up BBY shares remain down well over 10% for 2012, 20% for the last year and a stunning 50% over the last five years.

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