There's already plenty of healthy skepticism out there about the idea of Blockbuster taking over Circuit City--see, for example, the
analogy to K-Mart/Sears on our Dealscape blog, and also Deal Journal's questions about
possible premises for a combination.
To which Corporate Dealmaker will add one more objection. As most corporate development folks will attest, a key learning from dreadful deals in the past is the danger of overly top-down decision making. You know the syndrome: A CEO is convinced of the logic of a transaction and pushes it through without much attention to the practicalities of making the project work. It's pretty much the opposite of the way things are now done by the smartest acquirers: with ownership of the deal at the operating level, due diligence that tests the value-drivers of the deal, and systematic integration and follow-through. It's not swashbuckling, just effective.
So now we have the spectacle of activist investor Carl Icahn as one of the main drivers of a hostile deal that, were it to go forward, would be a bet on an implausibly ambitious transition for both these struggling retailers. The idea of my threadbare neighborhood Blockbuster becoming an Apple store strikes me as a fantasy. The real question, however, is: how does it strike the managers on both sides who would actually be asked to make it happen? I say would be, because--notwithstanding the enthusiasm of Blockbuster CEO Jim Keyes for the deal--my guess is that they haven't yet been asked.
Okay, give Icahn some credit for backstopping the financing. Admit that choices are few for both these outfits.
But also remember how previous deals have come a cropper. Turns out that the previous experiences of Best Buy--the tough competitor that is a big part of what ails Circuit City--are instructive here. In 2000 Best Buy made a major miscalculation when it paid $685 million for Musicland, an operator of mall-based CD retail chains (sound familiar?) that in 2003 it unloaded for next to nothing.
As detailed in a 2004 article in Corporate Dealmaker, Best Buy learned a number of
strategic lessons from the experience. One of them was the need to move from a top-down, centralized approach to dealmaking that was driven out of the CEO's office to a more market-driven, operationally aware one.-
Kenneth Klee
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