Term Sheet

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

Best Buy shareholders caught in the crossfire

August 22, 2012: 4:38 PM ET

Why can't Best Buy's board and its former CEO just get along?

FORTUNE -- Best Buy (BBY) shareholders must be feeling like children in the middle of a bitter custody battle. They keep hearing how both parents are looking out for their best interests but, in their heart, they know that each side just wants to keep the shiniest toy.

On one side is Best Buy founder and former chairman Dick Schulze, who wants to buy back the company. He thinks current management is destroying value, which offends both Schulze's legacy and his bank account (he owns more than 1.7 million shares of Best Buy stock).

He's also a bit peeved with the Best Buy board for stripping his chairmanship back in May, after learning that Schulze had sat on knowledge of an alleged affair between then-Best Buy CEO Brian Dunn and a 29-year-old female employee (the board offered to let Schulze serve out his term on the board, sans chairmanship, but he refused). After all, he hand-picked all of them.

On the other side is Best Buy's board of directors, an entrenched bunch that seems to believes Schulze was part of the company's past problems. Not just in terms of hiring and then trying to protect Dunn, but also in terms of broader strategic planning. Now that a perceived fly has been plucked from the ointment, Best Buy's board wants to prove itself capable of turning things around.

In short, the two sides have little use for each other. And, for Best Buy shareholders, that's becoming a major problem.

Under normal circumstances, Schulze would have privately asked the board for permission to assemble an investor group that would have access to Best Buy's internal financial data (such consent is required in Minnesota, where Best Buy is headquartered). The board would have said yes and, at some point, given informal guidance on what type of price would be needed to get its blessing for a buyout. Schulze then would have lined up financing and made an offer. At that point everything would have become public, as part of a friendly M&A process. Either the board would have accepted the offer, or rejected it as insufficient (at which point Schulze could have countered with a higher number). Not saying it would have worked, but at least it would have been orderly.

Instead, we have a major mess in aisle 12.

Schulze did first approach the Best Buy board privately, but was put off by its refusal to allow due diligence until earnings were released three weeks later. So he issued a public letter about how he was being refused access, along with a $24-$26 per share offer range that seems to have been pulled out of thin air (given that his supposed financial backers -- unnamed private equity firms -- hadn't yet examined the books).

Best Buy's board felt blindsided, and issued a brief statement that it would review the "highly-conditional" proposal. The highly-conditional part was likely a reference to the lack of identifiable private equity firms, although that was the result of its initial refusal to allow due diligence on Schulze's timeline.

This past weekend the two sides tried to hammer out a deal, but failed to do so. At issue was the length of a standstill agreement -- or how long Schulze would have to wait before making a counteroffer, were the board to reject his initial bid. Best Buy arrived at 60 days, based on its preference to not have ongoing negotiations during its critical holiday season (i.e., November and December). Schulze wanted 90 days, particularly since lenders would have been hesitant to sign up before getting at least some early indication of holiday sales.

The result was no agreement, with Best Buy issuing a statement on Sunday night about how it tried to give Schulze almost everything he wanted. For his part, Schulze said he was "disappointed and surprised by the Best Buy Board's abrupt termination of our discussions."

Best Buy then went ahead and named a permanent CEO on Monday. Not an insider, but an outsider who would have been unlikely to take the job if he thought there was a serious chance of having new ownership in the near future. And Schulze reportedly hired a proxy firm, either to get a better sense of shareholder sentiment or to try replacing board members.

If there wasn't bad blood between Schulze and Best Buy's board one month ago, there sure is now. And the company's shareholders are suffering.

Schulze says he is looking out for shareholders, by trying to offer them a way to salvage some of their investment. But he botched the process by getting bent out of shape over a 3-week waiting period, even though the entire M&A process was always guaranteed to take months. He was no longer an entrepreneur looking to close some new financing. He was an outsider (with insider ties) trying to transact a $9 billion buyout. And, in case you haven't been paying attention, private equity firms almost never do deals of that size anymore -- and certainly don't fast-track them. The result has been chaos.

As for Best Buy's board, why on earth would it prevent Schulze from making an immediate counter-offer if his initial proposal proved insufficient? Seriously: Let's imagine that Schulze offered $25 per share on October 31, and got rebuffed. Shouldn't he be able to come back with $27 per share on November 1? How is it in shareholders' best interests to make him wait until January? We all know that bidders seems capable of scraping together some extra dollars after submitting their "best and final offer."

The Best Buy board apparently doesn't want to distract employees with some sort of battle during the busy season, but it's a silly argument. Remember, the board was willing to possibly accept an offer by the end of October. Had it done so, wouldn't those same employees have been worried about being fired by the private equity sponsors? At least a bidding battle could have led to a higher price -- something appealing to those employees with stock options.

Let's also make one other thing clear: A friendly process led by Schulze is the only hope Best Buy shareholders have of an acquisition.

Schulze isn't going hostile, because he doesn't have the financial backing (PE firms won't play that sort of game). And other financial sponsors won't try to bid without Schulze, because it gets too expensive without his equity rolled in. In other words, it's this deal or no deal.

What both sides need to do now is leave their egos at the door, and issue the following joint statement: "We have entered into private negotiations over the future of Best Buy, and a possible buyout offer for the company. An offer may be made privately any time before year-end, and the board will announce the receipt of any offer and its recommendation shortly thereafter. If the offer undervalues the company, Mr. Schulze has the ability to submit an improved offer at his discretion. Mr. Schulze also has agreed to work with the board, and will not attempt any sort of hostile takeover of Best Buy."

It's what Best Buy shareholders deserve.

Sign up for Dan's daily email newsletter on deals and deal-makers: GetTermSheet.com

Join the Conversation
About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

Email a Tip | @danprimack | RSS
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.