Reuters is reporting that Blockbuster has offered Circuit City between $1 billion to $1.3 billion to acquire the floundering electronics retailer. And now, all that's left for us to do is laugh.
According to Blockbuster, it made the offer in February, offering $6 to $8 per share. Amazingly, that offer represents a premium of 54 percent to 105 percent over Circuit City's current share price of about $3.90, but much lower than last year's high of about $21 per share.
Blockbuster's chief executive, Jim Keyes, believes the merger will create a new Blockbuster that will be "the most convenient source of media entertainment" and its focus would shift from online rentals where it lost miserably to Netflix and turn to a more appealing mix of in-store offerings and DVD sales.
Circuit City has yet to comment on the news, but if you ask me, this deal will be confirmed by the end of the week and the people running the floundering big box retailer will run for cover.
But perhaps what's most compelling about this news isn't that two companies with totally different business models will become one major corporation that offers everything, it's that one poorly run organization is acquiring another. How can that be good for anyone?
Blockbuster is nothing more than an irrelevant shadow of its former self. For years, the company stood atop the rental business and destroyed any and all competitors in its path. But once Netflix saw it fit to change the way the rental business works, Blockbuster couldn't adapt and its once booming business turned into an overpriced cesspool of old business models.
Right now, Blockbuster's stock price is hovering at about $3 per share and according to its latest filing, it only made $40 million last quarter. That said, it was a much better quarter than those prior where it lost almost $40 million. All told though, the company lost about $85 million last year.
But as I look over the state of Blockbuster's financial health, I'm not sure how its acquisition of Circuit City makes any sense. In this industry, merging two junkers with each other will only create an even bigger junker that will meet its demise even sooner.
After all, Circuit City can't get out of its own way and as I mentioned in this prophetic piece, with a loss last quarter of over $200 million, I'm not sure another losing company can turn things around.
If nothing else, Circuity City and Blockbuster are plagued with poor management and pathetic business models that fail to adapt to change and appeal to the customer's desires. Realizing that, this deal is not the match made in heaven that Blockbuster wants you to think it is, but rather the match made in financial crisis.
Blockbuster is grasping at straws with its acquisition of Circuit City and the latter will jump at the chance of getting a premium on its current stock price and getting out of town before its forced to really admit how bad things are.
The Blockbuster-Circuit City deal will happen, but don't be surprised if it fails miserably. If nothing else, Blockbuster has shown that it can't compete with a small competitor that understands what customers want, so why does it think that it can compete with much larger competitors that have that same understanding?
This newly-formed company is doomed before the vows are recited. In one fell swoop, look for both companies to enter the junk heap much sooner than they would have if separate.
Trust me, the new Blockbuster will become an even bigger loser. If the company's management can't even run a rental business where it sat at the top, how can it be expected to make an impact in an industry where it's subdued at the bottom?
This deal is a joke of epic proportions and one that will be a lasting detriment to Blockbuster.
Just don't say I didn't warn its executives.