Which is Dumber?
When 1 + 1 = 0.5
Woke up this morning to the news that Blockbuster (NYSE:BBI) intends to make a bit for Circuit City (NYSE:CC).
So, the first question that popped into my mind was "So which is dumber - Yahoo wanting to tie its future to AOL or Blockbuster, having proven its ability to ride a dead business model into the ground, seeking to apply that talent to the downtrodden electronics retailer"?
As the economy heads south, it seems that the M&A deals start to head in the same direction. During boom markets, companies often overpay for deals, but at least they're usually overpaying for growth. For some reason, as markets go down, CEOs who miss their earnings numbers seem to think that they could do better managing someone else's mess.
Looking at the deal, it just doesn't make any sense. Blockbuster's business is a mess; revenues are flat the past few years, after declining from their 2004 peak. While the company stemmed the huge losses it faced a few years ago, it returned to losing money this past year, after a one-year stint in the black. It has been playing catch up to Netflix's unlimited rental service for a few years now, but the bigger risk for BBI is the move to downloaded movies from on-demand cable as well as providers like Netflix, Amazon, iTunes and others.
If you can believe it, Circuit City may be in even worse position than Blockbuster. It has been losing its head-to-head battle with Best Buy (NYSE:BBY) while getting clobbered by everyone from Wal-Mart to Amazon. With foreclosures growing, home equity loans disappearing and unemployment on the rise, they can't count on people using their stimulus checks to buy a new flat-screen TV.
According to the Wall Street Journal, Blockbuster argues that the deal would support the inevitable convergence in the consumer electronics business. But that argument makes no sense to me. To suggest that someone buying a TV or DVD player at Circuit City would then buy or rent their DVDs there is like saying that someone will buy their laundry detergent at Sears just because they bought their washer there. In today's market, users are more likely to split the purchases of hardware and media than ever before. They may buy their iPod at a retailer, but go online to iTunes for music.
As far as I can tell, the only parties for which this deal makes sense are the bankers who are starved for fees. And, perhaps, the bankruptcy lawyers who will inevitably get some action when the merged entity eventually can't fund the debt that it took on to make the deal happen.
To answer my opening question - which is dumber? I'll just quote Henry Blodget:
Tie two bricks together and they still don't float
Comments