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Battle for control of Best Buy could follow chairman's resignation

Published: Friday, June 8, 2012

Updated: Friday, June 8, 2012 07:06

 

MINNEAPOLIS - Richard Schulze's resignation from Best Buy's board Thursday sets the stage for a potentially divisive battle for the company's future, one that pits the founder against the very people he recruited to lead the struggling Minnesota giant.
 
Schulze, Best Buy's largest shareholder, said he is giving up his board seat and chairmanship early to "explore all available options" for his 20.1 percent stake in the company. Those options include a venture to reclaim control of the company by acquiring it through private investment, according to two sources close to the situation. Schulze has already hired a top lawyer in New York to assist in such an endeavor, the sources said.
 
"I continue to believe in Best Buy and its future and care deeply about its customers, employees, and shareholders," Schulze said in a statement Thursday. "There is an urgent need for Best Buy to reinvigorate growth by reconnecting with today's customers and building pathways to the next generation of consumers."
 
Schulze's decision to step down adds fresh drama to what has been one of the most tumultuous years in the company's history. Last month, Best Buy announced that Schulze would relinquish his chairmanship in late June and resign from the board next year, because he failed to notify the board of directors about alleged inappropriate behavior by former CEO Brian Dunn.
 
While Schulze publicly agreed with the company's conclusions, he was stung that the majority of the board, whom he handpicked, wanted to move forward without him, sources said. Given his attachment to Best Buy, Schulze decided not to go away quietly, analysts said.
 
"He's pissed off because he lost control of his board," said Colin McGranahan, an analyst with Sanford C. Bernstein & Co.
 
For more than 40 years, Schulze was the driving force behind Best Buy's transformation from a single music store to the largest consumer electronics retailer in the world. But in recent years, the company has seen its big-box stores lose sales and relevance to Internet retailers like Amazon.
 
Some investors and industry observers believe the company could eventually file for bankruptcy.
But like many company founders, Schulze believes he can rescue the company, no matter the circumstances, former executives and analysts said.
 
"He could not bear to see this company ... tarnished and see it fall into troubled financial times," said Flora Delaney, a former Best Buy executive who now heads Delaney Consulting, a Minneapolis company that advises retailers.
 
Schulze could not be reached for comment, and Best Buy declined to make executives or board members available for interviews.
 
"We don't know what (Schulze's announcement) means, but I guess we'll find out," said Bruce Hight, Best Buy's spokesman. "We certainly appreciate his past contributions, which were immense. But the company's going to proceed forward with plans that it has already announced," such as developing a new business strategy and finding a permanent CEO.
 
The turmoil in the company's ranks became public when Dunn resigned from the company in April.
 
An internal investigation by the board's audit committee determined that Dunn, the former CEO, had an inappropriate relationship with a female employee. The board also concluded that Schulze knew of the allegations, but failed to inform the board.
 
"The chairman failed to act in a manner consistent with ... good governance practices, and he created serious risks of employee retaliation and company liability," the company's report said.
 
As a result, Schulze agreed to step down as chairman in favor of board member Hatim Tyabji.
 
Then, in 2013, Schulze would resign from the board entirely. "I understand and accept the findings of the audit committee," Schulze said in a statement at the time.
 
But it now appears he is having second thoughts. Former executives and analysts say that Schulze, even in retirement, was always going to exert some influence at Best Buy, given his ownership stake and close relationships he still enjoys with people throughout the company.
 
Indeed, Schulze has increased his stake in Best Buy, acquiring another 3 million shares in March.
Schulze, though, faces major challenges in any effort to reclaim control of the company. For investors to sell their shares to Schulze and his allies, he would need to offer a significant premium over Best Best's current market value of nearly $6 billion. Schulze may have a tough time recruiting investors, given the weak economy and Best Buy's financial struggles.
 
For $9 billion to $12 billion, "absolutely we would sell," said a representative with a major institutional investor, who requested anonymity because he was not authorized to speak to the news media. "I doubt they can get it, though."
 
If Schulze can't buy the company through an investment group, he may try to rally enough investors to his side so that he can replace a majority of the board of directors and choose the next CEO. To do this, Schulze needs to control at least 51 percent of Best Buy stock.
 
But investors remain wary of Schulze's retaining a role in the company. Analysts mostly viewed Schulze's departure as a positive event, given his close relationship to Dunn and his perceived reluctance to embrace change and make tough decisions.
 
Founders often can't separate what's right for the company from their own emotions, especially when "the founder makes a break from the organization and that break is less than amicable," said Dave Brennan, a marketing professor with the University of St. Thomas and co-director of the Institute for Retailing Excellence.
 
In addition, Wall Street has been warming up to Best Buy's current leadership team. Interim CEO G. "Mike" Mikan, a board director and candidate to replace Dunn, impressed analysts during a recent earnings conference call despite his lack of retail experience.
 
But a portfolio manager with a large Wall Street investment firm told the Star Tribune he could be open to Schulze's plan if he promises to step aside in favor of a strong board and CEO.
 
No matter how the situation plays out, Schulze's announcement Thursday only hurts Best Buy in the short term, said Laura Kennedy, an analyst with Kantar Retail consulting firm outside of Boston. "It presents a big distraction when Best Buy is trying to fix its stores," she explained.
 
Meanwhile, talented candidates might not pursue the CEO position if the founder wages a battle to take over the company, Kennedy said. In such a scenario, she added, a critical question would be hang over Best Buy for several months.
 
"Who's in charge over there?"

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