There's a lot of buzz coming from a move Blockbuster is making, trying to purchase Circuit City. Interestingly, Blockbuster's market cap is $630 million, while Circuit City's is $750. The smaller company is making an unsolicited offer at the larger company for $1.35 billion in cash.
Guess who is behind this deal? Carl Ichan, who owns 16% of Blockbuster's class A shares.
Circuit City doubts that Blockbuster and Ichan have the money to finance this kind of a deal, but there is a more interesting question to ask: Does this deal make any sense?
Why would a brick-and-mortar DVD and video game retailer combine with a big-box electronics retailer? Aside from some financial-specific quandaries, I don't like how WSJ has broken down issues about operations, as well as products and services. Its obvious that these companies offer services that would cannabalize each other. The Journal asks "...will consumers be as eager to rent for $5 a night what they can simply buy for $15 a few aisles away?" But is that even a questions worth asking? Blockbuster has responded to netflix by offering online rentals, but fails to respond to the true direction of the industry: streaming content.
At the heart of this matter is the same reasoning as to why the Blu-Ray/HD-DVD format war has no real winner. Apple and Netflix have started offering movies streaming over the internet - there is no DVD to buy/rent/wait for, just an online account. This will effectively render Blockbuster's brick-and-mortar PPE assets useless over the course of the next decade.
So is this a good buy for Blockbuster? Only if they want to become a different company...
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