Best Buy founder Dick Schulze and the company's board have carried on a very public sequence of negotiations over Schulze's proposal to buy the company and take it private.
Schulze says he is very confident he can line up the financing to pay between $24 and $26 per share for all of the company's stock.
If you've been following the story, you know that there's been a lot of discussion that Wall Street is skeptical.
So, how can one determine investor skepticism without talking directly to a lot of investors?
The ticker tells the tale.
Essentially, the stock price speaks volumes about what investors think.
When Schulze revealed his proposal - it wasn't detailed enough to call it a bona fide "offer" - the share price jumped, but landed well short of the proposed minimum of $24 a share. The stock closed that day, August 6, at $19.99. The gap between the proposal and the closing price was at least $4.01.
Compare that to another large recent buyout in the news. A week ago, the big health insurer, Aetna, announced an agreement to buy Coventry Health Care, a managed care company. The offer was valued at $42.08 per share. That day Coventry's share price closed at $42.04--a gap of just four cents.
Mind the Gap
Translated into percentages, on Day One Coventry's share price closed at 99.9 percent of the sale price.
Best Buy's share price on day 1 closed at about 83 percent of the proposal's bottom price.
Why the difference? Risk.
In the case of Aetna and Coventry, the companies announced a merger agreement with a firm price. Investors decided there was very little risk that the deal would fall apart. They had high confidence that if they bought a share today at, say $40, Aetna would soon pay them $42.08 for that same share.
In the case of Best Buy investors were showing considerable doubt that if they bought a share at, say $22, that Dick Schulze would pay at least $24 for that same share. The day 1 close at $19.99 suggests they were more comfortable betting that they might get around $20 for that share.
Setting the odds
You can calculate how skeptical investors are and attach a number to it, and that's where the depth of doubt about Dick Schulze's plans becomes apparent.
Let's refer back to Aetna and Coventry for comparison.
Last Monday, the merger announcement indicated Aetna would pay $7.14 more for a Coventry share than the stock was worth at the previous close. That $7.14 is the "premium" Aetna was willing to pay. On Monday Coventry's stock closed up $7.10. The shares rose almost the entire amount of the premium--99 percent. In essence, that 99 percent represents the odds investors are giving to the deal being completed.
Contrast that with the initial reception to Schulze's proposal. Schulze was offering a premium of at least $6.36 per share. But on that first day, the shares closed up only $2.35. That gain represents only 37 percent of the premium. In other words, investors thought Schulze's odds of delivering $24 a share were less than 40 percent.
Of course, that assessment has fluctuated over time, as Schulze has continued to press his case and the company's responses have shaped investor perceptions. But the pattern is one of growing doubt. Best Buy's share price has fallen back and is close to $17.64, where it was before Schulze issued his proposal. The perceived odds that he can pull off a deal are in the single digits.
You can see those changes in the chart below. The dwindling blue bars show the perceived odds of a deal being completed. The black and yellow figures represent the stock price. The yellow markers show each day's closing price and the black bar displays the price range during the day. The green box represents the price range of Schulze's proposal.
The clear message is this: investors have yet to give Schulze even a 50/50 chance of buying the company.
The odds calculation, shown in the blue bars, is based on the day's closing price.
Source: Bloomberg News
The comparison would be more relevant if the other company being looked at was in the retail sector. Instead, it's a health insurance company. The marketplace dynamics are very different.
Best Buy has so far been able to outlive many of its peers (Circuit City and CompUSA, for instance). Regardless of whether Mr. Schulze successfully takes the company private, Best Buy will still have to try and overcome being relegated to a showroom for Sams Club, Costco, Amazon or other dotcoms.
In addition, online services such as the iTunes store and Netflix (to name just two) have dramatically changed how we buy music and movies. The square footage that BBY devotes to "traditional" CDs and DVDs is still substantial, but shrinking.
Mr. Schulze may win the battle to take back the helm of BBY, but the war may already be lost.