Risk of Accepting the Offer

¶ … risk of accepting the offer is that the company will be shut down and the employees will be let go. There are no promises to protect the employees and many of the stores can be expected to be closed. The legacy of the DeeBilder name will be lost. The reward will be financial -- most of the firm's value will be locked in, such that employees and shareholders will receive nearly full value for the company.

There are risks associated with not accepting the offer. Home Depot is entering the market, so there is the risk that the company is run into the ground by Home Depot. If the offer is not accepted, the company is likely to see its value decrease and runs the risk of going bankrupt. DeeBilder is unlikely to succeed competing head-to-head against Home Depot. Therefore, it is likely to lose market share and ultimately will lose firm value. The current bid of $70 million may be as valuable as DeeBilder is going to get, now that it must compete against Home Depot.

Rejecting the offer and preparing for a market war has some rewards, with respect to the personal stakes involved. The DeeBilder family has a strong personal stake in the company, so choosing to battle would be a moral victory for the company. It would also likely result in defeat. Home Depot competes on the came basis as DeeBilder using economies of scale to achieve cost advantage. Home Depot has greater economies of scale than does DeeBilder, so will win in this battle. In order to fight Home Depot, DeeBilder will need to develop other competencies. There is significant risk in this tactic. The company does not have the core competencies that support a differentiated strategy. Thus, adopting such a strategy will be difficult. Essentially what Home Depot is doing to DeeBilder is what DeeBilder did to the mom-and-pop hardware stores in the region. There is little chance of DeeBilder surviving at anywhere near its current size by adopting a differentiated approach. Moreover, the surviving mom-and-pop stores have already developed the competencies needed to survive as differentiated providers, whereas DeeBilder has not.

The reason that Home Depot has made the bid is to save the company some time and effort is squashing DeeBilder. Thus, there is some value for Home Depot in making this acquisition. The valuation of $75 million is not necessary a good valuation, as making such valuations on private companies depends on a number of assumptions. So the $70 million offer is not out of line with the value of the company. Home Depot may be willing to come up a bit on this offer. They are playing hardball in an attempt to intimidate DeeBilder, but ultimately Home Depot has the bargaining power. They are going to win this battle sooner or later. DeeBilder runs the risk that if they reject the offer Home Depot walks away, knowing that they are going to win the battle sooner or later.

For DeeBilder, however, there are potential rewards for entering into a negotiation. They understand that Home Depot would like to move them out of the way to make their entry into the market easier. There is value in that for Home Depot, and $70 million can be viewed as the opening offer. It would be worth looking at the history of Home Depot's moves into other markets to get a sense of their approach -- do they negotiate or are they serious about this being a one-time offer.

In terms of other options, there is little that DeeBilder can do in this situation. This takeover offers only marginal value for Home Depot in clearing DeeBilder out of the way, which means that Home Depot management has little say in the issue. One option that they can have is that they can negotiate not on price but to protect their employees' jobs and maybe earn a management position for some members of the DeeBilder family. This option could backfire in that Home Depot could still walk away, wanting to put its own people into the region. However, it could also preserve some of the DeeBilder legacy in terms of keeping the company's employees working despite the takeover.

Overall, the risk to DeeBilder is substantial. It does not appear than management has many opportunities to beat Home Depot, since DeeBilder competes as a low cost provider but Home Depot can undercut them on any product. DeeBilder will find it a tough adjustment to switch to a different business model, so they are in all likelihood going to lose this battle. Management in this situation needs to realize that the risk is almost entirely on their side. Home Depot has very little risk, the only issue at hand is how they are going to take over the market. For DeeBilder, the choice is whether to capitulate and go quietly, or whether to go down swinging, the latter choice likely to result in a total erosion of shareholder value.

2. It is unlikely that Home Depot is concerned about bad PR if they crush DeeBilder. Their low prices will win over the consumers and the public relations nightmare is unlikely to materialize. Home Depot has very little to lose in this situation, so DeeBilder is in a difficult position.

It is recommended that DeeBilder accept the offer but enter into negotiations to protect its employees. The company is negotiating from a point of weakness. It does not have the internal capabilities to compete as a differentiated provider. Home Depot has swept across the nation at the expense of dozens hardware chains just like DeeBilder. If DeeBilder had competencies that could support competing on a basis other than cost, it would have more flexibility in this negotiation.

A stakeholder approach helps to derive this recommendation. The private shareholders -- 40% of shareholders -- are going to benefit from the Home Depot's offer. The offer is approximately the value of the company. However, the presence of Home Depot in the upper New York State market will reduce the value of the firm considerably, so this offer is likely to be the most value that shareholders will receive, unless somehow the company can fend off Home Depot.

The other stakeholders -- the ESOP and the DeeBilder Trust -- have incentive to reject the offer. However, both of these shareholders have to realize that the value of the company is going to decline when Home Depot enters the market. The ESOP in particular represents the retirement fund of the employees, so there has to be a significant degree of risk aversion for the ESOP. The DeeBilder family has a personal stake, and may have economic interests elsewhere that the ESOP does not have. The ESOP should have the mandate to maximize the value of the investment fund to protect the retirement fund for the employees. The only way to do that is to accept the offer. The DeeBilder Trust should also take this view, although it may not. Without the Trust, there should still be 75% of the shares ready to vote for the acceptance of the offer. The Trust, however, if it ignores its personal stake in the matter, probably realizes there is limited growth opportunity and it needs to take the offer to maximize its investment.