Best Buy standoff evolved into Schulze-Joly alliance

  • Article by: THOMAS LEE , Star Tribune
  • Updated: March 26, 2013 - 6:10 AM

Over time, Richard Schulze and Hubert Joly saw eye to eye on Best Buy’s prospects.

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Best Buy founder Richard Schulze

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The day before Thanksgiving last year, three men gathered in Best Buy founder Richard Schulze’s office to prepare for what would be a make-or-break meeting with the company’s new CEO.

For the past six months, Schulze, along with former top executives Brad Anderson and Al Lenzmeier, had waged a contentious campaign to purchase the company with the help of private equity investors. But at Anderson’s urging, Schulze agreed to meet Hubert Joly, a Frenchman hired by the very board of directors that had ousted Schulze as chairman earlier in the year.

Schulze was skeptical. After all, why should Schulze, one of the most successful retail entrepreneurs of all time, listen to a man whose career highlight was running a travel and hospitality business?

A few minutes later, Joly walked into the office and immediately handed the billionaire his résumé. Suddenly, months of distrust began to fade.

“In a sense, he was applying for the [CEO] job,” Schulze said in an exclusive interview with the Star Tribune. “That meant a lot to me.”

It might seem odd that the leader of the world’s largest consumer electronics retailer would need to audition for a position he had already won the previous summer. But as it turned out, Joly’s gesture, a symbolic display of respect and humility, helped win over Schulze, the company’s largest investor who was trying to take the company private at the time.

What began as a tense standoff between Best Buy and its founder gradually evolved into an unlikely alliance between two men with enormous sway over the future of Best Buy: Joly as CEO and Schulze playing the role of both outside agitator and the company’s de facto spiritual leader. On Monday, Joly and Schulze formalized their partnership with the announcement that Schulze rejoined the company as chairman emeritus and with the appointment of former executives Brad Anderson and Al Lenzmeier as Schulze’s representatives on the board of directors.

But the detente between Best Buy and Schulze has as much to do with economics and strategy as Joly’s skills at diplomacy. Joly’s “Renew Blue” strategy to turn around Best Buy focused heavily on fixing, not eliminating, the company’s 1,000-plus stores in North America. The plan appealed enormously to Schulze, an old fashioned bricks-and-mortar guy who built his fortune on the backs of big box stores.

But Schulze’s quest to buy back Best Buy also ran into a major obstacle: the deal became too expensive. So Schulze cut his losses and worked with a CEO he had begun to trust.

“When [the buyout] didn’t work out, he had to do a lot of reflection,” said a source close to Schulze. “As a result, it was either do something or nothing at all. This was the best option. It was actually the only option.”

From different worlds

In many ways, Schulze and Joly could not be more different. Schulze, an Air Force veteran who never went to college, started Best Buy from scratch in 1966 and once sold electronics out of a tent on the State Fairgrounds in St. Paul when a tornado destroyed one of his flagship stores. Joly, a graduate of both HEC Paris and Institut d’Etudes Politiques de Paris, started his career as a consultant with McKinsey & Co. before eventually becoming CEO of travel and hospitality giant Carlson. A native of France, Joly is the first outsider to become CEO of Best Buy.

When the board awarded the job to Joly in August, Schulze instantly distrusted the new CEO. Joly had little retail experience, having run Carlson and the video game unit of Vivendi. The first time Joly tried to contact Schulze, the founder rebuffed him.

But Joly had two advantages. The first was Brad Anderson. As Best Buy CEO, Anderson had had regular contact with Joly because Vivendi supplied video games to Best Buy stores. The two struck up a friendship and Joly later appointed Anderson to the Carlson board.

It was Anderson, Schulze acknowledged, who worked hard to bridge the gap between himself and Joly.

“I had not had the pleasure of knowing Hubert,” Schulze said. “Brad spoke very highly of him.”

More important, Joly was not G. “Mike” Mikan. As a board director, Mikan helped lead the coup that ousted Schulze as chairman after an outside investigation concluded that Schulze withheld information about former CEO Brian Dunn’s alleged misconduct. After Dunn resigned, the board named Mikan interim CEO, a position many analysts expected to become permanent.

During last summer’s annual shareholders meeting, Mikan outlined his vision for Best Buy that suggested the retailer move away from its core business of physical stores and instead focus on selling Geek Squad services to outside customers like small businesses and expanding further overseas. (Mikan later resigned from the board after he didn’t get the CEO job.)

Joly’s ‘Renew Blue’ strategy

Joly, however, took the opposite stance. During a presentation to investors in New York last November, Joly debuted his “Renew Blue” strategy, which ruled out any major store closings. Instead, Best Buy could generate nearly $1 billion in additional operating income just by improving store performance by retraining Blue Shirt store employees, reducing product returns and shifting more floor space to faster-growing merchandise like smartphones, tablets and small appliances.

“Yes, there is a place in the world for a real life experience where consumers can touch, feel and understand what we sell,” Schulze said.

Joly also wooed Schulze in other ways. He made sure to openly praise Schulze to analysts and the media. Joly also kept Schulze informed of key hires and promotions, including CFO Sharon McCollam, U.S. retail chief Shawn Score and Bestbuy.com head Scott Durchslag.

In an interview, Joly said he viewed the volatile situation in a simple way. Despite the hoopla surrounding Schulze’s buyout campaign, Joly still approached the job as he normally would have.

“As CEO, you have to work with employees, vendors and shareholders every day and Dick is our largest shareholder,” Joly said. The buyout effort “didn’t change anything. I would have had to build a relationship with Dick [in any case]. Dick is our founder. He is our largest shareholder. [No matter what happened with the buyout] he would still be our founder and our largest shareholder.”

During the November meeting in Schulze’s office, Joly discussed strategy with the founder, Anderson and Lenzmeier. Schulze began to realize he and Joly were on the same page.

“After exchanging views, I have become more confident that Hubert looked at the business much as I do,” Schulze said.

Nevertheless, Schulze continued to pursue his buyout attempt. In December, Schulze and the company agreed to extend the buyout deadline until Feb. 28. But as the deadline approached, it became clear that it would cost Schulze and his partners a lot more money to acquire Best Buy, because Wall Street gained greater confidence in Joly and his management team. Best Buy stock had jumped from $11.20 in late December to over $16 by the deadline, meaning Schulze would need to offer shareholders billions of dollars more than he had originally anticipated.

In the end, Schulze decided to cast his lot with Joly and rejoin the company as chairman emeritus.

“It was the least expensive” of the options, Schulze said.

 

Thomas Lee • 612-673-4113

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