Home Depot's New Management as Incompetent as the Nardelli Crowd

It seems that Home Depot is really run by a bunch of amateurs to accept $8.5 billion for HD Supply when it negotiated to sell the company for $10.3 billion two months ago.

It really has taken a thick stomach to be a long-term shareholder of Home Depot.  It seems like the board and management just let anyone walk right over them these days.  Not only did they give Nardelli a huge package, but they paid him still more to leave at the beginning of the year.

The company tried to throw a bone to shareholders after Nardelli left by putting a floor in the stock price by offering a stock buy-back when the stock was trading at 40.   As the stock started to slip, the new management negotiated to sell HD Supply to private equity for $10.3 billion in June.

When speculation recently surfaced that the HD Supply business might not go through, the stock fell all the way to 33 (from a recent high around 43 and a price six years ago around 70). 

I think that the company's management panicked and did precisely what the stock market feared that they would do.  They let these private equity players walk right over them, and allowed the deal that was negotiated two months ago to be renegotiated down by $1.8 billion to $8.5 billion.  To boot, Home Depot is guaranteeing over $1 billion in HD Supply debt.

I come from the school where a deal is a deal and there are contractual penalties for walking away.  When it comes time to close, the buyer can't just say "I've changed my mind"  or "I am sorry but the housing market has collapsed and I'd like to cut the price by 20%."

According to published reports, the contract to sell Home Depot would have provided that the private equity players would have to pay Home Depot a $309 million termination fee for failure to close the deal on the terms agreed upon in June.  In other words, it seems (at least according to the media) that Home Depot and its attorneys had some reasonable contractual penalties in place here.  If I were running Home Depot, I would have taken this money and held HD Supply.

So why didn't they?  I can only come up with four reasons:

1) The company was afraid that it would need to cancel its recently announced buyback if they couldn't get the deal closed, and management was afraid to start the post-Nardelli period on this type of a note.

2) The company actually believed that the value of the HD Supply had changed so greatly that it would not be able to get a price of $8.2 billion from another purchaser (the difference between the current price and the amount of liquidated damages that it could have recovered from existing purchasers).  Even if this business is heavily tied to housing, I don't believe that management could possibly have analyzed that the value of the business fell by more than 20%.

3) Management is entirely incompetent and doesn't understand its ass from its elbow (this certainly was the case under Nardelli).

4) There is something else fishy going on here (more sinister).



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  • ChristySchien

    August 27, 2007

    I read that according to the renegotiated deal, they are going to still have 12.5% of HD Supply. So, they are really only allowing a markdown of 7.5% according to your calculations, which assume that HD would have been able to have recovered the $300 + billion and damages which is not so sure.

  • SSmith

    August 27, 2007

    They could have gotten a lot more than $309 million in penalties. Lehman became conflicted by playing both sides of the deal. HD easily could have sued them for conflict.

  • dd

    August 28, 2007

    don't HD get 10%+ enquity interest in HD Supply? It was not as bad as the 20% price cut.

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