Best Buy Swallows Napster: The Perfect Deal?

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Includes: BBY, NAPS
by: George Gutowski

Best Buy (NYSE:BBY) has offered a 95% premium to acquire Napster (NAPS). The rationale offered in public is that the two companies are an incredible fit with really great synergies. Best Buy has ruled the retail space for electronics and rightfully has developed respect from customers and investors. Napster's stock has dropped dramatically but people still listen to music. The company claims to have approximately 700,000 subscribers.

So from a marketing point of view this makes sense. No question.

But...

Digital platforms such as Napster and other sites require huge Capex spending for R&D. This is an industry that eats its own babies for the smallest incremental advantage. As of Q2, the company statements show it has approximately $1.5 Billion in Cash and Short Term. Take out approx $120 million for the acquisition and the deal looks cheap. But maybe it's like buying a cheap SUV... the purchase price looks good but it will not sip lightly on the gas.

We are not used to seeing R&D costs on Best Buy’s statements. The company's management team is not used to managing R&D. The deal makes sense, however it is not a complete slam dunk. How much cash will be needed to stay in the game and be good at it?

Disclosure: None