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Blockbuster's Rise and Fall: The Long, Rewinding Road

Stocks in this article: BBI

With growth playing the lead role of the company's business plan, in September 1986 Blockbuster set out to raise money with a public offering. Days before it was to be completed, however, a news article emerged revealing Cook's background in the oil industry and questioning his ability to run a video chain. As a result, the offering was canceled and Blockbuster quickly began running out of cash. By the end of 1986 it had lost $3.2 million.

Looking for any possible cash infusion, Blockbuster became involved in what was, at the time, considered another seedy industry: garbage collection.

In February of 1987, Waste Management (WM) founder Wayne Huizenga and a group of other investors stepped in, purchasing one-third of the company and buying more than $18 million in stock.

That was merely the boot in the Blockbuster front door. Within a few months, Cook had surrendered complete control of the company to Huizenga. And while Cook had envisioned steady growth through franchising, Huizenga planned to do what he does best: gobble up competitors.

At the helm, Huizenga spent the late 80s acquiring several of Blockbuster's key rivals -- most notably Major Video. He also bought back a chunk of franchised stores and opened new locations at a break-neck pace of one per day. Blockbuster was looking like, well, a blockbuster.

Act 2: Blockbuster Gets Bad Reviews
By May 1989, however, Blockbuster's push to acquire rival chains suffered a setback when a Bear Sterns analyst issued a report criticizing the company's accounting practices, calling it "inaccurate and grossly misleading." The report claimed Blockbuster's earnings growth was "due to dubious merger accounting, nonrecurring sales to new franchises, and changes in amortization practices."

Despite these concerns, Blockbuster refused to change its accounting practices. While investors quickly forgot about the potentially misleading practice, analysts started to question the long-term growth prospects of the company, especially after its largest shareholder, United Artists Entertainment, announced it would divest its 12% stake and sell its 28 franchised stores.

It didn't help that Blockbuster's sales growth was also waning. In 1988 monthly sales of company-owned stores had shot up 35%, but then rose just 8% and 7.5% in 1989 and 1990, respectively. Huizenga blamed the Gulf War for detracting attention away from videos and instead to television news.

At the time, pay-per-view and cable programming were becoming more mainstream. Faced with this rapidly maturing industry, Blockbuster looked to international expansion and in an effort to boost earnings lowered its rental price for hit movies.

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