“The decision to restructure the business through a Chapter 11 filing should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively,” James A. Marcum, vice chairman and acting president and chief executive officer, said yesterday (Monday) in a statement.

In the past year and a half, Circuit City has created nothing but a collection of ugly headlines. The Richmond, VA-based Circuit City has $3.4 billion in assets and $2.32 billion in liabilities, including a $119 million debt to Hewlett-Packard Co. (HPQ) and a $116 million debt to Samsung Electronics Co., Bloomberg reported.

Most recently, the fledging electronics retailer announced it would close 155, or 20%, of its 566 U.S. stores by Dec. 31 and slash its domestic workforce in an effort to conserve cash and reverse six consecutive quarters of falling sales.

The company has already slashed retail management positions, eliminated jobs at its corporate offices and laid off 3,400 retail workers.

On March 28, it was ousted from the Standard & Poor’s 500 Index.

The following month, Blockbuster Inc. (BBI) made an unsolicited $1 billion acquisition bid for Circuit City, offering at least $6 a share. The idea was to create a “supermedia” retailer that might be more competitive against such rivals as Best Buy Co. Inc. (BBY). But that offered fizzled.

In May, the company put itself on the auction block, a day after Best Buy announced plans to open stores in Europe via a $2.1 billion, 50-50 joint venture with London-based Carphone Warehouse Group PLC.

In June, Circuit City suspended its 4 cent dividend. And in September, President and CEO President Philip Schoonover resigned on the spot.

Circuit City has lost more than $5 billion in stock-market value in the past two years, Bloomberg reported.

Circuit City Files for Bankruptcy After a Year of Falling Sales and Corporate Cutbacks

Recent high-profile bankruptcies of mainstay American retailers, such as Sharper Image Corp. (SHRPQ) and Linens Holding Co.’s Linens ‘n Things, as well as the proposed mergers between Blockbuster Inc. (BBI)/Circuit City Stores Inc. (CC) and Delta Air Lines Inc. (DAL)/Northwest Airlines Corp. (NWA), and the admissions from the nation’s leading student lenders that their business models are no longer viable, mark the beginning of a long overdue overhaul of the American economy.  In short, the economy will be getting smaller and more expensive.

The success of all of these seemingly disparate sectors depends, to a large extent, on the ability of Americans to continue to borrow cheaply and easily.  Now that home equity extractions and zero-interest credit card rollovers can no longer be used to fund electronics purchases, vacations or tuition, those corresponding sectors are suffering.  The foundation of our bloated service-sector economy, supported by overseas savings and production, is now giving way.

This diminished capacity will result in a wave of bankruptcies and consolidations to restore profitability in what will become a much smaller service sector.  The days of cheap consumer goods from Wal-Mart Stores Inc. (WMT) and cheap airfares from JetBlue Airways Corp. (JBLU) are coming to an end.  It is all part of the process of an unprecedented decline in America’s standard of living, which is the inevitable result of years of living beyond our means.

For retailers, the business model of selling cheap foreign imported goods to over- leveraged Americans was doomed from the start.  It is fitting that just prior to the collapse, Wall Street private equity firms decided to jump aboard a sinking ship (Linens ‘n Things was purchased by Apollo Management LP for $1.3 billion back in 2006).  No doubt the added debt subsequently piled on to the firm by the profit-squeezing buyout boys hastened the company’s demise.  As revenue declines and debt-servicing costs rise for many retailers (who have been similarly hog-tied by private equity firms), look for additional blow-ups down the road.

As the dollar continues its historic decline, imported goods will become too costly for many Americans.  In addition, more of those products still made (or more likely grown) domestically will be exported to wealthier foreign consumers whose appreciated currencies increase their purchasing power.  As a result, fewer products will be available to fill our shelves and those that remain will carry much higher price tags.

In addition, as defaults on both credit cards and store-charge cards continue to increase, the market for such debt soon will disappear. As a result, the credit crunch will spread from subprime mortgages to all forms of consumer credit. 

The bottom line: Not only will Americans be staring at higher prices; they will have to pay in cash. 

Similarly, the looming airline consolidation will usher in a harsher era for the American airline industry.  In truth, given the rising costs of building, flying and servicing aircraft, U.S. carriers currently supply more planes and passenger miles than American consumers can afford to utilize.  While this may seem illogical in a time when domestic flights are usually fully booked, it is important to realize that these crowded planes do not translate into profits at current ticket prices.  While mergers may help the airlines hold down costs for a bit, the only lasting pathway to profit is fewer flights and significantly higher ticket prices.  Of course, this will mean that Americans of modest means will travel less by air. Unfortunately, that fact is simply an inevitable consequence of a sagging currency and diminishing national wealth.

Although many Americans have come to regard affordable air travel as a birthright, from a global perspective it remains the province of the wealthy.  The massive borrowing that has financed the American economy for generations – combined with an evaporating industrial base and a lack of domestic savings – have all combined to reduce America’s wealth in comparison to the rest of the world.  Consequently, as more materials, technicians and jet fuel go to service the burgeoning Asian air travel industry, the higher the costs will become for American travelers.  As with other hallmarks of a diminished standard of living, Americans now have to confront the reality of staying closer to home.

The same mathematics will come into play for our ridiculously expensive higher education system, which cannot exist without a well-lubricated loan infrastructure.  Limit the ability of students to take on heavy loans, and college education becomes untouchable for anyone but the wealthiest Americans.  If loans dry up, universities will be forced to slash their bureaucracies and substantially reduce tuitions.  Ironically, the silver lining here is that with low tuitions students will no longer need the loans that kept tuitions so high in the first place.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and dollar-denominated investments, read Peter Schiff’s new book “Crash Proof: How to Profit from the Coming Economic Collapse.”  Click here to order a copy today.

After a private bid went unanswered, Blockbuster made an unsolicited $1 billion acquisition bid for wounded electronics retailer Circuit City Stores Inc. (CC) for at least $6 a share – a move that sent Circuit City’s shares up 60% in pre-market trading Monday.

Blockbuster said it first approached Circuit City Chairman and Chief Executive Officer Phillip Schoonover with the offer on Feb. 17, but when the movie-rental giant didn’t get a response, Blockbuster decided to take its proposal public “because it believes the shareholders of Circuit City should have the opportunity to participate in determining the destiny of the company.”

However, Blockbuster already has an outline with regard to what that “destiny” would be: The merged companies would create a $18 billion retail enterprise that would benefit from their complementary products, marketing, distribution and financial synergies.

“Our vision for the ‘new’ Blockbuster is to be the most convenient source for media entertainment,” Blockbuster Chairman and Chief Executive Officer James Keyes wrote in a letter to Schoonover.

A Blockbuster Deal for a Browbeaten Market

Circuit City is the second-largest electronics chain in the United States, but the company has struggled recently. Over the past year the company has slashed retail management positions, eliminated jobs at its corporate offices and laid off 3,400 retail workers.

Making matters even worse: Circuit City not only lost more market share to industry leader Best Buy Co. Inc. (BBY), on March 28 it lost its spot in the Standard & Poor’s 500 Index.

Blockbuster hasn’t faired much better. Once an innovative icon in family entertainment and a cornerstone in the realm of media distribution, Blockbuster has more recently been the victim of increased competition and such technological changes as “video-on-demand” that have threatened its business. So it’s cut marketing costs and shed unprofitable customers in a desperate bid to fend off the Internet-based Netflix Inc. (NFLX).

The company’s troubles have led some – including Circuit City – to question whether or not Blockbuster even has the capital to follow through on its $1 billion all-cash offer.

“To date Blockbuster has been unable to satisfy Circuit City and its advisers that Blockbuster’s proposal could be financed,” Circuit City said in a statement.

The statement also questioned whether the proposed acquisition would require debt financing (and, if so, what the terms and structure would be) and how large a rights offering would be required to fund the transaction.

In a conference call, Blockbuster’s Keyes said the company has the support of billionaire board member Carl Icahn.

Presuming Blockbuster does indeed secure the proper financing, Louis Basenese, an mergers and acquisitions (M&A) expert and the editor of The Takeover Trader newsletter, said the deal bodes well for both companies, but mainly because independently, they are headed for the trash heap.

“This is clearly a merger to fight off extinction,” Basenese said. “Combining forces might only delay the inevitable.”

Technology business blog, the Digital Home, called Blockbuster’s proposal “laughable.”

“Blockbuster is nothing more than an irrelevant shadow of its former self. For years, the company stood atop the rental business and destroyed any and all competitors in its path,” Digital Home author Don Reisinger wrote. “But once Netflix saw it fit to change the way the rental business works, Blockbuster couldn’t adapt and its once booming business turned into an overpriced cesspool of old business models.”

A 2008 M&A Revival

A recent report from Thomson Financial indicated that the global volume of M&A plunged 31% to $661 billion in the first quarter of 2008. But that drop-off comes after a banner year for M&A activity. Total global deal volume checked in at $4.5 trillion in 2007, up 24% from the previous high-water mark set in 2006.

Since then, credit conditions have tightened significantly as many banks were badly burned by credit defaults. But while an era of “easy money” has come to an end, there is still ample opportunity for takeovers and tie-ups.

Basenese attributes most of the drop-off in M&A to a shift in the balance of power. Over the past several years, private equity firms had established themselves as the main drivers behind M&A activity by outbidding companies for assets.

However, it was those same buyout firms that led to the collapse in first quarter deals, with a 77% drop in acquisitions. And that has opened the door for companies flush with cash to get back down to business.

“Corporations are sitting with almost near record amounts of cash on their balance sheets,” Basenese said. And with that, they can “take advantage of the depressed stock prices of competitors without the fear of being outbid by overly aggressive private equity shops.”

Deals on the Docket

Microsoft made its move with an unsolicited $44.6 billion bid for Internet portal operator Yahoo! Inc. (YHOO). So far, Yahoo has done its best to thwart Microsoft’s advances, but most analysts believe Microsoft will get its way if it ups its $31 a share offer.

If that buyout goes through, it will be the largest-ever acquisition in the high-tech sector, exceeding even Kohlberg Kravis Roberts & Co.’s $26 billion buyout of First Data Corp. However, Yahoo’s explicit opposition to the takeover makes it impossible to rule out a narrow escape.