Ackman Pushes Borders Bid for Barnes & Noble
Usually in business, it’s the bigger company acquiring the
smaller one. But, when you’re a smaller company and you have a major investor
like William Ackman, the normal rules no longer apply as evidenced by
the announcement that Borders is considering a bid for Barnes & Noble.
Mr.
Ackman’s Pershing Square Capital Management, which holds a 37 percent share
in Borders, has offered to finance a deal to the tune of $963 million to acquire
the chains’ larger rival.
The proposed deal is reminiscent, at least in one respect,
to Edward Lampert’s deal for Kmart to take over Sears. It would have one smaller,
struggling retail chain acquire a larger and also struggling business. The
two traditional bookstore chains face challenges from Amazon.com, Target and
Walmart as well as new competitors in the e-book business, such as Apple and
Google.
Mary Davis, a spokesperson for Borders, said in statement that the company
supported Mr. Ackman’s attempt to forge a merger. "We have previously
expressed to Barnes & Noble our interest in such a business combination,
and we look forward to continuing those discussions," she said.
Analysts
and the market did not seem to be overly excited about the prospects of a Borders/Barnes & Noble
deal.
"While we think this is a reasonable offer, we do not anticipate that
Leonard Riggio, [Barnes & Noble’s] founder, chairman and largest shareholder,
will find it sufficient," Michael Souers, an analyst with Standard & Poor’s
Equity Research, told Reuters.
Borders had no comment.
Discussion Question: What do you think of the proposed merger between Borders
and Barnes & Noble? Would the combined companies have a greater chance
against big box and online competitors?
This reminds me of the 2004 “merger” of Kmart and Sears, in which the much smaller and weaker company had the financial resources to swallow up a retail giant. Without turning this into another exercise in Sears-bashing, the results speak for themselves, because the combination of two weak players does not usually result in a win. (Compare this to the Macy’s/May merger, in which the two industry leaders formed a stronger company over the long run.)
The parallel to Sears Holding extends to the company management: Eddie Lampert was a celebrated financial wizard who has not shown aptitude for running a retail business over the past six years. Likewise, William Ackman is a noted hedge fund manager who has parlayed his investments in several retail companies into a reputation as an “activist investor,” but without much of a track record of management or results to show for it.
There is one key difference worth pointing out: B&N and Borders are the “last ones standing” in the bricks and mortar bookselling industry. (The real competition is from e-commerce and digital books.) Some consolidation seems inevitable, but is Borders the company that can pull it off? And how does the business model avoid becoming another Blockbuster?
This is a sure sign of desperation on the part of Borders. While acquiring B&N would give them more scale, it would also saddle them with a host of vexing problems and challenges to deal with. Given that they haven’t shown much of a track record in solving their own problems, this doesn’t seem like a fruitful direction to pursue….
From a strictly business standpoint, it makes sense–the market can no longer support two national brick-and-mortar bookstore chains, especially now that Google is entering the e-book business. From the standpoint of a literature fan who likes physical books and a lot of authors who don’t make the bestseller lists, this is a terrible development. The only upside from the lit fan perspective is that there may be a resulting resurgence in local indie booksellers, much as the decline of national music chains has helped ferment a rise in indie music stores.
Perhaps there is some financial chicanery hidden inside of this proposed deal. If not, the troika effect of Borders, B&N and the changing technology in reading deliveries would seem to suggest that Borders would be buying a bigger pig in a shrinking poke.
You know a company is in deep trouble when the news coming out is that one of the financial backers wants to buy its larger, extremely well-run competitor. Is it financially feasible? Sure. Is it likely to happen? Please. If a merger made even the remotest sense, B&N could have picked up Borders (with its penny-stock valuation) for next to nothing.
The big challenge for the channel is to figure out how to compete with e-book technology. Combining the last two big box 4-wallers does nothing to address that challenge.
For the many B&N fans, this does not sound promising. In the face of e-book and e-tail competition, B&N needs a strategy that is consumer facing for the future, not more books and bricks. Difficult times ahead.
I don’t think Sears and Kmart is a good example. They were both struggling retailers that got stronger in combination, but they were also from different retail segments (products, customers, real estate, etc). Barnes & Noble and Borders are almost identical. Eliminating a competitor (who is not be the real competitive threat going forward) and increasing scale may provide some short term, modest benefits but it seems more like “fiddling while Rome burns” in the overall context of this retail segment.
Unless there is an e-book strategy that makes sense in combining the two to create, it makes no sense at all. Amazon holds that lead and it’s unquestionably the direction in the market.
Nevertheless, when this is forced to become ‘open’ by an unnamed competitor the market will flip on its head and could become anyone’s game.
So, unless the merger creates the opportunity for that to happen, it’s not a good thing for either side. Border’s is limping. B&N has a slightly but not a great chance of competing. If the debt stifles the possibility for the combination of the two to battle, then as Ed Grimely would say “Doomed as doomed can be.”
It’s a market that is wide open for an unknown to enter and really shake things up. When devices as yet unnamed and unknown today (and some known) force it ‘open’ this entire market could look completely different in a very short time.
Several of the comments talk about B&N being a better run entity. If Mr. Ackman believes that to be true he may be buying management as well as locations. As several comments have also pointed out these are the last two giants of the brick and mortar book business. Mr. Ackman may feel that despite the twin attacks of the Amazon (and others) and e-books that by having a well-run chain of large booksellers may be a survivable concept. I hope so as I still like to read a physical book.
I would be more in favor of this proposed merger if if the roles were reversed. The proposal is logical as I do not see both surviving against the onslaught of e-books hitting the market.
Let’s forget that Sears and Kmart were involved in a similar style transaction. Neither has thrived; although both have survived to this point. If Borders and B&N do merge there needs to be one surviving chain; and let the profitable locations be the winners.
One of the two of them should get serious about ebooks and leave the other bricks and mortar retailer behind. Eventually nearly all demand for physical books will go away and delivery of ebooks will be where growth opportunities exist. I’d rather see investment in solid ebook readers and content than more retail space. One slipping business buying another slipping business just isn’t smart.
Does this mean all the Barnes and Noble employees are now going to have wear those ridiculous headsets and walk around and talk to themselves all day? I find that to be the most irritable thing about Borders Books–the employees are more worried about talking on their headsets–unlike the old days, where they used overhead page and call between the phones, minus the headsets.
Borders has also eliminated the staffed information desks that were once fully staffed and very helpful. I don’t see how stringy headsets really improved everything, in fact, I feel Borders now has the worst level of customer service in their existence.
I do find that Borders selection of books does outweigh B&N, especially in the Arts and Architecture sections but I don’t support their customer service ways.
Let’s look at this from the consumer’s point of view. Do they care about the near-term strategy of Border’s stockholders? No.
The future of this business is probably consolidation and reduction. While it’s great to browse metropolitan-library-sized stores, is this a sustainable model in a future that needs innovation, flexibility and continual responsiveness to consumers?
I think we will always crave physical books and magazines (not so sure about the next generation) but they will be special, intimate experiences apart from our daily engagement streams.
The “4-wallers” (love that term) have a special place in consumers’ hearts and minds–look at the innovation coming from Library systems–they have an opportunity to be newly relevant by helping us manage not just the information at our disposal, but the inspiration, too.
That just might make a proposed deal like this make long-term sense.
Picking up on some of the best comments by others in this string, this announcement seems to be motivated by the financial elements of the transaction rather than by a well thought out business model that will better serve customers and represent a viable answer to the threat of digital booksellers.
It seems the market will support one well operated brick and mortar bookseller. Whether it is a combination of B&N and Borders remains to be seen.
I would prefer to see the stronger of the two force its advantage (if it really has one) and let competitive forces decide the fate of their competitor.
“The proposed deal is reminiscent, at least in one respect, to Edward Lampert’s deal for Kmart to take over Sears.”
Any enthusiasm I may have felt for this idea vanished with the uttering of those words.
Well, I suppose it is time to circle the wagons for both companies–see if they can figure out how to compete. But in a similar instance in the not-so-distant past, I’m not sure if the merger of all the music chains in the U.S. would’ve made any difference in terms of competing with the online buying tsunami. Similarly, buying books online and putting them on an iPad (or whatever) is a consumer- driven force forged on the second most powerful retail factor: convenience.
So, I guess I’m saying lots o’ luck.
My impression of Mr. Ackman, primarily from listening to him on CNBC during his involvement with Target, is that his focus is on retail real estate (much like Eddie Lampert). He felt then that Target’s real estate holdings were seriously undervalued by the company’s stock price.
My reaction to this, then, is that Ackman may be drawn to B&N by its real estate holdings. Many of their stores are free-standing in attractive locations. However the retail real estate market shakes out from over-capacity, those locations are likely to remain highly valued, even as retail booksellers come under increasing competitive pressure. The real value in B&N may be its real estate.
I founded Bookstop in Austin in 1982, which many consider to be the first book Superstore. I had studied the industry for 7 years before launching the new strategy. We stretched from Miami to San Diego by the time B&N bought us in 1989. So I am very interested in this industry.
While Borders was off to a wonderful start under Tom and Louis Borders, the Riggios and their colleagues have significantly outmanaged their successors.
We have overcapacity in the industry, its a mature concept.
We need fewer stores.
Sadly, Borders probably needs to go away and maybe B&N needs to close some stores.
I love books and live with 50,000 of them.
It may be that the big winners are Half-Price Books, Powell’s, and the relatively few libraries that are forward looking.
Amazon is Great but you cannot browse effectively, you cannot research social trends as well as observing bookstore shelves, and certain types of books do not sell well online. Paper and ink books will shrink in market share, but unlike local daily newspapers, they will not go away. Old ones will also continue to circulate and be desired. Abebooks wins no matter what, as does Print on Demand.
Borders would be acquiring the most robust reading technology out there: The Nook. Therefore it makes some sense. The overwhelming number of people still purchase hardcover books, but the trend is moving. I love The Nook and have the NOOKcolor as well, and several iPads. The technology for reading books is FAR SUPERIOR to the Kindle or the iPad. So in that regard it is positioning for success.