Why Borders' Buyout Bid for Barnes & Noble Has an Unbelievable Plot


When Barnes & Noble (BKS) first announced it was "exploring strategic alternatives" -- corporatespeak for looking into a possible sale -- we at DailyFinance entertained the fanciful notion that its nearest rival, struggling book retailer Borders (BGP), might put in a bid to buy the larger company.

But I didn't really think much of the idea beyond its entertainment value because of Borders' own ongoing troubles. The company has experienced multiple rounds of layoffs and several consecutive money-losing quarters, its stock price is hovering in the $1 range and its digital strategy in all respects lags far behind both of its bricks-and-mortar and online rivals.

Yet Pershing Square Capital owner William Ackman, who leads all Borders shareholders with a 37% stake in the company (up from 31% as of of May) appears to think the idea of Borders buying B&N is legitimate. According to Borders' most recent SEC filing, Ackman is prepared to finance the retailer such that it could make an offer to buy out B&N in an all-cash transaction valued at $16 per share, or approximately $963.2 million.

That bid would represent a 20.5% premium on B&N's closing share price of $13.28, and Ackman would be prepared to "finance, on mutually acceptable terms, an offer for mixed stock and cash consideration, to the extent BKS stockholders prefer to share in the substantial synergies of the business combination and receive equity in the combined company."

And with that, talk of a Borders-B&N merger is back on, reviving rumblings that have persisted since 2008, when Borders put itself up for sale, and B&N elected not to bid.

Reminiscent of Another Failed LeBow M&A Effort

The shoe may seem to be on the other foot, but really, it's anything but. For one thing, even though Ackman is in the news as the leading figure in the buyout, the tactics have Borders Chairman and CEO Bennett LeBow written all over them. LeBow muscled his way into Borders' top position by acquiring a considerable amount of stock and warrants that, when they came due, gave him a 35% stake in the company.

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Past precedent shows that LeBow's modus operandi with companies is to buy his way into one, use it in an attempt to buy a bigger company -- and sink both businesses in the process. In fact, the potential B&N-Borders merger echoes another M&A disaster from the late 1980s: The LeBow-controlled MAI Basic Four attempted to buy larger competitor Prime Computer in a hostile takeover bid. Things didn't end up so well for either company, with both ending up filing for Chapter 11 bankruptcy. LeBow was out of the computer business entirely by 1995.

The timing of Ackman's announcement is also noteworthy. On Dec. 9 -- the last day possible before the SEC starts asking uncomfortable questions about the company's financial status -- Borders will report its third-quarter earnings. They're expected to be anemic, certainly much more so than Barnes and Noble's quarterly earnings, which were reported last week and weren't exactly fabulous either.

Talk of a merger would certainly wake up otherwise sleepy investors who need all the help they can get to be excited about Borders' future, which even a spectacular holiday season won't be able to turn around. (And indeed, the merger talk has awakened investors: Barnes & Noble shares were trading Monday morning at $2.39, up 18%, at $15.60. BGP stock is up 19 cents, or 18%, at $1.27.)

Offer May Incite Riggio to Make His Own Bid

To keep investors' attention, though, Borders will have to demonstrate somehow that it has the ability -- and the cold hard cash -- to make this buyout work. If it's all smoke and mirrors, then the upshot could be a redux of the Tribune (TRBCQ) buyout. The 2007 acquisition of that old media empire by billionaire real estate owner Sam Zell has disintegrated into an extended bankruptcy court drama, accusations of fraud and the evaporation of hundreds of millions, if not billions of dollars in value that was never really there in the first place.

Instead, the sleeping giant that the merger news will likely wake up is B&N founder and Chairman Leonard Riggio. His recent anointment as Publishers Weekly's "Person of the Year" is more puff piece than real accolade, but again, the timing happens to be right on the money. The plaudits will remind B&N investors of why the majority backed Riggio and his slate of candidates for the board of directors in their proxy fight against B&N's second-largest shareholder, Ron Burkle.

The move by Borders may finally spur Riggio to make his own long-expected bid to buy B&N, likely in tandem with private equity. So far, CNBC reports that six private-equity companies have signed confidentiality agreements to get involved with a B&N bid. Neither Borders or Ackman, however, have signed such an agreement.

Accelerating a Downward Spiral?

In the end, Borders making a play for B&N makes sense only if you prefer your business news to resemble a reality-TV show. It's not a serious overture, and even if it is, it would be difficult, and not economically feasible, for B&N to accept a bid from a company it has repeatedly said no to in the past.

And as for Borders, if a merger was its plan for saving itself, expect B&N's rejection of the deal to accelerate its downward spiral -- an end that, sadly for the publishing industry, is likely to come sooner rather than later.

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