The Market's Strangest Plot Twist

Plagued by debt and flagging sales, Borders Group (NYSE: BGP  ) has long seemed to have one foot in the grave. Who, then, would ever expect that it might buy out rival Barnes & Noble (NYSE: BKS  ) ?

Borders may not have a great competitive advantage, but it does have friends in high places. The company has long gained a ton of support from major shareholder William Ackman (the man behind hedge fund Pershing Square Capital Management). Now Ackman's at it again, offering to help Borders finance a $900 million buyout of Barnes & Noble, which would amount to paying $16 per share for the bookseller.

The irony, of course, is that Borders has been in a precarious financial position for ages. Until yesterday, it seemed an outlandish candidate to buy its major book superstore rival. Borders hasn't posted an annual profit since the fiscal year ended January 2006, and annual sales have regularly and significantly dwindled. Furthermore, its total debt-to-capital ratio of 90% is hardly the sort of secure figure that would attract cautious investors.

Lately, Barnes & Noble hasn't reported such a hot financial outlook, either, but it can at least boast a promising product. Its e-reader, the Nook, has helped the chain claim a significant 20% of the digital book market. However, the Nook's popularity can't offset the decline in physical book sales, and although the e-book market is growing at an exciting rate, it's still pretty young.

Overall, Borders and Barnes & Noble must face off against a strong rival in both physical and e-books: Amazon.com (Nasdaq: AMZN  ) and its e-reader, the Kindle. Apple's (Nasdaq: AAPL  ) iPad is well known for its e-book capabilities, too. And just recently, Google (Nasdaq: GOOG  ) announced its own digital bookstore, adding to all this bibliophile mayhem. All these factors add up to serious competitive threats for both Borders and Barnes & Noble.

It's doubtful that merging these two booksellers will save either one, given the industry's major changes and the shift toward digital books. Investors should think twice about speculating in these stocks; whichever way this newly thickened plot twists, it seems like an ultimate dead end for Borders and Barnes & Noble.

Google is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers selection. Apple and Amazon.com are Motley Fool Stock Advisor picks. The Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2010, at 6:34 PM, foolindeed1 wrote:

    What a joke, Ackman did it just to raise the Borders stock price before the earnings announcement scheduled for Dec. 9 that will be so bad that it would delist the stock. Never in a million years Barnes & Noble will agree to be taken over by this zombie company which has been on a brink of bankruptcy for years. B&N already has 8-10 offers from private investment companies all over the place. Again, what a joke.

  • Report this Comment On December 08, 2010, at 2:12 AM, kthup wrote:

    Although this aritcle is better than most by this website on this topic, it nonetheless indicates a lack of understanding of this particular situation on the part of its author. BKS' poison pill provision isn't addressed. The notion of BKS going private is not considered. BKS current market cap relative to BGP isn't discussed, nor is the fact that BKS previously opted not to acquire BGP due to what they felt to be an inferior real estate position on the part of BGP. The most telling sentence, though, is this: "The Nook's popularity can't offset the decline in physical book sales, and although the e-book market is growing at an exciting rate, it's still pretty young." There are two problems with this statement. First, there seems to be an assumption that sales of the device itself are intended to off-set the sales of physical books. If so, that assumption is not correct and the author does not understand the business model. Second, the assumption regarding the e-book market growing at an exciting rate and still being young seems to be intended as a negative. The fact that exciting growth in a young market could be seen as a negative is telling.

Add your comment.

DocumentId: 1392210, ~/Articles/ArticleHandler.aspx, 7/26/2014 1:17:33 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement