Buyer Beware on Borders

Borders (NYSE: BGP  ) shares surged after major shareholder Bill Ackman made a few upbeat comments about the beleaguered bookseller. But to eager buyers of the stock, I say caveat emptor.

Ackman, the founder and CEO of hedge fund Pershing Square Capital Management, said he thinks bankruptcy is a "low-probability event" for Borders. He did suggest that the company's future could include industry consolidation, mentioning the possibility of combining Barnes & Noble (NYSE: BKS  ) and Borders someday.

However, bear in mind that Ackman owns 18% of the bookseller; what else would he say about the company's potential for bankruptcy? "I plan to go down on this sinking ship?" Sure, his stubborn perseverance implies that he believes in the company's revival, but that doesn't mean the company will survive. Meanwhile, Pershing Square has been lending Borders money at beneficial terms (for Pershing Square, that is), making its involvement essential to Borders' continued existence.

Borders recently reported dismal holiday numbers, lost its CEO, and is cutting costs by laying off workers at its corporate offices. As for all that money it's been lent, Borders must repay $42.5 million to Pershing Square on April 1.

Even if Borders weren't in such precarious financial condition, beset by lagging sales and a high debt load, it faces major competition from Amazon.com (Nasdaq: AMZN  ) and discount retailers such as Wal-Mart Stores (NYSE: WMT  ) , Target (NYSE: TGT  ) , and Costco (Nasdaq: COST  ) , all of which participate in the vital best-seller portion of the bookselling world. In addition, its dead-tree business could face a serious disruption from the growing popularity of e-books.

I understand that the support of smart individuals like Ackman can provide bullish reinforcement for an investment thesis. But Foolish investors should apply a critical eye to anything anyone says; nobody's right all the time. And while Ackman's known for his successful past agitation at MBIA (NYSE: MBI  ) and Wendy's/Arby's, he's not perfect. Look no further than his involvement with Target; he lost nearly $2 billion for his investors, and waged what many considered a misguided proxy war against the retailer's management. Some critics opine that he may have a difficult time admitting when he's wrong.

I suppose that a Borders survival scenario isn't impossible. After all, I predicted its departure from the retail scene way back in October 2008, and that hasn't come to pass yet. Still, investors shouldn't invest hoping for miraculous outcomes. There are far better, more prudent stock ideas than Borders to choose from, even if Ackman's convinced that the bookseller's worst-case scenario won't come to pass.

Costco and Wal-Mart are Motley Fool Inside Value picks. Amazon.com and Costco are Stock Advisor selections. The Fool owns shares of Costco. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (16)

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.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1103649, ~/Articles/ArticleHandler.aspx, 8/30/2014 12:33:55 AM

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