Why Business as Usual at B&N is the Best Measure Against Burkle's Proxy Fight

(MoneyWatch) 

When we last checked in with Barnes & Noble (BKS), talks between activist investor Ronald Burkle and majority stakeholder Len Riggio had broken down to the point where Burkle's now prepared to mount a proxy fight in order to buy up more stock.

Yet, while these major players duke it out center stage, B&N's management team can't rest. It must continue building market share for both physical stores and its online business as if the drama isn't playing out. The future of the chain depends on it.

Burkle sued in May, challenging the legality of the "poison pill," a measure that stops anyone from acquiring 20 percent or more of the retailer's common shares. (Burkle's Yucaipa Cos.' stake currently stands at 19.2 percent.) But what exactly does B&N's second-largest shareholder know about bookselling? Not a lot.

What he does know is how to snap up shares in "undervalued" companies. After all, Burkle made his billions in the grocery business (think A&P and Whole Foods) by a series of savvy mergers and acquisitions. Yucaipa Cos. now owns stakes in about 35 companies including cold-storage logistics company, AmeriCold Logistics, as well as Morgans Hotel Group Co.

When you think about how Barnes & Noble was worth a whopping $2.2 billion back in '01 and now has a market capitalization of just under $950 million, (that's even after the 25 percent run-up in after-hours trading following Riggio's announcement of a possible sale two weeks ago) it's easy to see why Burkle's been angling for a bigger piece of the bookselling pie ?€" he can't resist a bargain.

Critics of Len Riggio's management style would say Barnes & Noble's founder still has a chokehold on what was once truly his family's business. But in the lead up to its new digital initiative, Riggio saw his brother Steve Riggio step down as CEO and be replaced by William Lynch. To be fair, Lynch is a relative newbie to publishing, too. But he's no stranger to e-commerce after a stint leading the charge at Home Shopping Network's HSNi, where he was EVP of marketing and general manager of HSN.com.

Since Lynch's installation, B&N's built some momentum with its investment in e-books. 2009 saw the launch of the Nook e-reader, and earlier this year, the grand opening of its digital bookstore which now boasts over 1 million titles (both free and paid). http://www.barnesandnoble.com/ebooks/index.asp

Around that, Lynch and company crafted a hybrid scheme attempting to draw readers back into stores with brick/click crossover promotions such as free in-store downloads and free coffee.

It's also launched PubIt!, a self-publishing service that allows independent publishers and self-published authors to distribute e-books on B&N's Web site.

B&N's moves to dominate digital echo those of the entire publishing industry. Everyone's scrambling to figure out how to make the rapid growth of e-books into a profitable commercial enterprise. And Amazon's (AMZN) a big player -- already on track with sales of digital downloads finally outstripping hardcovers.

It doesn't help that B&N now has to factor in the expense of a costly court battle. (And you know Burkle's not offering any suggestions on how to master the e-book marketplace). The best thing to do right now is batten down the hatches against the coming Burkle/Riggio sh*tstorm. Business as usual is good for business.

Image via US Army CC 2.0

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• B&N's Self Publishing Service Could Upend the Industry