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Will Barnes & Noble-Borders Merge?

The old "if you can't beat 'em, join 'em" philosophy might work in the sandbox, but in the world of big box bookstores, not so much. That's why it's an almost comical thought that a struggling Barnes & Noble (BKS) would be merging with the even-more-distressed Borders (BGP).

While B&N is technically up for grabs, ahem, considering "strategic alternatives," to boost value for its stockholders (who've watched shares tumble 30 percent this year) activist hedge-fund manager William Ackman is closing in. Ackman currently owns a 37 percent stake in Borders and has deep pockets. He's apparently ready to shell out the $960 million it would take to snap up B&N.

Here's why it's funny and (hopefully) won't happen soon:

As Sarah Weinman over at Daily Finance pointed out, though Ackman appears to be the knight in shining armor, he's really riding in on a tactic that Borders chairman and CEO Bennett LeBow has employed -- to disastrous effect -- in the past.

Back in 1985, LeBow took a leveraged buyout of MAI Basic/Four in an attempt to remake the failing computer systems company. Several strategic moves led to a few brief years of success. But when LeBow set out to gobble his larger competitor Prime Computer in a hostile takeover, the effort sunk both companies into Chapter 11 bankruptcy. A decade later, LeBow was no longer a player in the computer business.

The problem is that while LeBow did a smart thing and sold off Basic/Four's unprofitable Canadian division among other strategies, his track record since taking over the chair at Borders has been less impressive. In fact, since he installed himself at the end of May, Borders efforts to gain digital market share along with in-store sales included such mystifying moves as launching an in-store Build-a-Bear Craft Shop and setting up pop-up shops amid massive layoffs and store closures.

Though LeBow may be angling to employ the Basic/Four strategy with Ackman as his fall guy, it's kind of hard to see how either of them would do anything to further either of the chains' fortunes. Ackman's hedge fund, Pershing Square Capital Management, invested in Borders back in 2006. Since then Borders' story has been a sad one filled with downward spiraling sales. In fact, Ackman stated back in may that Pershing was Borders' "stuckholder," referring to the ownership of struggling stock he couldn't unload.

While he's been playing stuckholder, Ackman's been building a spotty reputation for working with existing management at his other investments. He lost a bid for five board seats at Target (TGT) last year, and JCPenney (JCP) has limited his holdings.

Meanwhile, B&N has plenty of woes of its own. Fresh off an expensive proxy battle between chairman Len Riggio and billionaire investor Ron Burkle, the chain has ramped up its digital efforts but sales at its 700+ stores continue to weaken.

So why then, does either Ackman or LeBow think merging the two booksellers would be a good idea? One theory is that by joining forces there could be a more effective pooling of resources for distribution, consolidation of brick-and-mortar operations. It could also help Borders co-opt B&N's better e-commerce and e-book strategies.

But it's not likely to happen. While analysts speculate that the $16 per share price is too low, I'd wager there'd be a bigger obstacle to overcome. He may have taken some hits, but Riggio, recently named Publisher's Weekly Person of the Year, is not going to relinquish his hold on the company he built into a bookselling superpower that easily. Especially when he's on the brink of something big. As Simon & Schuster (CBS) CEO Carolyn Reidy noted, "Len is the only person looking to integrate print and digital." For publishers to succeed, "We need robust print and digital markets. What Len is doing is unique."

Image via Steven McKay CC2.0


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