Geoff Gannon December 6, 2010

Bill Ackman Tells Borders (BGP) to Bid $16 a Share for Barnes & Noble (BKS)

Just wrote an article for GuruFocus, so you may want to read that first.

Bill Ackman – the hedge fund manager who runs Pershing Square – just filed a 13D with the SEC saying he wants Borders (BGP) to buy Barnes & Noble (BKS) for $16 a share. Ackman would provide the cash. Borders itself could never pull off this kind of deal. They are in much worse shape than Barnes & Noble.

These are the two biggest booksellers in the U.S. The third place player – Books-a-Million (BAMM) – is a very distant third. There are a couple interesting angles to this story. Obviously, as a Barnes & Noble shareholder I tend to focus on that side. Barnes & Noble is auctioning itself off right now. And Ackman’s offer will let us see if there are any other bidders. It will certainly encourage Riggio and Burkle to get off the fence.

If it looks like such a combination really was going to happen, it would also mean some soul searching for companies like Bertelsmann. Do we really want a single customer that big? Do we really want only two real retail paths – Barnes & Noble and Amazon – to our readers. And, of course, those two paths would be both print and digital.

I think we can say that if Borders merged with Barnes & Noble the idea of any serious e-reader other than Kindle and Nook is dead. I’m talking from the publisher’s perspective here. I’m sure we’ll see other devices. But as a realistic distribution system, it would only be Amazon and Barnes & Noble. It’s a scale business. And you need both the content and the relationship with the reader. I’m sure other folks will engineer e-readers of exquisite technical excellence. It won’t matter.

I have a gold coffee filter at home. I put a paper filter in it. Gold is pretty. Paper does the job I ask.

Anyway, this has me thinking about the likely and immediate scenarios and the less likely more long-term scenarios. Obviously, actually consummating a marriage between Borders and Barnes & Noble for $16 a share in cash is an unlikely and distant scenario. The immediate issues are the reactions from others at Borders and the reaction from Barnes & Noble. Barnes & Noble is tenuously controlled by Riggio – he had a narrow majority of the September vote and since then the stock price has gone down with a lot of Nook spending and little news on the buyout front.

There was also a report in the New York Post that Riggio wasn’t very interested in buying the whole company. If that’s true, coming out at the very beginning and making a big show of the fact that he might be a bidder is unlikely to have endeared him to the few outside shareholders who supported him.

And, obviously, if Barnes & Noble is in play, then basically no one has control of the company. You need a huge stake to confidently block a bid without offering a counter bid once the board decides the company is in play and their duty is just to get the highest price.

I’ll have much more on this story when I hear more and think more.

The other angle – which I really haven’t considered yet – is what this would mean for Borders. That’s such a strange situation. But it’s possible that if this deal did happen at terms close to what Ackman is talking about you could be left with some shares of the combined company in public hands. And those shares would be held by people who thought they were buying a second place bookseller on the verge of bankruptcy. Instead they end up shareholders in a much, much bigger business.

But it’s way too early to think about that part. However, one thing that might be different here is how Borders’s stock reacts. Usually, the potential acquirer’s stock drops. There’s absolutely no reason for that to happen here. I’d be surprised if it did. There’d just be no sense in Borders shares trading down on this news. None at all.

Both stocks probably pop.

So this is definitely a unique situation.