bloggingbuyouts

Barnes & Noble (NYSE:BKS), the No.1 bricks and mortar bookseller, is looking at a buyout of No.2 player Borders (NYSE:BGP). Neither company has done especially well as readers have turned to Amazon (NASDAQ:AMZN) and other places to buy books online. While both of the book chains have web sales operations, they are not large enough to offset the trend to stay out of stores. Adding to their troubles is the fact that younger Americans do not read, perhaps because they don't know how.

According to The Wall Street Journal, "Barnes & Noble has about 20% to 22% of the retail book market, while Borders controls 10% to 12%." Since the companies are taking a shellacking from online rivals, The Justice Department may show them some mercy.

A merger won't solve any problems. It may allow for some management and distribution costs to be pulled out. Weak stores can be closed. But the market is wise. Over the last two years, Amazon's shares are up about 130%. BKS is off close to 20% and BGP is down closer to 70%.

Continued at 24/7 Wall St.

Back in November, I wondered whether hedge fund genius William Ackman was barking up the wrong tree with his 17% stake in Borders (NYSE: BGP). Since then, the stock has declined from over $10 a share to less than $5. Ackman has shown tremendous commitment to his stake in the company, but I'm still skeptical. The stock is down 34%, in spite of the company's announcement that it is exploring strategic alternatives. The problem is that, in addition to that rosy decision, the company reported pretty ugly fourth quarter and year-end results. Oh, and the company also suspended its dividend to conserve cash.

But Ackman's Pershing Square Capital is staying strong. In light of the company's tight cash position, the fund lent $42.5 million at a 12.5% interest rate, and also agreed to purchase the company's Paperchase, Australia, New Zealand and Singapore subsidiaries for $125 million if Borders decides it wants them to. Ackman's fund also receives 14.7 million warrants to purchase Borders stock at $7 per share -- warrants which are badly out of the money.

But back to the strategic alternatives thing: the company hired JPMorgan and Merrill Lynch to help conduct a "review process will include the investigation of a wide range of alternatives including the sale of the company and/or certain divisions for the purpose of maximizing shareholder value."

The plummeting share price is indicative of the street's skepticism that anything will get done, and I understand why. Given Borders' lack of profitability and a business model that is becoming obsolete, I don't understand why anyone would want to buy Borders.

But this is a contrarian play, and today's plunge has sent Borders' stock into a position where it's trading at a large discount to its book value. But the declining fundamentals could scare off many suitors. I'll be watching this one from the sidelines.

Borders Group Inc. (NYSE:BGP) has finally woken up and smelled the overpriced coffee.

The book retailer is dramatically scaling back its brick-and-mortar operations and is focusing on the Internet. Too bad for shareholders this is 2007 and not 1999. I am not sure how much patience Wall Street has left for Borders. Perhaps the company would do better in private hands.

Shares of Borders are down 9% over the past five years, under-performing Barnes & Noble Inc. (NYSE:BKS) which rose 20% and Amazon.com (NASDAQ:AMZN), up 184%. The company also faces stiff competition from other rivals including Costco Wholesale Corp. (NASDAQ:COST) and Wal-Mart Stores Inc. (NYSE:WMT).

The turnaround plan Borders announced is smart.

It's ending its alliance with Amazon and launching its own e-commerce site next year. The company will sell or franchise its superstores overseas and will close nearly half of its Waldenbooks outlets in the U.S., according to the Wall Street Journal [subscription required]. Borders also will sign more deals with best-selling authors and celebrities to beef up its proprietary publishing operation, the paper said.

Still, the future is very uncertain for Borders.

Today the retailer reported a fourth quarter net loss of $73.6 million, or $1.25 per share, compared with profit of $119.1 million or $1.78, a year earlier. Revenue rose 2 percent to $1.5 billion. Excluding charges profit was $1.61. Analysts were expecting profit of $1.63 on revenue of $1.48 billion, according to Thomson Financial.

Investors are going to want to see improvement pretty quickly.