Deal seen motivated by online concerns; publishers see little downside; government approval may take longer than expected

Much of the publishing world last week was still mulling over the ramifications for the industry following the stunning news of Barnes &Noble's plans to buy the Ingram Book Group. There was a consensus among larger publishers that the acquisition will have little impact on their own operations, although some smaller publishers speculated that the merger could lead to a drive for further operating efficiencies, limiting their access to B&N stores. Booksellers, meanwhile, said that, given Ingram's strength in the marketplace, they may have no other choice but to continue to do business with them, albeit grudgingly.

And while the deal is certain to be closely scrutinized by the government, it is likely to be approved.

Most industry members felt the acquisition had more to do with B&N's online efforts than it did with their stores. One publisher who didn't want to be identified said that in his view, "Barnes &Noble has determined that online is the future, and that the branding contest will be won or lost in the next couple of years. B&N felt they had to jump in with both feet or they would never catch up to Amazon.com." Peter Mayer, head of the Overlook Press, called the deal "an insurance policy for B&N's online investment." Scott Flanders, president of Macmillan, said the merger "increases B&N's prospects to compete with Amazon."

Few publishers were critical of the deal, seeing it as a sound business decision for Ingram. "It makes an enormous amount of sense for both B&N and Ingram," said Simon &Schuster consumer group president Jack Romanos. Another publisher observed that Ingram saw that it was losing business from the three major booksellers in the country -- B&N, Borders and Amazon.com -- and that Ingram had to pick one to partner with if it was to survive.

Romanos said that a critical issue for the combination to be successful will be how much of Ingram's non-B&N business it can retain. To that end, Ingram Book Group chairman John Ingram sent a letter to all its accounts assuring them that Ingram intends to continue to provide them with great service.John Ingram told PW that he has "the responsibility and the authority" to ensure that Ingram will not share confidential information about its other customers with B&N. "We have never and will never violate any confidentiality agreements," Ingram said, noting that he will devote "100% of my time to the Ingram Book Group." On the question of fairness in delivering books, John Ingram explained, "If there is one copy of a book left on the shelf, the title will go to wh ver placed the order first. That's the way it has always been."

Among those bullish about the deal was Macmillan's Flanders, who told PW that "every move Len and Steve [Riggio] have made has resulted in more books being available and more books being sold." Flanders added that he was "very pleased John Ingram has agreed to become vice-chairman of B&N. John set the standard for ethics in the industry and I can't question his motives or intentions."

Most publishers also felt that while the initial reaction among independent booksellers would be to cut back their business with Ingram, in the long run most will continue their relationship. "There is no way other wholesalers can absorb the volume Ingram d s," one publisher noted. Romanos observed, "There are reasons why Ingram has been so successful and why stores became so dependent on them. If they move away from Ingram, they will quickly be reminded of why they went to Ingram in the first place." Although Romanos said he d s not foresee any long-term disruptions in distribution dynamics, he acknowledged that if the majority of independents did not use Ingram during the holiday season, S&S would have a problem. "We've shipped a lot of inventory to Ingram. If booksellers stay away, we'll have books in the wrong place," Romanos said.

Approval May Take Time

Approval from the Justice Department and the Federal Trade Commission for the B&N/Ingram deal will probably be secured in the end, but it could be a protracted process, according to Lauren Albert, a lawyer familiar with book industry antitrust issues.

Albert, a partner in the firm of Axinn Veltrop &Harkrider, told PW there are two big issues that will receive particularly close scrutiny in Washington. The first is the independent booksellers' ability to get books from the new combination. Will it be an adequate vehicle for publishers to get books by their less popular authors to market? Under Barnes &Noble ownership, for instance, will Ingram be as receptive to as wide a range of books as before, or will it be likely to concentrate only on strong-selling titles?

The other key issue, according to Albert, concerns barriers to entry by new players into the wholesaler marketplace. Baker &Taylor could be seen as a viable alternative, but how hard will it be for new players to enter the market on a sufficiently large scale to offer adequate competition? New warehouses, truck fleets and computer systems will be needed; how long will it take to build viable alternatives? If it is improbable to happen within a sufficiently short time -- if, for instance, it could take several years -- then that, too, might be seen as an obstacle to approval.

Albert noted, "At the end of the day, I think the deal will be approved, but it's likely to get very close attention, and it will take time." Barnes &Noble/Ingram might have to agree to sell to B&N's competitors on a nondiscriminatory basis in order to appease antitrust concerns. It might also be required to set up a system to prevent "knowledge of the pricing and sales of its competitors," including, in this instance, both independent bookstores and online bookseller Amazon.com, which have been major customers of Ingram's.

On the question of discounts, Albert observed, "[The B&N/Ingram deal] poses Robinson-Patman problems of discriminatory pricing." Since the new entity might be figuring applicable discounts both as a retailer and a wholesaler, there will have to be a clearly separated two-track system as to what it buys as a wholesaler and what it buys as a retailer.

Albert believed that Amazon.com, although it already had a public relations battle with B&N over the planned deal, had no legal grounds for concern. "They can go to Baker &Taylor for their books, they can buy direct from publishers, they can build more warehouses of their own. I can't think how they could prove they would be hurt by this," explained Albert. In fact, if Amazon.com was to become a better supplier itself as a result, that would be good for customers, and therefore likely to appease Washington regulators.After B&N/Ingram files for clearance from Washington, the government has 30 days in which to render its judgment on the deal -- unless the deal g s through the Second Request procedure, which would involve much more detailed documentation of the planned acquisition and its likely impact, and could take many months. "Given the political overtones, I can't see how a deal like this wouldn't go to a Second Request," Albert noted.

In any case, Albert thought it "highly unlikely" that the deal would be approved within the projected 45-day period the parties had originally announced for its completion; it might be well into 1999 before it is an accomplished fact.