Last week's news that Borders chairman and CEO Greg Josefowicz will leave the company by the end of fiscal 2007 and that one of his chief lieutenants, executive v-p and chief product officer Mike Spinozzi, will depart February 3 heightened speculation over the future of the nation's second largest bookstore chain. While the company has continued its policy of not commenting on reports that a number of private equity groups may be considering a bid for the chain, the possibility of a buyout has enough credibility among investors that the company's stock price has risen 10% since word first surfaced. And analysts have also given credence to the reports; Prudential increased its rating on the stock from "underweight" to "neutral," while Stifel Nicolaus raised its outlook from hold to buy.
The prospect of Borders moving into private hands is not something many publishers are eager to see. Publishers are concerned that a venture group would keep Borders for only a short period, during which it would look to maximize its investment—and cash flow—by aggressively cutting costs. Among the actions that could be taken, analysts said, are a sharp reduction in new store openings, reducing remodeling efforts, cutting marketing expenses and reducing inventories. None of these actions, which could slow top-line growth, is a pleasant prospect for publishers.
Borders almost went private in 2000, but the buyout failed because of inadequate financing. That is not the case today, as equity firms are swimming in funds and looking for places to invest. One recent retailer that was taken private, Sports Authority, shares some of Borders's heritage; both companies were spun off from parent company K mart in 1995. While retailing has never been the first choice among equity firms, bookstores are a relatively predictable business, even if growth is slow and margins thin
One alternative to a private buyout is a purchase of Borders by Barnes & Noble. But for many publishers that possibility is worse than an acquisition by a private firm, since the combination of the two companies would give B&N unparalleled market clout. While such a merger would seem to raise obvious antitrust concerns, it is not a slam dunk that the FTC would block a deal. A B&N/Borders merger would control 35% to 40% of retail bookstore sales. However, its share of all sales of books, sold through such channels as the Internet and mass merchandisers, is considerably smaller, estimated at 25% to 30%.
