Borders & Noble: A ‘Wretched’ Idea

December, 2010 | Volume 35, Number 12

We spoke with Simba Information Senior Analyst Michael Norris about what a merger between the two largest bookstores chains could mean.

Though Wall Street seems fairly happy concerning the potential merger, you don’t seem particularly thrilled. Why is that? What was your first reaction when you heard the news?

My first reaction was horror as I think it’s a wretched idea. Borders’ investors essentially want to put the money together to buy the largest bookstore chain in the country the way college buddies pony up cash for a pizza. But a merger is a lot more complicated than deciding who gets the last slice. If the objective is to reduce costs, physical stores will have to be shuttered and doing that will be a complicated and time consuming project. A merged entity would have to integrate separate books, separate customer relationship management systems, separate operations and, the wild card here, separate management teams. That all takes time, and by the time a merged—I guess we can call it ‘Borders & Noble’—entity is ready to present itself to the world, even in the most perfect of circumstances, a couple of years will have passed and the new entity will be that much further behind its competitors. Bottom line: a merged Borders & Noble would be less than the sum of its parts.

Are there any positive outcomes of a merger between the two?

I can’t think of a single good thing that would come about for a Borders-Noble merged entity. There’s a big positive outcome for companies like Amazon, Apple and Google, since two huge booksellers will basically be out of commission while figuring out how to design new business cards. Non-bookstore physical stores that carry books including Target and Wal-Mart will be pleased too. They already have more physical store locations than Barnes & Noble, Borders and Books-A-Million combined and would stand to gain from the largest bookstore chains combining.

What would the effects on the general consumer, or simply the general population, be?

As we’ve noticed over the years, there’s a rather obvious but little understood effect when a bookstore closes, which is that people stop buying books from that bookstore. Since far more stores have closed than new ones have opened, the market share and the overall ‘location footprint’ of bookstores has been ticking downward. A Borders & Noble would have fewer physical store locations than the two separate entities, for sure.

We’re still crunching numbers, but we’re trying to find out whether the decreasing number of bookstores has any kind of a correlation or causation with the diminishing number of adults buying books as gifts. If you go into a bookstore and ask for a good gift for someone who likes x, y and z, it’s as likely as the next sunrise the bookseller will help you out and even gift wrap the title. So the consumer will have fewer places to buy books, fewer booksellers to help them buy books and fewer opportunities for people to know books even exist. The publishing industry will feel the difference when thousands of booksellers are out of work and it won’t be a good feeling.

Barnes & Noble’s and Borders’ e-book strategies have been somewhat different, with B&N launching its own proprietary device and Borders partnering with other companies for in-store offerings. How much of an issue are these separate mindsets were the companies to merge?

The integration between these two very different e-book strategies would definitely take center stage in a merger, because it seems the shareholders at either company want all of the benefits but none of the costs involved with growing an e-book business. And they are going about it in separate ways. One of the comments I read recently was from (Barnes & Noble shareholder) Ron Burkle, who basically said he rather Barnes & Noble pick up a strategic partner on the tech side to incur the costs the bookseller is ringing up in developing their e-book presence. That’s bad short-term thinking and Burkle doesn’t even need to take my word for it.

Borders, for years, had the exact same mentality he was advocating and had Amazon handle its e-commerce function. Amazon had the infrastructure, yes, but they also controlled the customer relationship and had no incentive to entice Web buyers to visit a Borders store. The set up also made Borders’ loyalty program, which had only been rolled out a year earlier, half as effective, at best. Recognizing the need to invest on its own, Borders did so pretty late in the game and it has been trying to play catch-up ever since. So investors may not like the bottom line effects of the investments Barnes & Noble has made in e-books but the alternative is to be beholden to a third party. And as we’ve learned from Google recently, in the wake of their new online bookstore, you don’t always get to cut out the middleman. Sometimes, the middleman cuts out you.

In the end, how likely do you think this merger?

Luckily for everyone, so far it seems fairly unlikely. The idea they should merge comes up every once in a while and each time nothing comes out of it. Even though things are different now in terms of the market conditions and the circumstances it’s still a bad idea. The book industry needs a large number of retailing ecosystems in place in order to remain healthy and with the right investments and management teams, I see no reason why Barnes & Noble and Borders can’t keep selling books as separate companies.

Another thing that makes this unlikely is that in the aftermath of the merger rumors, the stock price of Barnes & Noble already got close to the per-share asking price, and Borders’ shares got a boost too. Who knows, that could have been the whole objective to this idea being floated. But seriously, we’ve also seen how Barnes & Noble responds when a wealthy shareholder or two suddenly decides they want control. If this gets farther and Barnes & Noble resists, I like their chances.■

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