Borders on the borderline

<p>Borders is on life support. Everybody has been expecting it. Seriously debilitated for some time, the body has witnessed a revolving door of doctors and been subjected to a series of dubious cure-alls. Now facing the reality of its condition, the book business finds itself scared and shocked.</p>
<p>This week Borders c.e.o. Bennett LeBow, president Mike Edwards and chief financial officer Scott Henry were making their second round of visits to New York's biggest publishers, this time presumably armed with hard numbers about refinancing prospects with GE Capital and the loans, or interest-bearing debt, that Borders want publishers to assume instead of being paid the hundreds of millions of dollars it owes them.</p>
<p>How will it play out and for how long? Will American publishers, some of whom are owed tens of millions, use a mediator as reports have suggested? Will the bankruptcy court take over? Or will Borders survive even the fallout from this crisis? One question can be answered already: How did this happen?&nbsp;</p>
<p>One anonymous executive identified three factors in the company's decline. First, after a string of mistakes, Borders is still overwhelmingly bricks-and-mortar. Second, the executive says, there has been a large number of c.e.o.s at Borders in the past five years. As people with decision-making authority rarely have long-term bookselling experience, the company has lost sight of customers' needs. Third, store leases &quot;haven't been run well&quot;.</p>
<p>Sourcebooks c.e.o. Dominique Raccah emphasised Borders' &quot;disadvantage&quot; in operating on an old supply chain model. Former Time-Warner Book Group c.e.o. turned agent Larry Kirshbaum says the business is undercapitalised. Trying to compete without the financial resources they enjoyed when they were younger has been a major drag, he says.</p>
<p>Kirshbaum also sees a disadvantage conferred by Borders' corporate location. While Barnes &amp; Noble is centrally located in New York, Borders is 1,000 miles away, in Ann Arbor, Michigan. &quot;B&amp;N is extremely entrepreneurial and has been such a dominant factor [that] it's been hard for anybody except Amazon to compete,&quot; Kirshbaum says.</p>
<p>Borders was founded by Tom and Louis Borders in 1971 in the college town of Ann Arbor. Two decades later, after expanding to 21 superstores, Kmart bought and combined it with the mall-based mega-chain Waldenbooks, and in 1995 spun it off as the Borders Group. In 1997, with just over 200 superstores, came a vision to boldly go where B&amp;N feared to tread, expanding internationally. We know what happened.</p>
<p>However, in the 1990s many customers preferred the retail experience at Borders to Barnes &amp; Noble. They found staff more knowledgeable and committed. Customers also liked the combination of its large music catalogue alongside books. But times change. Amazon arrived. B&amp;N started selling books online. Borders came too late to the party.</p>
<p>The first &quot;revolving-door&quot; c.e.o. arrived in 1999. Phil Pfeffer had worked at Ingram and Random House. At Borders he lasted just five months. Meanwhile the company's large music exposure and that market's increasing shift to digital downloads became increasingly problematic.</p>
<p>At the beginning of the new millennium, the company began to think in terms of recapitalisation, a merger or leveraged buy-out. In 2006, Pershing Square hedge fund impresario William Ackman bought an 11% stake, then later increased it. He lent Borders $42.5 million (&pound;27 million) in 2008, wanted to be paid back, and finally was, last March. <br />
In late spring 2010, LeBow, with extensive tobacco experience but little in the book trade, invested $25m, becoming its new largest shareholder and, in short order, chairman and c.e.o. <br />
<br />
<b>Sales plunge</b><br />
A month ago, with B&amp;N majority shareholder and chairman Len Riggio facing relentless incursions from Amazon, Ackman proposed a classic counter-intuitive ploy&mdash;buy B&amp;N and combine it with Borders and a load of debt. But by the end of 2010, B&amp;N, with a savvy digital offer, a longstanding cadre of executives, and a new c.e.o. from the tech world, had its most profitable holiday period since 1997. Meanwhile, Borders' last quarter sales have plunged by 17%.</p>
<p>Another anonymous publishing executive estimates that Amazon now accounts for 25-30% of overall sales, B&amp;N 15-20%, and Borders 8-10%. Ten years ago, Borders' piece of the pie was 20%.</p>
<p>Since there is a huge overlap of store locations between Borders and B&amp;N, should Borders go out of business, Barnes &amp; Noble could pick up some sales, and possibly some of the more desirable leases. The stronger indies could also gain. But publishers point out that not all of Borders sales would be recouped.</p>
<p>Kirshbaum says: &quot;There is not a lot of flexibility to act&mdash;B&amp;N and the independents are looking over their shoulders,&quot; demanding an equal playing field should they try to help Borders. If publishers cannot or will not take on more risk, Borders' inventory will suffer and sales will drop further. If there are no new books, liquidity needs will go up. <br />
Yet, says Raccah, publishers like her are &quot;rooting for the company to survive&quot;. We shall know soon enough.<br />
<br />