Buying out Barnes & Noble would give its much smaller rival, Borders Group, a bigger and firmer stake in the digital world, but some analysts said combining the two largest companies in the shrinking world of traditional book selling could hurt both — perhaps irreparably.
Activist investor William Ackman and his investment firm announced in a regulatory filing Monday that they had offered to finance a $963 million bid by Borders for Barnes & Noble Inc.
Under the deal, Pershing Square Capital Management would sponsor a bid by Borders of $16 per share for more than 60 million outstanding Barnes & Noble shares.
The stock shot up 13.6 percent to $15.08 on the news Monday afternoon.
Both companies face increasingly tough competition from larger merchants, online and in stores, including Amazon.com, Target and Walmart. And both have said they are relying for growth on electronic books and readers, a still-small arena in which another giant, Google Inc., launched its own bookstore Monday.
Barnes & Noble debuted its reader, the Nook, last year and has invested heavily in its electronic bookstore, while Borders sells readers and e-books on a smaller scale through a partnership with Kobo.
The financing from Ackman, who owns 37 percent of Borders’ outstanding shares, would let Borders to make a “quantum leap” in the e-book space, Morningstar analyst Peter Wahlstrom said.
“It is a sign Borders is looking to catch up,” Wahlstrom said.
Borders spokeswoman Mary Davis said the company welcomes Ackman’s “participation.”
“We have previously expressed to Barnes & Noble our interest in such a business combination, and we look forward to continuing those discussions,” she said.
Barnes & Noble had no comment.
A combination could save the companies money through consolidation. But Simba Information analyst Michael Norris said combining would be a distraction to the companies in the short term and wouldn’t help them with the larger challenges traditional book sellers face.
“(They) would spend a year thinking about what overlapping stores to close, and at least another year combining systems and operations while trying to hang on to talent with both hands,” he said. “While that’s going on, rivals like Amazon, Apple and Google will just be steaming ahead unimpeded.”
Government census data show sales at physical bookstores have hovered about $17 billion since 2005 and edged down less than 2 percent to $16.91 billion in 2008, the last year data for which are available.
Electronic books are expected to generate nearly $1 billion in U.S. sales this year and $1.7 billion by 2012 as more people buy readers and use tablets and other computers to read e-books, according to Forrester Research.
The offer of $16 per share is about 21 percent above Barnes & Noble shares’ closing price Friday of $13.38.
“While we think this is a reasonable offer, we do not anticipate that Leonard Riggio, Barnes & Noble’s founder, chairman and largest shareholder, will find it sufficient,” Standard & Poor’s analyst Michael Souers said in a note. “In addition, we think a merger of the two bookstores would be unappealing to Barnes & Noble, which holds a digital advantage over Borders, given costs associated with closing numerous redundant stores.”
Barnes & Noble put itself up for sale this year during the dispute with billionaire investor Ron Burkle and his Yucaipa Cos., who proposed replacing three board members with its own slate and opposed ratification of a poison pill limiting individual stakes in the company to 20 percent.
Yucaipa Cos. had no comment Monday on the proposal from Borders.
Borders is to report its third-quarter results on Thursday. Its shares rose 41 cents, or 38 percent, to $1.49 in afternoon trading, then fell back to close at $1.39. The stock has traded between 85 cents and $3.29 over the past year.
Barnes & Noble shares rose $1.78, or 13.4 percent, to $15.06 in afternoon trading, and closed at $14.69. The stock has traded between $11.89 and $24.71 over the past year.
But analysts said the price still might not be enough for the leaders and shareholders of a company that just won a bitter battle against Burkle’s effort to increase his 19 percent stake in the company.