Reprints

This copy is for your personal, noncommercial use only. You can order presentation-ready copies for distribution to your colleagues, clients or customers here or use the "Reprints" tool that appears next to any article. Visit www.nytreprints.com for samples and additional information. Order a reprint of this article now.

February 16, 2011

Borders Bankruptcy Shakes Industry

By JULIE BOSMAN and MICHAEL J. de la MERCED

After Borders, the 40-year-old retail chain that helped define the age of the book superstore, filed for bankruptcy protection on Wednesday, the struggling book industry was left wondering what was next and maybe even who was next. The troubles of Borders are rooted in a series of strategic missteps, executive turnover and a failure to understand the digital revolution problems in many ways of Borders own making. But as those in the volatile industry digested the news that most saw coming, they were acutely aware of the bigger picture: that in a fast-evolving bookselling environment there is slim margin for error. The book retailing industry is very challenging right now, said Michael Souers, an analyst for Standard & Poors. Weve had significant transformation. Bookstores have gradually been losing their prominence, and the U.S. market is oversaturated in terms of the number of retail stores. So that trend will likely continue as e-books gain more prevalence in the market. Borders was once seen as the brainier of the large chains, beginning in 1971 as a used bookstore in Ann Arbor, Mich. In the 1990s, that image began to fade as the chain expanded wildly and helped wipe out many mom-and-pop independent stores. Now the company is set to close some 200 stores and shed much of its staff in the coming weeks. The stores slated for closure are scattered throughout the country, including three outlets in Manhattan, 35 in California and 15 stores in the Chicago metropolitan area. The company currently operates more than 650 stores and employs 19,500 people. Borders said that its stores would remain open during the bankruptcy process and that its rewards program would remain in effect. The company said it would continue to honor gift cards and coupons. In its filing in United States Bankruptcy Court in Manhattan, Borders listed $1.29 billion in debt and $1.27 billion in assets. As of the filing, Borders owed $272 million to its 30 largest unsecured creditors including $41.1 million to the Penguin Group USA. Publishers, mourning the loss of valuable shelf space, said they hoped the bankruptcy filing

would be a chance for the bookseller to reinvent itself. But they were also skeptical that the companys deep-rooted problems could be overcome. Borders told publishers on Wednesday that it was working on a long-term plan for its revival. It has become increasingly clear that in light of the environment of curtailed customer spending, our ongoing discussions with publishers and other vendor-related parties, and the companys lack of liquidity, Borders Group does not have the capital resources it needs to be a viable competitor and which are essential for it to move forward with its business strategy to reposition itself successfully for the long term, Mike Edwards, the company president, said in a statement. One area in which the chain has struggled is its online business. Borders, which was hurt by pressure from Amazon.com, Barnes & Noble and big-box stores like Wal-Mart, badly lagged behind Barnes & Noble in establishing a viable online book business. In 2001, it linked its online store to Amazon, but waited until 2008 to restart its own e-commerce site. Shake-ups at the top of the Borders corporate structure contributed to an overall sense of instability in the last several years. When other stores were downsizing or eliminating their music and DVD sections, Borders delayed scaling back its own. Borders also opened stores overseas, a move that analysts said stretched the company thin. They overexpanded, said Michael Norris, senior analyst with Simba Information, which provides research and advice to publishers. They just had the mentality of, If we open a new store, the growth will happen. As e-reading began to take off, Barnes & Noble created its own signature product, the Nook, to compete against the Amazon Kindle. Borders, in contrast, carried at least six devices, including the Kobo, the Velocity Micro Cruz tablet, the Sony Pocket Edition and the Franklin AnyBook, an audio-only reader shaped like a remote control. None of them have gained significant traction with consumers, compared with the more popular Kindle and Nook. For the last five years, Borders stock has drifted downward and the number of employees reduced to 19,500 from 35,000. Its same-store sales were down more than 12 percent in the third quarter of 2010, with a loss of $74.4 million. In conversations with publishers last year, top executives at Borders said they were confident the troubled company could revamp, even suggesting that some stores would be outfitted with

wine bars to offer a more social atmosphere. The executives also said they believed there was a strong possibility that Borders could eventually merge with Barnes & Noble. Borders has been in crisis mode since December, when it stopped paying publishers for books shipped through the holiday season. The company asked publishers to accept i.o.u.s for their missed payments, a proposal that publishers considered but eventually rejected. Now publishers, burned by Borders unpaid bills, have been left to decide whether they will resume shipping books to Borders. Several publishers said they are not convinced, given the companys financial instability. Others said they would consider it if Borders was willing to pay in cash, an arrangement that Borders indicated that it would be open to. A spokesman for the Ingram Book Group, a major wholesaler, said on Wednesday that the company stopped shipping books to Borders at Borders request but that it would resume shipping books as the process allows. Large publishers have grimly accepted that they will lose millions on books they shipped to Borders throughout the holidays. Besides Penguin, other publishers owed money include the Hachette Book Group, Simon & Schuster, Random House, HarperCollins and Macmillan. A spokeswoman for Penguin said in an e-mail that Penguin hopes that Borders will emerge from this process as a smaller but stronger book retailer, and will work closely with Borders management to support this transition. Penguin has been following developments at Borders very closely for many months and has taken appropriate steps to mitigate the financial impact of the companys bankruptcy on Penguin. Borders said it had secured $505 million in financing from lenders led by GE Capital to keep it operating through the court process. One publisher estimated that it was enough money to last two to four months. Last month, GE Capital had offered Borders a $550 million loan commitment, but one that was dependent on the companys reaching certain milestones, including securing $125 million in junior debt. That money would have come in large part from persuading publishers to accept interest-bearing i.o.u.s in lieu of missed payments. The two biggest equity holders William A. Ackmans Pershing Square Capital Management and the groups chairman and chief executive, the financier Bennett S. LeBow may suffer the most from the bankruptcy filing. Neither Mr. Ackman nor Mr. LeBow has made additional investments in Borders since the company began looking for new financing. Last year, Mr. Ackman had proposed lending Borders up to $960 million to finance a merger of

the company with its larger rival, Barnes & Noble. He still supports a deal, but only if Borders is able to shed enough underperforming stores, a person briefed on the matter said. Many retailers, including Amazon.com and independents, stand to benefit from a reduction in Borders stores. Barnes & Noble, the nations largest book chain, will be the biggest beneficiary, said Peter Wahlstrom, a retail analyst with Morningstar Equity Research, who suggested that customers would move their dollars to the next-closest retailer. It also gives Barnes & Noble the chance to use its position as leverage with publishers and landlords. Does it provide an opportunity for Barnes & Noble to go back and fight for lower rates with their real estate owners? Mr. Wahlstrom said. Or, No. 2, does it provide a catalyst for Barnes & Noble to go back and get better terms from publishers and distributors? Borders struggles as a corporate behemoth are a world apart from its origins. Susan Orlean, the author of The Orchid Thief, said she remembered spending hours in a Borders as an undergraduate at the University of Michigan in the 1970s. I was a poor college student, and they were always very welcoming, she said. It was a wonderful bookstore. Borders always felt smaller and more human scale, sort of handmade.