Borders Should Not Be Bought

May.22.08 | About: Borders Group, (BGPIQ)

The Wall Street Journal is reporting that Barnes & Noble (NYSE:BKS) is putting together a team of advisors to consider acquiring Borders (BGP), the second biggest bookseller in the U.S.

Other than killing their biggest and only serious competitor, we fail to see the advantage for Barnes & Noble. Since it appears that the majority of Borders stores are located in close proximity to Barnes & Noble stores, the combined company would not be expanding its footprint. This would amount to another expense for Barnes & Noble in addition to assuming Borders $548.6 million debt.

The biggest hurdle for Barnes & Noble is the antitrust issue. Acquiring Borders would give Barnes & Noble a third of the U.S. book market. As Borders CEO George Jones rolls out more concept stores, it becomes even clearer that Borders does much more than just sell books.

If Barnes & Noble wants to acquire Borders, they would have an extremely weak case to present to the Justice Department. Consumers will pay more, as Borders offers a free membership Rewards program vs. Barnes & Noble’s costs $25 a year. Barnes & Noble could argue that consumers have alternative outlets to buy books, such as Costco (NASDAQ:COST) and Wal-Mart (NYSE:WMT). But those examples only supply consumers with the most popular selection of titles. I doubt that I would find a copy of Barbara Hand Clow’s “The Mayan Code” there, for example. The book is available on (NASDAQ:AMZN), but Amazon is not able to fix me a café drink to enjoy while I peruse through the physical book.

And that’s the biggest point. People visit Borders and Barnes & Noble for an entertainment experience. To see the books, feel the books, read the books - along with magazines, music, and movies. Amazon, Costco, etc. do not offer lectures and musical performances. These stores offer a pleasant environment to hang out with friends. It is these elements that make these two booksellers great.

Listening to Barnes & Noble’s earnings calls, I sense CEO Leonard Riggio’s enthusiasm about books. A true book lover would not kill his competition, but instead offer consumers even more compelling reasons to shop at his stores rather than venture down the street.

Disclosure: Long BGP