Handicapping a B&N Takeover of Borders

It may in part be wishful thinking, but most publishers do not believe Barnes & Noble will move ahead with an acquisition of Borders. Too much overlap among stores and too expensive to integrate the back-office and physical infrastructure, goes the thinking. “B&N doesn't need the name, locations, expertise or systems” was the way one publisher summarized his view of a potential acquisition.

And even if B&N went ahead, most publishers believe the government would step in and stop the merger on antitrust grounds. But would the FTC and/or Justice Department block the purchase? It could depend on the numbers they chose to use. There is no question that a combination of Borders and B&N would give B&N an overwhelming share of sales made through bookstores. The two chains combined for sales of $9.23 billion in their most recent fiscal years, giving them a 55% share of bookstore sales, based on U.S. Census figures of bookstore sales of $16.76 billion. The percentage of total retail book sales, including those made over the Internet, however, is much less. Bowker estimates the two combined would account for 27% of books sold by all retailers. Attorneys familiar with antitrust law said there is no magic number that prompts a review of a merger, although any deal that gives a company more than a 30% market share is likely to at least draw the government's attention. The chief consideration given to all such reviews is whether a deal would lead to unfair competition and higher prices for consumers.

A little more than a decade ago, the FTC blocked a merger between two superstore chains in the office supply field, a deal that had similar characteristics to a B&N-Borders combination. In 1997, the FTC prevented the merger of Office Depot and Staples on the grounds that it would lead to higher prices in at least 40 markets. Like books, office supplies are sold through warehouse clubs and mass merchandisers (but in '97, not via the Web), but the FTC found the merger would result in a lack of competition in too many major markets where the two chains had competing stores. For example, the FTC study found file folders in Office Depot's Orlando, Fla., store, where it competed with Staples and Office Max, priced at $1.95. The same folders at an outlet 50 miles away with no competition cost $4.17. The merger was blocked, even though part of the deal called for the combined company to sell 63 stores to Office Max, the third-largest chain. A similar proposal could be made by B&N to Books-a-Million, although how many stores BAM could afford to buy is unclear.

But times, and administrations, have changed since 1997. Andrew Berg, a well-known antitrust lawyer who represented Putnam in the ABA's antitrust suit and who recently joined Sonnenschein Nath & Rosenthal as head of its antitrust/competition practice, believes a B&N purchase of Borders would be approved. Such a ruling “would be consistent with newer decisions in retail cases,” Berg said. The pro-business approach of the Bush administration and the ability to buy many products online has changed the equation since the Office Depot ruling. In the B&N case, Berg said, the FTC is unlikely to view the books and other items that B&N/Borders carries as “unique products” that can't be bought elsewhere. “There are other sources where books can be bought,” Berg said, that would allow consumers “to defeat price increases” implemented by B&N.

While he acknowledged that a merger of B&N and Borders would likely raise issues involving cultural diversity and First Amendment choices, the economic analysis would likely lead to approval. “It wouldn't be a slam dunk, but it's a deal that could be done,” Berg said. Of course, if the Democrats win in November, the regulatory landscape could be altered dramatically, making a deal harder to get through. If B&N is serious, Berg said, “timing is essential.”