Last week's announcment that Borders will eliminate 90 positions revived speculation about the possible sale of the nation's second-largest bookstore chain. Rumors that private equity firms were interested in the retailer first surfaced earlier this year, and the company has repeatedly had no comment on those reports. While some publishing industry members wondered if the layoffs were part of an effort by Borders to make the company a more attractive acquisition target, others downplayed the notion that a sale was in the works.
The staff reduction involved approximately 6% of Border's corporate workforce, with the majority of the cuts coming at the company's Ann Arbor, Mich., headquarters in such areas as IT and merchandising. A few employees who work directly with publishers, such as buyers and vendor liaisons, were also let go. No store positions were cut, said spokesperson Anne Roman, who added that the reductions were done to bring costs in line with revenue and income projections. Despite the cuts, Borders has not altered its sales forecasts which include projections for a same store sales increase in the low single digits at its superstores.
While downsizing news often results in an uptick in a company's stock price, Borders's price continued to fall after the report as investors seemed to focus more on the announcement that the company had made an error in calculating the gross margins in its Books etc. U.K. division in 2005 and was taking a charge in this year's first quarter that resulted in a net loss of $20.2 million, compared to a previously announced loss of $18.9 million. (The error resulted in a $1.9-million decrease in inventory and an increase by the same amount in cost of sales.) Roman said the layoffs were not connected to the correction.
The day the error was announced, June 7, Borders's stock fell 36 cents, to $20.45, and closed on June 8 at $20 per share. If investors believed the staff cuts were a prelude to a sale, the stock price would most likely have risen, as investors bid up the price in anticipation of a deal. The low stock price, while making it cheaper to acquire the company, may be so low, however, that Borders would be reluctant to approve an offer unless it came well above the current stock price, as InterMedia Partners did when it paid a 21% premium for Thomas Nelson, offering $29.85 per share at a time when the publisher's stock price was at $24.66 a share. Whether an equity company, or any other outside firm, would be willing to pay a premium for a company in the highly competitive, slow-growing bookselling marketplace is an open question.
