Analysis: Can Borders avoid liquidation?

But it also raises the very realistic chance that the company will not be able to identify a sustainable business model, an outcome that could result in its liquidation.

“I don’t hold much hope out for the successful reorganization of Borders,” said Jim McTevia, a turnaround consultant with Bingham Farms-based McTevia & Associates. "They’re going to try to restructure and reorganize the company, but that is not going to solve the problem they have in dealing with the problems in the industry.”

Borders’ biggest short-term problem is its 640 store leases, which cost about $1 billion a year. Bankruptcy can help fix that. The company will be able to exit leases on 200 unprofitable stores, which are collectively losing about $2 million a week, according to bankruptcy documents. (The list of stores expected to close includes the Arborland Center location on Washtenaw Avenue in Ann Arbor.)

But bankruptcy will not change the fundamentals of the industry. Borders’ revenue fell about $1 billion over the last two years for a reason.

Amazon.com is still the dominant player in book sales, rival Barnes & Noble is still a better managed chain, consumers are still buying cheap mass-market books from Walmart and Target, and Borders is still not succeeding in the emerging electronic books market.

“I do not think there is a market for a lot of physical booksellers in the country anymore,” McTevia said.

Perhaps, though, Borders can chart a path to profitability by reinvigorating customer service, rejuvenating its remaining stores and reconnecting with customers who have become disenchanted with the chain in recent years.

The company was able to convince GE Capital to provide $505 million in debtor-in-possession financing, which will help the firm continue to operate during the bankruptcy process.

University of Michigan bankruptcy law professor John Pottow, who correctly predicted in early January that Borders was headed toward a likely bankruptcy filing, said he is cautiously optimistic that Borders will survive.

“It’s as good as any company filing for bankruptcy can be,” Pottow said. “It’s like saying to you, ‘You’ve got a good cancer.’”

He added: “They’ve signaled to the market strongly that they’ve got a real good plan. They’re going to hack off a limb to save the rest of the body.”

Nonetheless, Borders must boost its online sales and figure out a way to capitalize on e-books as soon as possible.

The company is still haunted by a deal in which it outsourced its online sales to Amazon from 2001 to 2008 - a relationship now viewed as a potentially fatal mistake. By the time Borders launched its own website in 2008, Amazon was the market king.

Cutting into Amazon’s sales will be extremely difficult. In the third quarter of 2010, online sales made up about 2.7 percent of Borders’ revenue. In other words, the impact of Borders’ online business on its sales performance is negligible.

Meanwhile, generating additional income from e-books will be very difficult without a Borders-branded e-reader. With barely any cash reserves, the company had no way to develop its own e-reader while Amazon was launching the Kindle, Barnes & Noble released the Nook and Apple unveiled the iPad.

Without an e-reader, Borders opted to contract with Toronto-based Kobo Inc. to develop its own e-book store in hopes of securing 17 percent of the market by mid-2011. The company now sells e-books that can be read on most mobile devices after users download a free software application.

Bungling the emergence of web commerce was a key factor in ultimately driving Borders into disrepair.

But failing to get e-books right may determine whether a smaller Borders can ever be viable.

Contact AnnArbor.com's Nathan Bomey at (734) 623-2587 or nathanbomey@annarbor.com. You can also follow him on Twitter or subscribe to AnnArbor.com's newsletters.