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Posted on Mon, Mar 22, 2010 : 5:59 a.m.

Borders faces critical April 1 loan deadline as it hires for Ann Arbor-based digital division

By Nathan Bomey

A New York hedge fund manager may control the fate of Borders Group Inc., even as the distressed Ann Arbor-based book store chain advertises to hire several people for its digital division.

Borders faces a critical April 1 deadline to repay a $42.5 million loan owed to Pershing Square Capital Management, a hedge fund managed by investor William Ackman, who’s already renegotiated the loan three times.

Ackman could opt to extend the loan again, giving Borders more runway to pursue a profitable business model. But if he decides to force repayment, Borders may be forced to fork over cash vital to its daily operations.

Borders had $32.8 million in cash as of Oct. 31, down from $38.4 million at the same point in 2008.


Borders employs 646 workers at its headquarters on Ann Arbor's Phoenix Drive.

Turnaround experts familiar with major corporate restructurings told that they’re concerned Borders won’t avoid bankruptcy much longer.

A spokeswoman for Ackman said he was not available for comment.

“Borders has poor operating revenue and not a lot of cash,” wrote Lou Kasman of Ann Arbor-based consultancy Marketing/Management Associates LLC, in an analysis conducted on behalf of “I don’t see strong cash flow, so meeting debt is questionable. Whether the lenders will change payment requirements is the question.”

Borders’ financial trajectory has led to reports that the firm is laying off inventory managers, weeks after the company cut its corporate head count by 10 percent.

Borders spokeswoman Mary Davis declined to make executives available for comment.

“Borders is always looking for opportunities to improve performance and profitability,” she said in an e-mailed statement. “Any recent changes are a continuation of our efforts."

With speculation swirling about Borders' future, the firm has quietly posted job openings for six software engineers and programmers on the Web site of economic development group Ann Arbor SPARK.

The firm is also seeking a new leader for its digital operation.

"As far as the job postings, as a matter of doing business we are actively working to fill positions as we need to as other organizations do," Davis said in an e-mail. "No news there."

By most accounts, Borders narrowly dodged liquidation during the height of the financial crisis in late 2008 and early 2009. The firm aggressively cut costs and streamlined its operations to escape bankruptcy in the short term - but Borders’ long-term viability is still in question, said Jim McTevia, managing partner of Bingham Farms-based turnaround consultancy McTevia & Associates.

“Borders is a classic example of a company that is struggling for survival,” McTevia said. “I would say that if somebody doesn’t buy Borders and merge them into an operation that Borders will probably fail and liquidate.”

That decision may fall to Ackman, Borders’ largest individual shareholder.
Ackman told CNBC in February that he envisions a “low probability” of Borders filing for bankruptcy.

Still, Borders, which employs 646 workers at its headquarters on Phoenix Drive, faces numerous challenges, including:

-A massive real estate footprint. Borders, which had 513 super stores in the U.S. as of Oct. 31, faces annual lease costs of $562 million. Those leases could be renegotiated or shed under bankruptcy protection.

-Revenue crisis. Declining sales show no signs of reversing, which reflects general industry trends. Consumers are flocking to the Internet to buy books, and book industry experts said competitor Barnes & Noble is beating Borders on the in-store experience. Borders said in January that its holiday sales slipped 13.7 percent for the 11-week period ended Jan. 16. The firm is expected to report its full fourth-quarter results within the next two weeks.

“Barnes & Noble is on the same downturn in sales and profits, but Barnes & Noble is much more diverse and has a stronger balance sheet,” Kasman said.

-Leadership turmoil. Ron Marshall, who took over for ex-Borders CEO George Jones in early 2009, resigned in January 2010. New CEO Michael J. Edwards, the company’s executive vice president and chief merchandising officer, has not publicly identified any major turnaround initiatives.

“The question that needs to be addressed by Borders’ management and Board of Directors: When are you going to face reality rather than thinking things will change by osmosis?” Kasman said.

Nonetheless, investors seem to be gaining confidence in Borders shares. The stock, which had briefly slipped below $1 a share in recent weeks, was trading back above $2 late last week.

Still, Borders’ long-term financial health is uncertain.

“We plan to operate our business and execute our strategic initiatives principally with funds generated from operations, financing through the credit agreement, credit provided by our vendors and other sources of new financing as deemed necessary and available,” Borders said in an SEC filing Dec. 4.

“However, there can be no assurance that we will achieve our internal sales projections or that we will be able to maintain our current vendor payable support or borrowing capacity, and any failure to do so could result in our having insufficient funds for our operations.”

McTevia said the general industry trends are the greatest concern, as surges and consumers begin to embrace e-book readers like Amazon’s Kindle, Barnes & Noble’s Nook and Apple’s iPad.

“You’re seeing the beginning of a decline in the industry that sells book to the consumer in the store,” McTevia said. “I think eventually you’re going to see Barnes & Noble struggle.”

McTevia said he would advise Borders to hire a consultancy that specializes in turnaround strategies. He speculated that it’s possible Borders is already quietly working with a turnaround team.

Borders should “hire a sophisticated turnaround company to get in there and try one last time to reorganize the company outside of court and get the creditors together and get the bondholders together and try to work something together as opposed to letting the company failing.”

But Kasman said creditors will want to see a defined strategy for reversing Borders’ declining revenue. He suggested Borders try selling video games to capitalize on the success of firms like GameStop and generate foot traffic.

“Here is a test for Borders management and its Board of Directors - why haven’t you moved on new innovative revenue streams?” Kasman said. “If I was going to lend them money now, that’s one of the big questions I’d ask. To me, that is the major problem for Borders’ business to grow again and make money; seems like they see themselves as only a book seller.”

Contact’s Nathan Bomey at (734) 623-2587 or or follow him on Twitter. You can also subscribe to Business Review's weekly e-newsletter or the upcoming breaking business news e-newsletter.


David Briegel

Mon, Mar 22, 2010 : 7:13 p.m.

All "Genius" resides at the top. Stifle the "resistance". Why should "they" rock their own boat? Bite the hand that feeds them? Failure gets a big contractual buy out! Success? Who cares? Fiduciary Responsibility? An Oxymoron for the boards of directors for so many banks, auto companies, and other American corporations. Formula For Failure!

Jon Saalberg

Mon, Mar 22, 2010 : 3:53 p.m.

Between the huge spaces they're on the hook for, and consumers' use of eBay's and Amazon, Borders seems headed for an unfortunate place in retail history. Add to those issues a totally inadequate website, even after a redesign.


Mon, Mar 22, 2010 : 2:51 p.m.

@Brian and @Bob - I totally agree. Plus (as a current Borders employee) include the manner in which money was spent when the company was making money. The company has scraped lots and lots of 'investments' that were expensive. Reminds me somewhat of GM - behind the curve and poor spending habits. @Bob - the leadership is still making money. Employees haven't had any salary increase in 3 years, but a plan was just announced for executive bonuses for this year and 2011. I know bonuses are an accepted part of executive culture and that these are small in comparison, but this definitely factors into employee morale. I think (using the above paragraph as evidence) that the culture at Borders has changed enough that employees no longer feel connected, engaged, or valued. The old-timers here talk about how great it used to be and how they had a voice and the environment was collaborative and creative. It is certainly no longer that way. Most employees don't feel valued and so don't work with the kind of dedication or enthusiasm that they could. I think that is an important piece of why Borders isn't doing well.


Mon, Mar 22, 2010 : 1 p.m. hit the nail on the head! Those 4 things are leading to Borders demise...and as a a former 9 year employee at the corporate office...I would add #5 - Terrible management at all levels, some of them couldn't manage their way out of a paper bag, yet they were getting their fat paychecks every month so why change? I think we all know why now...too little, too late.

Brian Bundesen

Mon, Mar 22, 2010 : 11:47 a.m.

I hold out fading hope that the company can somehow restructure under a bankruptcy, or otherwise save the jobs of some great people. Unfortunately, a sadder fate may be inevitable. I had the opportunity to work for Borders for eight years during it's largest growth and profitability. The reasons for it's decline are many. Some self-inflicted, but mostly due to the overall economy and technological advances. This is just my two-cents, but I did have an inside front row seat to the ups & downs. IMO, there are 4 major factors contributing to Borders' demise: 1) iPod: Back in the 90's, one of Borders' competitive advantages was it's fantastic and diverse music inventory. At the time, I think everyone underestimated the impact of the iPod, plus Borders was too over extended in commitments to the retail space needed to carry all that inventory. As a result, when CD sales dropped to multiple months of consecutive double digit negative comps, it became a hemorrhage of red ink that impacted the profitability of other departments. 2) Walmartification of Best Sellers. Once Walmart and other Big Box retailers were allowed to sell the block buster books like Harry Potter at a loss, Borders' loyal customer base eroded quickly. They couldn't compete. Bookselling was no longer a level playing field. 3) Online: Amazon, etc. Borders was simply too late into the game. It was understandable at the time, but Management did not see Amazon as a sustainable business model. 4) Revolving Door CEO's. From the start, and during most of it's corporate lifetime, Borders' best asset was it's people. This was known and appreciated for the most part up until the 2000 - 2001 time frame, when books and staff began being treated like interchangeable expendable commodities. I could go on, but this topic has been well hashed out elsewhere. Suffice it to say that Barnes & Noble seems to have found the right formula regarding leadership. They're in the same business, with similar models and markets. Even though they're struggling too, they're better positioned to survive. Again, I hope a scenario can unfold which allows for the saving of those jobs. Borders is what brought me to Ann Arbor, and is a huge part of what makes Ann Arbor a great town.


Mon, Mar 22, 2010 : 10:56 a.m.

if you don't have enough money to operate sooner or later you shut the doors.seems that time is upon BORDERS


Mon, Mar 22, 2010 : 10:55 a.m.

eReaders, books-on-Blackberry, books-n-music players- these tools have a place, and are, on occasion, preferable to print. But they are about as pleasant to gaze into as the surface of the sun, and as comfortable to handle as a cactus. Texting's devastating impact on society is bad enough- the human eye would never return to reality should such devices take over entirely. Neither chain can compete with the Amazonian mix of selection, convenience and price, and will likely dissolve, surely and immediately in the case of Borders, but the existential assault on the print medium must stop. If we took the word of these persons, we should simply hand every book over to be scanned and then toss them into the shredder to be used as compost- after all, the shelves are valuable server space.


Mon, Mar 22, 2010 : 10:01 a.m.

E-reader is the future. For now we all need to support this local company that employs so many people. Skip B&N for Borders to show support.


Mon, Mar 22, 2010 : 8:29 a.m.

Bookstores cannot survive the eReader onslaught that's coming. They are the modern equivalent of an ice delivery company after home refrigerators were invented. If I were in charge of the company, I would embrace the iPad and Kindle with self-published educational books and software and close all unprofitable stores, one by one, until there are only a few left.


Mon, Mar 22, 2010 : 7:50 a.m.

I am not much of a book reader so I never shop at Borders, the wife does sometimes though. It does look as though they are not going to make it much longer. Washtenaw County cannot afford to lose these high paying jobs and the taxes Borders pays. Very sad indeed.


Mon, Mar 22, 2010 : 7:42 a.m.

This is sad news for a once proud company.

Anonymous Due to Bigotry

Mon, Mar 22, 2010 : 6:21 a.m.

They could save some money by closing that "experimental store" over in the Best Buy shopping center. That place is terrible. It seems to be a marketing experiment in getting people to impulse buy in a bookstore which seems kind of ridiculous.


Mon, Mar 22, 2010 : 6:03 a.m.

They're doomed. It's been a long time coming, but the end is near. I feel bad for the employees who will lose their jobs. I'm floored to think that there are only ~650 people left at the HQ. There were well over 2000 when I worked there. Unbelievable.


Mon, Mar 22, 2010 : 5:22 a.m.

Dead store walking. I'll be the first in line for the liquidation sale.