Investors Wary Over Borders and B&N Share Boost

Take two struggling companies in a rapidly declining industry, add the fact that the handful of analysts that still follow them are not impressed with a new possible deal to merge the two companies, and what do you get? Two surging stocks.

This is what happens when a well-known activist investor suddenly becomes a potential match-maker. I’m referring, of course, to Pershing Square hedge fund manager Bill Ackman, who on Monday morning offered to finance a $16 per share takeover of Barnes & Noble by Borders Group, both of whose stores seem to be vaporizing from local malls quicker than you can say e-reader.

Speculators—but most likely not the savvy merger arbs—were all giddy Monday morning, bidding up Borders’ beaten down shares by 37 percent to $1.50, less than the price of a bookmark or a cup of coffee sold in their stores.

Barnes & Noble’s shares surged more than 15 percent to something over $15 a share.

Until Ackman came along there was no reason to buy these shares. Brick and mortal booksellers are losing share to Amazon.com and other online companies.

On the same day Ackman’s curious investment was disclosed, Google announced the launching of its own internet book store, sending its stock up by 5 percent on the news.

Meanwhile, Barnes & Noble recently reported its third straight quarterly loss, and this time much larger than expected. No wonder its stock is down 67 percent or so from its March 2006 high.

Borders’ shares have suffered more. They were down more than 95 percent since the same period, until today’s upward move.

While the speculators who like to get all excited about activists have giddily bid up the stocks of both book sellers, the Wall Street pros who follow them and presumably know the companies better are unimpressed. At least two analysts on Monday maintained “Hold” recommendations.

Michael Souers, who follows both stocks for S&P Equity Research, Monday morning maintained his “Hold” rating on Barnes & Noble, conceding $16 is a “reasonable offer.” His current price target is $15.

He added he does not believe Leonard Riggio, Barnes & Noble’s founder, chairman and largest shareholder, will find it sufficient. “In addition, we think a merger of the two bookstores would be unappealing,” to Barnes & Noble, he told clients, citing its digital advantage over Borders as well as the costs associated with closing numerous redundant stores.

David Schick of Stifel Nicolaus told CNBC he maintained his “Hold” rating as well. “We are seeing a lot of entrants to e-books,” he said.

And although he did concede that publishers and authors do want to see books on a bookstore table, Schick stressed: “We’ll see how e-books go.”

For the meantime, the stocks are up on Ackman’s offer. Call it the activist premium. Ackman did not return a phone call.

After all, there does not seem like there are any other strong reasons to push up these stocks.