Wednesday, November 26, 2008

How Borders Group Returned Value to Nobody

The poster child of poor capital management might just be Borders Group.

Borders, which runs one of our favorite book stores in the country (Union Square in San Francisco) and goes by the ticker BGP, is the now-beleaguered bookseller spun out of K-mart long ago in happier times.

Borders is also one of those companies that so desperately wanted to make Wall Street’s Finest happy—not to mention its own shareholders—that it spent all its cash, and more, to buy back stock.

“Returning value to shareholders,” it was called back in February 2005, when Borders management proudly announced a $250 million share repurchase plan, and the stock price was $25.

Wall Street’s Finest were, of course, delighted, and the company received the kind of “attaboys” that caused a long list of management teams to pursue the greatest value-destroying fad in American business history. In this case, it crippled a once wonderful chain of bookstores:

“The stock’s cheap, in our opinion, and the company seems to agree,” [hedge fund manager Bill] Ackman said last week at the Value Investing Congress in New York. Borders…has “one of the most aggressive share-repurchase programs I’ve ever seen.”

—Bloomberg LP, November 2006

In the end, of course, that repurchase program was far too aggressive.

Five years ago Borders had a $1.9 billion market value and more cash than debt on its books. Today, Borders has a $50 million market value (yes, that’s right, $50 million) and more debt than cash. Like, $525 million in debt against $38 million in cash.

Oh, and the stock’s current price? $1.00 a share.

“Returning value to shareholders?” No. “Mortgaging the future,” at best. “Destroying the company,” at worst.

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Mark said...

One could alternatively argue (and I will, because I like to "alternatively argue")that retail bookstores are a slowly dying business anyway, so at least those buybacks-- while perhaps not as optimal as cash dividends-- were preferable to letting the company's declining business simply bleed that money away over the ensuing years.

JB said...

No question companies and CEO's mismanaged stock buybacks over the last 5 years. Many of those companies are hurting today from heavy debt loads however I think it's important to put the BGP buyback into context. The CEO began in mid July of 2007. In Q3 and Q4 (ignoring the partial month of July) the company bought back $123.7mm and $148.7mm...that equates to roughly 19% of the total dollars allocated to buybacks since Q4 2004. Clearly that $272mm would have been better spent paying down debt but at least after getting a better understanding of the company /industry and economy the buybacks stopped and the focus shifted to paying down debt despite the stock slide from the low 20's to below a could have been even worse if they didn't stop when they did.

Ed said...

Jeff, here is a good one from this side of the Atlantic: