NEW YORK — Buying out Barnes & Noble would give its much smaller rival, Borders Group, a bigger and firmer stake in the digital world, but some analysts said combining the two largest companies in the shrinking realm of traditional book selling could hurt both – perhaps irreparably.
Activist investor William Ackman and his investment firm announced in a regulatory filing Monday that they had offered to finance a $963 million bid by Borders for Barnes & Noble Inc.
Under the deal, Pershing Square Capital Management would sponsor a bid by Borders of $16 per share for more than 60 million outstanding Barnes & Noble shares. The news sent Barnes & Noble's shares up 10.6 percent, or $1.41, on Monday to close at $14.69.
Both book sellers face increasingly tough competition from much bigger merchants online and in stores, including Amazon.com, Target Corp. and Wal-Mart Stores Inc. And both have said they are relying for growth on electronic books and readers, a still-small arena where another giant, Google Inc., launched its own bookstore Monday.
Barnes & Noble, which is based in New York, debuted its reader, the Nook, last year and has invested heavily in its electronic bookstore, while Borders sells readers and e-books on a smaller scale through a partnership with Kobo.
The financing from Ackman, who owns 37 percent of Borders' outstanding shares, would let Borders to make a "quantum leap" in the e-book space, Morningstar analyst Peter Wahlstrom said.
"It's is a sign Borders is looking to catch up," Wahlstrom said.
Borders spokeswoman Mary Davis said the company, which is based in Ann Arbor, Mich., welcomes Ackman's "participation."
"We have previously expressed to Barnes & Noble our interest in such a business combination, and we look forward to continuing those discussions," she said.
Barnes & Noble had no comment.
A combination could save the companies money through consolidation. But Simba Information analyst Michael Norris said combing would be a distraction to the companies in the short term and wouldn't help them with the larger challenges traditional book sellers face.
"(They) would spend a year thinking about what overlapping stores to close, and at least another year combining systems and operations while trying to hang on to talent with both hands," he said. "While that's going on, rivals like Amazon, Apple and Google will just be steaming ahead unimpeded."
Census data show sales at physical bookstores have hovered around $17 billion since 2005 and edged down less than 2 percent to $16.91 billion in 2008, the last year data for which is available.
Electronic books are expected to generate nearly $1 billion in U.S. sales this year and $1.7 billion by 2012 as more people buy readers and use tablets and other computers to read e-books, according to Forrester Research.
The offer of $16 per share is about 21 percent above Barnes & Noble shares' closing price Friday of $13.38.
But analysts said the price still might not be enough for the leaders and shareholders of a company that just won a bitter battle against billionaire investor's Ron Burkle's effort to increase his 19 percent stake in the company.
"While we think this is a reasonable offer, we do not anticipate that Leonard Riggio, Barnes & Noble's founder, chairman and largest shareholder, will find it sufficient," Standard & Poor's analyst Michael Souers said in a note. "In addition, we think a merger of the two bookstores would be unappealing to Barnes & Noble, which holds a digital advantage over Borders, given costs associated with closing numerous redundant stores."
Barnes & Noble put itself up for sale this year during the dispute with Burkle and his Yucaipa Cos., who proposed replacing three board members with its own slate and opposed ratification of a poison pill limiting individual stakes in the company to 20 percent.
Yucaipa Cos. had no comment Monday on the proposal from Borders.
Barnes & Noble said late last month it still is meeting with "both strategic and financial institutions" but that the talks might not result in a sale or any other deal.
Borders is to report its third-quarter results on Thursday. Its shares rose 31 cents, or 28.7 percent, on Monday to close at $1.39. They have traded between 85 cents and $3.29 the past year. They fell 8 cents after hours.
Barnes & Noble shares have traded between $11.89 and $24.71 over the past year. They were unchanged after hours.