Barnes & Noble Needs a Novel Idea

NEW YORK (TheStreet) -- Barnes & Noble (BKS) has made plenty of headlines recently, and it's been for all of the wrong reasons.

There's no denying this company still has value. But you will be hard-pressed to find any analyst willing to bet his or her reputation the bookseller can survive as a self-sustaining entity.

It certainly doesn't appear that William Lynch, the company's now-former CEO, believed in Barnes & Noble's long-term prospects. Lynch, whose background was in e-commerce, came to Barnes & Noble in 2010 at the onset of Barnes & Noble's e-books initiatives. He stepped down Monday, presumably because he no longer saw a competing brand.

I'm just speculating here, but given the fact that Lynch also resigned from the board or directors, I'm inclined to believe there were heated disagreements with the company's strategy, one that includes the decision to exit the tablet market altogether to pursue growth in the retail business. But we've been down this road before -- it's a dead end.

There is now speculation about what this move implies, including the obligatory mention of Microsoft ( MSFT), which is always rumored to be interested in buying Barnes & Noble. Again, this is not a new idea. Let's remember that expectations also ran high last year when Microsoft invested $300 million in Barnes & Noble for what amounted to roughly an 18% stake in the Nook business.

Although Barnes & Noble had plenty of use for the cash, it wasn't immediately clear what Microsoft was looking for in return. Fast-forward a year later: Not only has Microsoft failed to offer any rationale for its investment, but Barnes & Noble's future, particularly in the Nook business, is arguably worse off than when Microsoft stepped in.

Another thing: Doesn't it seem odd that after a full-year after Microsoft's investment that Nooks were still being powered by Google's ( GOOG) Android platform? Wouldn't it have made sense to have converted them to Windows? This fact introduces questions about whether Barnes & Noble and Microsoft ever had any real discussions about creating synergistic advantages.

Truth be told, I expected Microsoft to take over portions of the Nook business, seizing the reins in software and device designs and leading Barnes & Noble out of its rut. I was wrong.

Just to be clear, though, I'm not in any way blaming Microsoft for Barnes & Noble's failures. But I don't believe that Barnes & Noble showed the same urgency that it had in trying to transform its business from the traditional retail format to a model that could survive an Amazon ( AMZN) world and an iPad-dominated era.

For these reasons, I don't see how it makes any logical sense for Microsoft to do a deal, much less be willing to pay the estimated amount of $1 billion. At this point there isn't anything that Barnes & Noble has that Microsoft would need. Barnes & Noble has been a non-factor in tablets as Apple ( AAPL), Amazon and Samsung have left the Nooks virtually no share of the market.

Nook unit revenue fell 34% to $108 million in the recent quarter. This is while losses before interest, taxes and other items ballooned 130% to $177 million. Now investors are suggesting that Barnes & Noble was a victim of Apple's so-called "price-fixing" conspiracy for the e-books market. (I will go into Apple's "price-fixing" issue in more detail in a separate article.) But are we going to pretend that Barnes & Noble's business was not already permanently impaired prior to Apple launching its iBookstore in 2010?

That's too easy of an escape. Lest we forget, during the same time as Apple launched its iBookstore in 2010, Barnes & Noble Chairman Leonard Riggio, who was CEO at the time, proclaimed that Barnes & Noble would top 18% market share "overnight" once the company enters the e-book business.

Further, Riggio predicted the company would earn better margins from e-books than its traditional print books -- this is while suggesting the company's booksellers would be known as "e-bookevangelists." Now, after such strong promises and several years of losses, Riggio wants to take Barnes & Noble private.

This is while Riggio wants to rededicate the company's focus back to its retail book business -- the same business that has not been able to compete with Amazon. The same business that watched former rivals including Borders, Dalton, Media Play and several others get killed off by the online/e-books concept.

While privatization may shield Barnes & Noble from investors' pressure and scrutiny, it won't change the fact the company is flipping through pages of ideas to see what works.

Sadly, I can already see how this is going to end. Unfortunately for Barnes & Noble, the writing is on the wall. I believe management sees it. For investors, it's not the type of script that is suitable for books.

At the time of publication, the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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