From MSNBC
Amazon.com investors need to take
closer read of Barnes & Noble deal
B&N's planned acquisition of Ingram may face obstacles — but if it goes through, Amazon should watch out
Barnes & Noble's deal with Ingram Book Group will bring 80 percent of B&N's customer base within overnight delivery range of a Barnes & Noble-owned distribution warehouse.
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
Nov. 10 — Why haven't Amazon.com's shares dropped through the floor in the last couple of days, while Barnes & Noble's have shot through the roof? That, of course, is what one might have intuitively expected in the wake of the startling announcement by Barnes & Noble last week that it was acquiring the major wholesale supplier to its arch-rival online bookseller, Amazon.com.
Barnes & Noble buys Ingram Book
BUT THE NEWS that the book-selling giant headed by ex-prizefighter, Leonard Riggio, has agreed to pay $600 million in cash and stock to acquire privately held Ingram Book Group Inc. of Tennessee barely nudged the share prices of Barnes & Noble or Amazon.com.
Following the announcement on Friday, Nov. 6, and through the trading day Monday Amazon.com's shares lost less than $1.50 to close at $126.87 on Monday, while Barnes & Noble's stock price had climbed a mere $2.50, to $33.50 per share.
But by Tuesday morning it was Barnes & Noble that was weakening, falling back to $32.25 in mid-morning trading, while Amazon.com was once again rising, to nearly $135 — exactly the opposite of what one might normally have expected. We'll see why in a minute, as B&N is trading — as it always has — on the fundamentals of the company, whereas Amazon's price is being driven by momentum hedge funds and day traders, who are pushing it steadily higher whether there are fundamental reasons to support the run-up or not.
Why the reaction from Wall Street? A quick survey of market-savvy investors and fund managers turned up a prevailing sentiment that the deal will never pass muster with federal antitrust regulators.
“It'll never fly,” summed up Jeffrey Hooke, the well-known Washington, D.C., money expert and author of ‘Security Analysis on Wall Street' (John Wiley & Sons, 1998). An official at the Department of Justice confirmed that DOJ's antitrust division would review the deal, and regulators at the Federal Trade Commission are expected to do the same.
Barnes & Noble to buy Ingram Book
AMAZON VULNERABLE
However Washington responds, the announced deal underscores just how vulnerable Amazon.com is to competition from the likes of an outfit like Barnes & Noble, which was late to wake up to the promise of Internet marketing but is now throwing very large corporate resources into the game of catch-up.
Barnes & Noble vice chairman Stephen Riggio defends the company's planned acquisition of Ingram in an interview with CNBC Nov. 9
A merger of Barnes & Noble and Ingram Book Group — a unit of privately held Ingram Industries, Inc. — would bring 80 percent of B&N's customer base within overnight delivery range of a Barnes & Noble-owned distribution warehouse. Standard delivery times for shipments via Amazon.com now run as long as a week and a half. Barnes & Noble would also be able to capitalize on an under-exploited Ingram operation in the reissuance of out-of-print titles.
Though Barnes & Noble stressed that the Ingram operation will continue as usual to supply independent bookstores along with rivals like Books-A-Million and Borders, Inc., and of course Amazon.com, one can easily imagine a situation eventually developing in which incoming orders for Barnes & Noble customers get processed first while those of rival customers get pushed to the back of the line.
This, in turn, could wind up seriously undermining the willingness of customers to place orders with a Barnes & Noble rival when they can get the same product quicker and cheaper by ordering through Barnes & Noble itself.
INVESTORS DISMISSING FACTS
In fact, though it isn't yet widely appreciated among investors, Amazon.com's book business is already beginning to slow — a main reason why the company is now seeking to diversify into fields like music retailing. In recent quarters, the growth rate of book sales revenue at the company has slipped dramatically from its earlier torrid pace, falling sequentially from a 74 percent rate of gain in the fourth quarter of last year, to a 21 percent increase in the quarter ended Sept. 30.
Barnes & Noble, Inc. (BKS)
price change
$32.81 -0.688
Full quote data:
price:
$32.81
change%:
-2.05%
volume:
793,700
day high:
$33.50
day low:
$32.06
Amazon.com, Inc. (AMZN)
price change
$131.75 +4.875
Full quote data:
price:
$131.75
change%:
+3.84%
volume:
5,729,300
day high:
$140.00
day low:
$128.13
Data: Microsoft Investor and S&P Comstock 20 min.delay
That can only get worse now that retailing mega-monster Wal-Mart Stores Inc. has precipitated on-line price war in the book sector. Wal-Mart is currently selling paperback titles such as Sebastian Junger's best-selling sea epic, ‘The Perfect Storm,' for $3.84 plus a flat fee of $3 for shipping no matter how many different titles are ordered. Total for a single-copy order of the Junger title: $6.84.
By contrast, the same order — available through either Barnes & Noble or Amazon.com — would cost $5.59 plus $3.00 per shipment, plus $0.95 per book within each shipment. Total for the order: $9.54.
For almost any other sector except the Internet, trends such as those would cause a serious reconsideration of a company's growth prospects. But the apparent willingness of investors to dismiss even the fact that the two parties involved in last week's announced deal — Barnes & Noble and Ingram Book Group — think the sale will indeed be approved by regulators, suggests that prudent stock analysis no longer prevails (if indeed it ever did in Internet stocks). At least in the case of Amazon.com, investors seem to have become blinded instead by a kind of zealous faith that whether the news is good or bad, the company's shares can only go up.
In fact, the deal does represent a threat to Amazon.com, and no one was quicker to spot it than Amazon.com's Chairman, Jeff Bezos, who quickly fired off a press release saying the deal raised unspecified “questions” for the industry — a coy way to hint at a looming onslaught of predatory business practices by Barnes & Noble.
Indeed, the differing behavior of the two stocks in the wake of these events suggest plainly enough that investors in Amazon.com seem determined not to see any risks at all.
For its part, Barnes & Noble tends to trade on fundamental valuations of the company — mainly because the company has a track record of actual, reported earnings from which to make estimates about future performance.
But weigh that against the judgment of investors in Amazon.com that the deal represents no threat whatsoever and that, in its wake, the company is now actually worth nearly $420 million more than it was before the deal was announced.
Who's right? With momentum hedge fund operators and day traders now accounting for the overwhelming bulk of all trading in Amazon.com, my own guess is that the Barnes & Noble side has the better take on the situation since the Amazon.com side is in the hands of investors who aren't interested in valuation issues in the first place. Good luck to them, I say, because when they all pile in to the down-elevator in the next correction it's once again going to be a quick ride from the skies back to street-level.
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