Wednesday, September 22, 2010

ISS Sides with Burkle in B&N Matter

Institutional Shareholder Services (ISS) a major proxy-advisory firm, has recommended that shareholders in Barnes & Noble vote for the dissident slate backed by Yucaipa Cos. in the ongoing proxy fight.

B&N holds its annual meeting a week from today. Each of the other three major proxy-advisory firms, Glass Lewis, PROXY Governance, and Egan-Jones, has come down on the management's side.

This is in accord with the developing pattern. The folks at ISS are more likely to back insurgents than their colleagues.

In this case, ISS says: "Barnes & Noble’s history of poor performance, analysts’ lack of confidence in management’s ability to achieve its targets, corporate governance concerns regarding the company’s employment relationships with Leonard and Stephen Riggio, concerns about the independence of the current board, and questions over the rationale for the 2009 acquisition of Barnes & Noble College Booksellers from Chairman Leonard Riggio."

The book selling business is in the midst of a major transformation, and B&N has tried to keep ahead of the curve, bring out its Nook to compete with Amazon's Kindle and the other eReaders on the market for example. B&N has been increasingly aggressive over the last year in using its bricks-and-mortar stores to push the eReader on shoppers. That sounds a bit odd: "Buy this, and you'll never have to come here again!" -- but such is the transition to a digital age. Or to whatever the heck we are all heading for.

But some are skeptical of whether they really are out in front. Goldman Sachs, in a late-August report, said: "Results fell short of our forecast and, more importantly, reduced visibility on objectives going forward, given two factors: (1) Additional disclosure revealed surprisingly low gross profit margins for the .com business, reflecting both sharp, structural margin cuts in the traditional (physical) .com realm, and poor underlying profitability of the digital business in aggregate (Nook + ebooks). (2) Soft superstore sales, as results missed guidance issued two thirds of the way through the July quarter."

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