Borders employs more than 11,000 workers, including nearly 400 at its Ann Arbor headquarters.

Melanie Maxwell | AnnArbor.com

Borders, five months removed from its Chapter 11 bankruptcy filing, is running out of cash, and its hopes of surviving rest on an auction for the company's assets that is scheduled to take place Tuesday in New York.

A team of liquidators, led by Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC, received preliminary approval on Thursday to become the leading bidder in the auction.

They are stepping in to serve as the so-called “stalking-horse” bidder after Najafi Companies, a Phoenix-based private equity firm, pulled out of its tentative deal to acquire Borders. Najafi — which owns Direct Brands, operator of the Book of the Month Club and Doubleday Book Club — had offered to buy Borders, but that deal effectively collapsed after landlords and publishers objected.

The developments don’t necessarily mean Borders will be forced to liquidate, experts said. Other bidders — including possibly Najafi — could step in and outbid the liquidators.

“We are hopeful that Najafi Companies and other potential bidders who are interested in operating Borders as a going concern will choose to participate in the auction,” Borders said in a statement, using a business term that refers to a operating company. “In the meantime, as the process moves forward, we continue to conduct business as usual.”

But if no one else emerges as a competing bidder, the liquidators are likely to win the auction.

In that scenario, the 11,000 people who still work for the company, including nearly including nearly 400 at the corporate headquarters on Ann Arbor’s south side, would lose their jobs. If the liquidation is approved, going-out-of-business sales could start as soon as Friday, according to court filings.

Even if Najafi or some other entity steps in to acquire Borders and decides to continue operating the company, it’s likely that more stores will close, industry observers say.

“The ideal outcome is for the fewest number of bookstores to close as possible,” said Michael Norris, a publishing industry analyst with Maryland-based Simba Information.

Borders declined to make its CEO available for an interview, and attorneys for the company did not respond to a request for comment.

The bankruptcy auction process can be a dramatic affair in which prospective bidders jockey to acquire assets for a good price, trying to out-maneuver each other and convince lawyers that their bid represents the best route.

It’s a highly unpredictable process, but possible suitors may “come out of the woodwork” by the July 17 deadline for submitting bids, said John Pottow, a University of Michigan law professor and a national expert on bankruptcy proceedings.

“A lot of these auctions are really auctions,” said “This could be a really interesting, really tense July 19.”

Bankruptcy auctions look a lot like the NFL Draft — with “guys wearing suits,” “little deal teams” and each group setting up “their own war room” to strategize and develop counter bids, Pottow said. Bankruptcy auctions can even drag on deep into the night.

“Judges can pull all-nighters, too,” Pottow said. “This could be a late thing. But it could be over in 45 minutes, you never know.”

According to bankruptcy filings, Borders received interest from 86 possible investors or acquirers. That list turned into 20 parties that signed confidentiality agreements to examine Borders’ financial data — after which five parties filed “non-binding indications of interest.” Two of those, including Najafi’s offer, were “for the majority” of Borders’ assets, attorneys said in the filings.

The other offer was believed to be from Los Angeles-based private equity firm Gores Group, which was competing with Najafi to be named as the leading bidder for Borders, according to the Wall Street Journal.

If the liquidators’ bid turns out to be most lucrative, Borders attorneys would be obligated to recommend that the court approve a sale to the liquidators, who would shut down the rest of the company’s stores.

Borders, in a court filing, estimated that a liquidation of all of the chain’s assets would yield between $252 million and $284 million.

Najafi, which declined an interview request, had tentatively agreed to pay $215.1 million in cash and assume about $220 million of liabilities. The firm emphasized in a statement that it was still interested in buying Borders, but its plans were disrupted when publishers objected Wednesday to the proposed sale.

The publishers, speaking as a committee of unsecured creditors, told the court that Najafi’s bid did not prevent Najafi from waiting a few months to liquidate Borders, pocketing the cash and keeping valuable intellectual property. They also objected to a proposed $6.45 million fee that would have been paid to Najafi if Borders picked a different suitor to buy the company. But that fee was scrapped when Najafi removed itself from consideration as the stalking-horse bidder.

If Borders is to be liquidated, the publishers said they want the process to be handled by the liquidators Borders has already selected — not Najafi.

"From day one, our intention had been to keep Borders intact and to provide the best long-term outcome for Borders’ loyal customers, publishers, employees and the entire book industry," Najafi said in a statement.

In any bankruptcy auction, the leading bidder is always the “the presumptive, odds-on favorite party to win the auction,” Pottow said.

Even if Najafi bids and wins the auction, it’s unclear how many stores will remain open. Najafi has not commented on what strategy it would pursue if it wins the auction, but most industry observers expect more stores to close.

Borders — which currently operates about 400 stores, including more than 100 small-format locations — has closed more than 230 superstores since its bankruptcy filing.

The company had hoped to reorganize under Chapter 11 bankruptcy and reemerge in September as a profitable company, ready to capitalize on the lucrative holiday shopping season. But that plan fell apart as losses continued despite the closure of unprofitable stores.

For Ann Arbor — the home of Borders since it was started 40 years ago as an 800-square-foot shop on South State Street by brothers Tom and Louis Borders — the outcome of the auction is of supreme importance.

It’s not clear how a sale of Borders as an operating company would affect the 400 workers employed at Borders’ headquarters or the two remaining stores in Washtenaw County: the flagship location on Liberty Street in downtown Ann Arbor and the superstore on Lohr Road in Pittsfield Township.

Private equity firms often decide to consolidate operations in a bid to restructure struggling companies and return them to profitability. But they often choose to invest in technology development or infrastructure needed to make the company successful.

One of Borders’ many challenges is that the company has had no spare cash to invest to develop its own electronic books reader or upgrade its stores in recent years.

“Borders has had a lot of problems over the past eight years and some of it has been of their own making and some of it has been poor retailing circumstances,” Norris said. “What Borders needs more than anything is a clear vision in terms of what it’s going to do for the next several years as a retailing entity, and it also needs to create one cohesive system to satisfy the customer.”

He added: “There needs to be leadership at Borders that ties everything together and really explains to people why a bookstore matters.”

Contact AnnArbor.com's Nathan Bomey at (734) 623-2587 or nathanbomey@annarbor.com. You can also follow him on Twitter or subscribe to AnnArbor.com's newsletters.