Behind Kobo’s market success was a grimmer financial story. By the summer of 2011, the start-up was chewing through millions a month, a drain that confirmed Schwartz’s worst fears about technology investments. “They kept talking about burn rate and I said, ‘ding, ding, ding, ding, this is 2000 all over again,’” Schwartz says. The financier had personal reasons for being wary about technology ventures. His stepdaughter Andrea Reisman had raised close to $150 million to launch her online pet supply business, Petopia.com, during the height of the dot-com boom—only to see it virtually wiped out when the bubble burst. Kobo, Schwartz says with a shake of his head, was costing “a lot of money.”
The financial drain came at the same time that Indigo’s traditional book sales and profit margins were shrinking. The quarter that ended last Oct. 1 saw a net loss of $35 million, a huge plunge from a $1.8-million loss a year earlier. Shareholders started to bail from the stock, driving the price to a 52-week low of $6.43 in November, 2011, less than half its peak of $15.53 in October, 2010.
But as the bad news mounted, the Kobo story was attracting attention from an unexpected suitor.
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Although little known outside Asia, Rakuten Inc. is Japan’s largest e-commerce company. At age 46, CEO Hiroshi (Mickey) Mikitani personifies a new generation of Japanese entrepreneurs who, contrary to the tradition of doing all dealmaking within keiretsu networks, are making acquisitions globally. Most of the company’s employees have been taught to speak English; in 2010 and 2011, Rakuten went on a global buying spree that included the acquisition of U.S. online retailer Buy.com and Internet retailers in France, Indonesia, Brazil and Germany.
In August, 2011, Mikitani asked for a meeting with Kobo’s owners. By the time they met him in the middle of the month, Reisman, Schwartz and Serbinis knew to expect a takeover offer. Despite Kobo’s financial challenges, Reisman was ambivalent about selling the division that had grown to global acclaim so quickly. She designated her husband to be her negotiator, but she made it clear she wanted the moon for Kobo—$400 million, a price that she today concedes was “unbelievable.”
What the Kobo team didn’t fully realize at the time was that Rakuten had a huge strategic need for a tablet. According to sources, the Japanese company had looked at acquiring other tablets, including Barnes & Noble’s Nook, but had been unable to strike a deal. By the time they came to Toronto, the company’s executive team had become concerned that Amazon might start selling its Kindle globally, threatening Rakuten’s position as one of Asia’s leading online retailers.
It took less than three hours for the Indigo team to strike a deal with Mikitani and his chief negotiator, Yoshihisa Yamada. After opening with a bid of little more than $250 million, the Rakuten team quickly closed in on Reisman’s ambitious asking price. With a handshake, Mikitani agreed to buy Kobo for $375 million.
It was an incredible price for a two-year-old Canadian venture that was likely years away from earning a profit. But what Reisman remembers about the session is that she left with a heavy heart and tears welling in her eyes. Her husband puts it more bluntly. “Heather was unbelievably emotional about it. She didn’t leave with tears in her eyes; she was crying. She was really, really upset.”
It was not long before tears were replaced with sighs of relief. Just as a window may open to new technology entrants quickly, it can slam down sharply. For Kobo, there were a number of finger-crushers. By the fall of 2011, Borders had become such a financial black hole that its creditors decided to liquidate the chain, depriving Kobo of a U.S. distributor. Then Playbook, the Research In Motion tablet that was set to use a Kobo application as its exclusive e-reader, was widely panned—“a dud,” in Reisman’s words.
Without the selling heft of Borders or a home on a mass-market tablet, Rakuten started to get cold feet. To save Reisman’s deal, dutifully called Project Queen by Indigo’s legal advisers at Torys, the book monarch, her husband and Serbinis agreed to meet with Mikitani and Yamada in October.
The opening offer from Mikitani and Yamada when they sat down for talks in the Four Seasons Hotel in Paris was worse than Reisman expected. They wanted to lower the purchase price by $75 million to $300 million. Once again Reisman handed the negotiations to Schwartz, and once again she demanded more than Rakuten offered. “I said ‘Gerry, go back and tell them $315 million or I am literally walking out.’” If Rakuten was offering $300 million, Schwartz knew that $315 million would not likely be a deal killer. A few hours later, the two sides shook hands, and Reisman once again walked away with her terms.