Borders faces an ultimatum: Deal or dilute

With Borders' (NYSE: BGP) efforts at a sale of the entire company so far producing no results, the company is coming up on an important deadline. Under a deal struck with hedge fund manager William Ackman, if the company doesn't sell itself by October 1, Ackman's fund will receive options to purchase 5.15 million shares of the company's stock at $7 per share. Given that that represents a good chunk of the company's 60.5 million shares outstanding, any deal at a substantial premium would become a lot more expensive after October 1.

The Wall Street Journal reports (subscription required) that since "shares of Borders are trading close to the exercise price of the warrants, Mr. Ackman is likely to wait to redeem them until the shares are well above their current level. If Borders misses the deadline to complete a deal and issues the warrants, Mr. Ackman stands to benefit even more from a sale and may begin to exert pressure on Borders to secure a transaction quickly."

I'm not so sure about that. I think the problem is that no one wants to buy Borders -- Barnes & Noble (NYSE: BKS) reportedly lost interest after taking a look at the books -- and the higher cost to a potential buyer that will come with the options grant will make a sale much less likely, however badly Ackman wants it.

Ackman already has a 35.6% stake in Borders, and shareholders are lucky to have someone as smart as him on their side, pushing the board of directors to maximize value. But it may be too late.