How Reader's Digest Bungled a Buyout

The company's board feared Ripplewood's "requested due diligence activities could distract our management and disrupt our operations." Worse, the board harbored doubts about its own stock valuation and worried that "Ripplewood's proposed price might not be achievable, and might not receive the required financing after completion of due diligence by Ripplewood."

But Ripplewood didn't go away.

In July, it was back again with the same $18.50 a share offer, even though Readers Digest's stock had fallen to $13.44 a share -- a 6% slide since Ripplewood's initial bid. Again, Ripplewood sought to open exclusive negotiations with the publisher and once again it was rebuffed.

But this time, the company's board didn't engage in any hand wringing about the current state of its market value, according to the regulatory filing. Instead, it formally hired Goldman Sachs and directed the investment bank to contact other potential private equity buyers.

Over the next few months, the investment bank lined up at least five other potential buyers, none whom are named in the filing. But the group of investors led by Ripplewood, which also includes Merrill Lynch(MER Quote), is the only private-equity consortium to ever submit a formal bid.

Meanwhile, as the bankers at Goldman Sachs tried to generate a late-summer bidding war for Reader's Digest, the publishing company's stock continued to sink. By Sept. 22, the stock was down to $12.45 a share and prospects for a buyout grew bleaker.