Reader's Digest ( RDA) is providing Wall Street with an abridged version of how not to do a corporate takeover. But these useful tips won't be found in a recent copy of the publishing company's pocket-sized magazine. Rather, they are disclosed in a recent regulatory filing chronicling Ripplewood Holding's proposed $1.6 billion buyout of Reader's Digest. The Pleasantville, N.Y. publisher reveals the private-equity firm twice offered to pay $18.50 a share for the company, almost 9% more than the $17 a share takeover price that Readers Digest's board ultimately agreed to in November. It appears Reader's Digest's fumbling of the lengthy negotiations with Ripplewood may have cost shareholders up to $150 million in a buyout premium. The lower takeout price also raises questions about the performance of Goldman Sachs ( GS), the company's investment bank, in trying to auction the company to the highest bidder. Officials with Reader's Digest and Goldman Sachs could not be reached for comment. Reader's Digest, in a regulatory filing late Friday, discloses that in March it received an unsolicited proposal from Ripplewood to buy the company for $18.50. At the time, Reader's Digest shares were selling for $14.40. But the company's board rejected the proposal and Ripplewood's request to enter into a period of exclusive negotiations aimed at ending in a leveraged 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), 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.
A few days later, Ripplewood came back with a revised bid for Reader's Digest. But this time it was proposing to pay just $16.50 a share for the company. The private-equity firm says the lower bid reflected the precipitous decline in Reader's Digest's stock and "the uncertainty and operational risk associated with achieving'' the company's earnings estimates. Not happy with the turn of events, the board instructed Goldman Sachs "to continue the strategic process and, in particular, to determine if Ripplewood would pay a higher price.'' In the end, however, no other bidder emerged for Reader's Digest. Ripplewood did up its bid to $17, but that's only because shares of Reader's Digest had bounced back and were trading above $14 by mid-October. The filing notes that if the buyout is approved, Goldman Sachs will receive an $11 million banking fee for its effort. Given the way the tortuous negotiations with Ripplewood evolved, Reader's Digest shareholders can only wonder whether the bankers earned their fee.