J. K. Dietrich - FBE 532 – Spring 2006 Hostile Bid for Red October February 2, 2006

J. K. Dietrich - FBE 532 – Spring 2006 Sources of Value to Acquirer u Cash: $.70 per share u Land: $ 9.44 per share u Brand name Red October –Lack of national distribution –Lack of growth u Cost efficiencies –Rising costs, falling profits projected –Rising SG&A (management comfort?)

J. K. Dietrich - FBE 532 – Spring 2006 Valuation Analysis

J. K. Dietrich - FBE 532 – Spring 2006 Using Comparables u Differences in multiples –Currencies –Risks –Product and brand names (Red October) –Marketing strategies (global versus regional) u Russian stock market conditions –Low multiples –Thin markets, low liquidity

J. K. Dietrich - FBE 532 – Spring 2006 Sources of Value u Cash flows –Why no growth in production –Effect of translation to dollars (ruble inflation in 1993 = 900%, 1994 = 210% –What happed to $12 million and why future planned capital expenditures with flat sales u Discount rate –Dollar rate versus ruble rate –Problems with beta estimate (index used)

J. K. Dietrich - FBE 532 – Spring 2006 White Knight and Defense u Realizing value from Red October assets –Foreigners may be limited due to political questions, e.g. use of land –Management and cost structure definitely threatened if foreign acquirer to realize value –Brand is national and that is probably important u Poison pill and white knight strategies work in highly developed markets

J. K. Dietrich - FBE 532 – Spring 2006 Outcome u Less than 10% of shares tendered u Red October offered Menatep two seats on the board and they called off bid u Company sales still around $50 to $60 million in 2000, dropped in 1998 crisis, steadily losing market share, production cuts planned in 2001 u Share prices traded $2.65-$5.25 in 2000 in very illiquid market