Tiffany Case

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The case

In July l993 .Tiffany& Company concluded an agreement with its Japanese distributor, Mitsukoshi Ltd. that would fundamentally change its business in Japan. Under the new agreement, Tiffany’s wholly owned subsidiary, Tiffany& Company Japan Inc. (Tiffany-Japan), assumed management responsibilities in the operation of 29 Tiffany &Company boutiques previously operated by Mitsukoshi in its stores and other locations in Japan. Tiffany looked forward to the new arrangement, as it was now responsible for millions of dollars in inventory that it previously sold wholesale to Mitsukoshi, resulting in enhanced revenues in Japan derived from higher retail prices. It was also apparent, however, that fluctuations in the yen/dollar exchange rate would now affect the dollar value of its Japanese sales, which would be realized in yen. Since Japanese sales were large and still growing, it seemed evident such fluctuations substantial impact on Tiffany's future financial performance. Company Background

Founded in New York in 1837,Tiffany &Company was an internationally renowned-retailer, designer, manufacturer ,and distributor of luxury goods .The famous blue-box company found its initial success in fine jewelry, most notably diamonds, but had since expanded its product line to include timepieces, china, crystal, silverware, and other luxury accessories. In the fiscal year ending January 31, l993 (FY1992), Tiffany earned $15.7million on revenues of $486.4million and had total assets of$419.4 million. Recent financial statements are provided in Exhibits 1and 2.An historical summary of operations is provided in Exhibit 3. After more than a century of independence, Tiffany was acquired by Avon Products, Inc. in 1979.For the next several years, Avon, a nationwide door-to-door cosmetics marketer, worked to expand Tiffany's product line to reach beyond its traditional affluent customer base to the larger middle market. While this diversification strategy resulted in enhanced sales for Tiffany from $84million in l979to $124million in l983, operating expenses as a percentage of sales grew inordinately from 34%to 43% in 1978and l983, respectively. Avon soon realized that Tiffany's traditional market niche was substantially different than its own and, in l984, decided to put the company up for sale. The most attractive offer came from Tiffany's own management, who agreed to buy back Tiffany's equity and the Fifth Avenue store building for a total of $135.5 million. In what ultimately took the form of a leveraged buyout (L B O), the terms of the deal distributed virtually all of the equity shares to three key investor groups. Management ended up with 20% of total equity shares. Investcorp, the Bahrain-and London-based merchant bank that backed management in the deal, received 49.8%of total equity shares. The third player, General Electric Credit Corporation(GECC), ended up with 25.7%of total equity shares.1t was through an $85 million credit arrangement with GECC that management was able to refinance a substantial portionof the purchase price. The aftermath of the LBO was marked by very tight free cash flow coupled with significant growth potential on the horizon. After the company had once again become profitable and realizing that the company's growth prospects demanded more cash than could be generated internally, in 1987,management offered Tiffany stock to the public at approximately $15 a share(adjusted for a subsequent stock split).In l989,Mitsukoshi purchased l.5 million shares of Tiffany's common stock from GECC. As of January31, 1993, Mitsukoshi owned approximately 14% of Tiffany stock, the largest percentage of any single institutional investor. Three other institutional investors collectively owned approximately 26% of the stock, followed by all Tiffany executive officers and directors as a group at 4.9%. In l993, Tiffany was organized into three distribution channels: U.S. retail, direct marketing, and...
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