Case Study: RJR Nabisco
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July 20, 2013
One of the most famous leveraged buyouts (LBOs) that have has been studied is the RJR Nabisco LBO. There was also a movie made about this LBO entitled Barbarians at the Gate, which you may be interested in watching.
Review this case study in Chapter 7 of your text and conduct your own research. In a 3–4-page case study, address the following:
1. Discuss the background of the case. Who were the players? What prompted this leveraged buyout (LBO)?
2. What made this LBO feasible?
3. Discuss the terms and conditions of the LBO in terms of both pre-LBO and post-LBO corporate structure.
4. Discuss the financial qualities of the LBO in terms of the stock value
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LBOs have ability to acquire smaller companies that have very little capital and the acquired company can benefit from organization and reform. Simply, LBOs can prevent shutdown needed of a company. On the other hand, LBOs could possible display hostile takeovers and due restructuring, downsize the acquired company which in turn can have large impact on employees. Moreover, due to management buyout, there could be a conflict of interest among employees and management, including mismanagement by the buyout owners. RJR was anticipating the increased popularity of tobacco consumption, and in 1913 introduced four new brands, which was a very risky move on their part. For instance, one of the brands was a Camel and Winston cigarette. Yet, few years later during depression, RJR was hurt by cheaper brands. Under pressure of cheaper brands competition and economy, RJR differentiated their products from other brands, started production on the international market, changed cigarette packaging and addressed health issue at home that pertain to cigarette smoking. Taking all of this into conversation, RJR was very attractive to LBO candidates. Up to 2006 RJR Nabisco leveraged buyout was the largest LBO of all times. RJR Nabisco was outcome of a merger between RJ Reynolds Tobacco Company and the Nabisco food company. RJR Nabisco didn’t perform well before the buyout. In fact, various features did made RJR Nabisco attractive as LBO candidate. Its operations did
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The stock market has increased from 1.896 in ’86 to 4.789 in ’95 thus creating an incentive for DLJ to offer an IPO. Strategy involved being the IPO allowed employees to exchange their compensation plans for shares and options in DLJ thus giving them an incentive to stay with the company. There were also many advantages and disadvantages related to DLJ going public. Advantages included DLJ increasing liquidity and allowing founders to harvest their wealth, permitting founders to diversify, facilitated raising new corporate cash, established value for the firm, and increasing the potential markets. Disadvantages included the cost of reporting, new disclosure requirements, self-dealings, a possibility of inactive markets reducing price, the firm losing some of its control, and a higher degree of investor relations had to be maintained.
For the corporation that has acquired another company, merged with another company, or been acquired by another company, evaluate the strategy that led to the merger or acquisition to determine whether or not this merger or acquisition was a wise choice. Justify your opinion.
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Aside from the two aforementioned proposals the company can raise its leverage in other ways. By conducting DuPont analysis and understanding operating leverage we see that purchasing fixed assets and decreasing stockholder’s equity will raise the equity multiplier and the firm’s operating leverage. In this instance we recommend against this approach as the firm already has a large amount of excess cash above what they require to fund new positive NPV projects and purchase new assets. Investors would rather see their capital returned to them in the form of share repurchases and dividends as it is evident by the company’s cash stockpile that they can
* For the corporation that has acquired another company, merged with another company, or been acquired by another company, evaluate the strategy that led to the merger or acquisition to determine whether or not this merger or acquisition was a wise choice. Justify your opinion.
Once the goal of corporations became maximizing the value of the firm, they attracted wealthy “corporate raiders”, who used this new corporate philosophy to launch many takeover attempts on companies, with the intent on restructuring these companies, as to increase their stock prices, so that they can “refloat” them for a considerable profit. Most of these takeovers were financed with borrowed money, hence the term leveraged buyouts, or LBOs. As the article states, “In a typical LBO, the acquirer would buy out the public stockholders and run the company as a private concern, slashing costs and slimming it down. The ultimate aim was to refloat the company on the stock market at a higher valuation”. Initially this was seen as one of the best remedies for the agency issues that surfaced between shareholders and mangers. However as the economic climate changed, many realized that the LBO was not the answer. “When the economy went into a recession during the early nineteen nineties, many of the firms that had gone private, such as Macy’s and Revco, couldn’t keep up their interest
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