RJR NABISCO

MERGERS AND
AQUISITIONS

Types and Nomenclature

Takeover

The transfer of control from one ownership group to

another.

Acquisition

The purchase of one firm by another

The combination of two firms into a new legal entity

A new company is created
Both sets of shareholders have to approve the
transaction.

Merger

Amalgamation

A genuine merger in which both sets of shareholders

must approve the transaction
Requires a fairness opinion by an independent expert
on the true value of the firms shares when a public
minority exists

Meaning
Acqu
isitio
n

A transaction where one firms

buys another firm with the intent
of more effectively using a core
competence by making the
acquired firm a subsidiary within
its portfolio of business
It also known as a takeover or a
buyout. It is the buying of one
company by another.
In acquisition two companies are
combine together to form a new
company altogether.

Example: Company A+ Company

B= Company A.

Difference Between Merger And

Acquisition:
MERGER

i.

Merging of two
organization in to one.
ii. It is the mutual decision.
iii. Merger is expensive than
acquisition(higher legal
cost).
iv. Through merger
shareholders can increase
their net worth.
v. It is time consuming as
the company has to
maintain legal issues.
vi. Dilution of ownership
occurs in merger.

ACQUISITION

i.
ii.

iii.
iv.
v.
vi.

Buying one organization

by another.
It can be friendly
takeover or hostile
takeover.
Acquisition is less
expensive than merger.
Buyers cannot raise their
enough capital.
It is faster and easier
transaction.
The acquirer does not
experience the dilution

Spin Off Strategy

Aspin-out, also known as aspin-offor astarburst, refers to a

type ofcorporate actionwhere a company "splits off" sections of
itself as a separate business.

The "spin-out" company takes assets,intellectual

property,technology, and/or existing products from the parent
organization.

Shareholders of the parent company receive equivalent shares in

the new company in order to compensate for the loss of equity in
the original stocks; thus, at the moment of spin-off, the ownership
of the original and spun-off companies are identical.

However, shareholders may then buy and sell stocks from either
company independently; this potentially makes investment in the
companies more attractive, as potential share purchasers can
invest in only the portion of the business they think will have the
most growth.

LEVERAGED BUYOUT

Leveraged Buyout

Leveraged Buyout

The acquisition of another company using a significant amount of borrow

Characteristics

Often, the assets of the company being acquired are used as collateral fo

Deal Structure
Cash Transaction
The receipt of cash for shares by

shareholders in the target company.

Share Transaction

The offer by an acquiring company of shares

or a combination of cash and shares to the

target companys shareholders.

Securities

The issuance of bonds and debentures in lieu

of the existing shares

Deal Financing

Secured
Senior debt Long term
Granted against qualified
assets

Unsecured
Also known as

Intermediate debt

medium term

Generally up to 5 years

Debt granted on the

basis of collateral like

plants & equipments
Future cash flows are
also looked at while
financing

subordinated debt
No collateral to fall back
higher interest rates
Mezzanine Layer
Financing
Has both the
characteristics of debt
and equity
Warrants can be issued
which provide the equity
nature to this type of
financing

Motives

Synergy
Synergy value is created from economies of integrating a
target and acquiring a company; the amount by which the
value of the combined firm exceeds the sum value of the two
individual firms

V VAT -(VA VT )
Where VA-T Combined Synergy
VA & VB Individual Synergies

Synergies are created through:

Economies of Scale
Economies of Scope
Complementary Strengths

Financial Motives
Reduced cash flow variability
Increase in debt capacity
Reduction in average issuing costs
Fewer information problems
Tax Benefits

CASE ANALYSIS

Barbarians at the Gate- A

Sneak Peek

RJR Nabisco

It started as a tobacco company in 1875 & later entered

in foods business by making acquisitions in 1967

By 1987, RJRN had entered & exited several lines of

business like Sea-land (container-shipping), Heublein
(alcoholic beverages) & American Independent Oil
Company (energy)

In the year 1987

Tobacco business had sales of $6.3 billion & operating income

of $1.8 billion
Food business had sales of $9.4 billion & operating income of
$915 million

In 1988, two different groups [The Management Group

and KKR & Co.] made bids for buying-out RJR Nabisco

Pre-Offer Operating
Plans

A total of $10 billion in capital expenditures was

projected for 10 years [1989-98]

A major investment commitment was made for

development & test marketing of Premier, a
smokeless cigarette

Company had already spent $300 million on Premier

It also planned to spend $2.8 billion to modernize its

bakeries under foods division

Attractiveness of RJR Nabisco

for LBO
Cash flows were steady and predictable and did not vary with business

Conflicts of Interests in
MBO
Managers

are responsible for running the

corporation to maximise the value of
stockholders investment and provide them with
the highest return

When

the management of RJR Nabisco presented

an offer to take Nabisco private in an MBO, the
offer was superseded by KKR bid

Thus,

if management was attempting to

maximise the returns why did it advocate an
offer that was not in their interests

Proposed Solution
Neutralised

deal: The proponents of

the deal dont participate in the
approval process

The

appointment of an independent
financial advisor

Mandated

auctions of corporations
presented with an MBO

The Management Group

Bid

The management group bid was made by

F. Ross Johnson [CEO & President of RJR Nabisco]
Edward Horrigan [Vice Chairman of RJR Nabisco & CEO of RJRN
Tobacco Company]
Investment Banking Firm of Shearson Lehman Hutton

The offer valued RJR Nabisco at $17 billion. The offer stood at
$75 a share, 34% above the pre-offer price of $55.875

The Management Group strategy was to sell-off food assets &

take tobacco business private

A special committee was constituted to evaluate the proposal

of management group

At the same time, the American food industry was witnessing

restructuring & revaluation. Pillsbury & Kraft were also targets

The KKR - Introduction

Kohlberg, Kravis, Roberts &

Co. was a firm specializing
in leveraged buy-outs

It had acquired 35
companies before it put its
RJRN bid

Before its RJRN bid, KKR had

completed $6.2 billion LBO
of Beatrice Foods, the
largest LBO till that date

KKRs bid valued RJRN at

$20.3 billion [$90 a share]

The KKR Bid

Entering

into a confidentiality agreement

enabled KKR to bid competitively

KKR

did not contemplate selling-off the foods

business

KKRs

strategy sharply contrasted with MGs.

Offered

to purchase 87% of common stock

for $90 a share, $108 a share for preferred
stock

The Bidding Groups - Summary

The Long Wait

Final Bid Comparison

RJR Nabisco
Management
Group

KKR Acquisition
Group

First Boston Group

Oct-19

Nov-04

Nov-25

Nov-29

Dec-01

$112/sh.

$101/sh.

$100/sh.

$92/sh.

$75/sh.

$109/sh.

$106/sh.

$94/sh.

$90/sh.

$118/sh.

$84 Cash
$24 Preferred Stock
$4 Common Stock
$88 Cash
$9 Preferred Stock
$4 Other Security
$90 Cash
$6 Preferred Stock
$4 New Common Stock
$84 Cash
$8 Debt Securities
Bidder did not specify
form of payment
$81 Cash
$18 Preferred Stock
$10 Debentures
$80 Cash
$18 Preferred Stock
$8 Convertible Bond
$75 Cash
$11 Preferred Stock
$8 Convertible Bond
$78 Cash
$12 Securities
$110 Notes
$3 Other Securities
$5 Warrants

Greed Downside of
Management Bid

Rationale
KKRs

offer was guaranteed

Ross Johnson got involved in some
controversy called Golden
Parachute Deal
Time Magazine featured Johnson with
following headline
A Game of Greed: This man could
pocket $100 million from the largest
corporate takeover in history

Current Scenario

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