It is a great read, no doubt. It is not only very instructive to understand (at an elementary level) how the deals of this size were financed, but also to read how various financial firms got involved, and for what reasons (often more than just money).The case told the story of RJR Nabisco between its CEO F. Ross Johnson and KKR’s Henry Kravis.
After seeing how others made a ton of money doing LBOs, Johnson wanted to do one himself by taking RJR Nabisco private. He pissed off the LBO king Henry Kravis because although Kravis gave him the idea of doing an LBO, Johnson wanted to do it himself, not with Kravis, but with his buddies at American Express and Shearson Lehman. A bidding war ensued. Johnson first bid at $75 a share. Kravis topped it at $90. A few more rounds went by.
Finally Johnson bid $112 a share and Kravis bid $109. The board of directors took the bid from Kravis because they despised Johnson after they learned that Johnson made secret deals with his bidding partners Shearson Lehman and Solomon which would give a big piece of the ownership to Johnson himself.RJR Nabisco was an American corporation vending tobacco and food products. It was made in the year 1985 by the merger of Nabisco Brands and R J Reynolds Tobacco Company. The case given deliberates the leveraged buyout of the company, which was at that time the biggest LBO in history. A leveraged buyout can be distinct as a situation where an investor group, which often includes some of the target company’s top managers, borrows billions to try to take the company private by buying its stock from the shareholders.
After an aggressive sequences of negotiations and proposals, the special committee decided to call for a blind auction. The special committee actively participated in the bidding process by laying down rules and regulations regarding the bid. They ensured that the best interest of not just the shareholders but also of all the primary stakeholders will be taken into consideration.The fact that the auction was sealed; it fuelled the competition between the competitors.
In the end, the special committee accepted KKR’s bid of $109 per share instead of a $112 per share bid offered by RJR Nabisco.The primary reasons why KKR won the bid could be that KKR offered to keep 25% of the shares public against 15% offered by the management group. Additionally, KKR intended to only sell a part of the food subsidiaries whereas the Management wanted to dispose off the entire food assets.