Lecture Notes: RJR Nabisco Buyout

Introduction

• The presentation revolves around the corporate dynamics and bidding war associated with RJR Nabisco.

Characters Involved

• Ross Johnson: CEO of RJR Nabisco, central figure in the buyout drama.
• Henry Kravis: Investment banker, key competitor in the bidding war.
• Charlie Hugel: Chairman of RJR Nabisco, interacts with Ross and others.
• Ed Horgan: President of the tobacco division, focused on stock performance and market reactions.
• Linda: PR representative, provides insights into the dynamics between the parties involved.

Key Events & Themes

Initial Offer & Negotiations

• Ross Johnson proposes to buy RJR Nabisco for $75/share.
• Discussion around the potential for increased stock value and shareholder profits.
• Emphasis on leveraging the company's assets to fund the buyout.

Market Reactions

• Initial bids lead to speculation and analysis of stock performance and potential acquisitions.
• Concerns about the health impacts of tobacco and the introduction of smokeless cigarettes (Premiere).
• The financial implications of ongoing lawsuits against the tobacco industry and the potential for public relations backlash.

Competing Bids

• Henry Kravis counters with a bid at $90/share, escalating the competition.
• Discussions about the process of leveraging buyouts (LBOs) and their effect on company structure and management.
• Ross faces challenges from the board and has to craft a compelling argument to keep his position.

Corporate Culture & Management

• Ross's management style and the extravagance of top executives come under scrutiny.
• The need for tighter control and management discipline as the debt levels rise with each competing offer.
• Concerns about layoffs and the possible impact on employees are highlighted.

Critical Analysis of Offers

• Board deliberates over the offers made, weighing the financial implications against the management structure.
• Ultimately, the board favors Kravis's offer due to its structure and potential long-term viability despite Ross's efforts.

Conclusion

• The bidding war reveals the intense pressure and complexities of corporate acquisitions.
• Highlights the balance needed between shareholder interests, corporate responsibility, and executive governance.
• Ross’s narrative culminates in a loss of his position as CEO while Kravis secures the takeover of RJR Nabisco.