Case Study: Rjr Nabisco

1074 words 5 pages
Raymond Britton
Case Study: RJR Nabisco
March 22, 2015

The RJR Nabisco Leveraged Buyout (LBO) case study analyzes the history prior to the LBO and the post LBO corporate organization. RJR Nabisco was not performing well prior to the LBO. Financial analysis’s also implies that the shareholders of RJR Nabisco profited from Kohlberg Kravis & Roberts winning LBO bid. (Gaughan). To define a leveraged buyout or LBO, it is “a financial procedure used by a many business entities, including the management of a corporation or outside groups, such as other corporations, partnerships, individuals, or investment groups” (Gaughan). An LBO is the acquisition of another company where borrowed money is used to meet the cost of
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Part of the new plan in the beginning was to sell part of RJR Nabisco’s food segment as this part of the business was undervalued in its market. Ross Johnson, CEO for RJR Nabisco at that time, as well as other upper executives had knowledge to information which the market had not yet received, and therefore decided to take company privately to avoid negative market reaction. Additionally, going private with RJR Nabisco, management would have more control over the company and eliminate control of the shareholders. RJR Nabisco would not have to worry about the stock price and could focus on the production of the tobacco and food products. Contradictory to the pre LBO initiative, the management team decided to discard the food segment and sell that sector in the private market. The objective was to eliminate the undervalued portion of the business which in return would provide a huge profit. Exclusion and merging of the food segment would change the focus to the tobacco portion of the business. Ultimately, this was to place greater focus on the value creation and profitable segment of the business which would maximize shareholders value. Inversely, KKR had a different view of the buyout’s direction. For KKR it was significant to keep the food and tobacco business segments together by using LBO. KKR ultimately wanted to develop


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