Muhammad Ghufran

MBA2K10-12 Assignment NO. 1

1. What was the role of First boston Group in the deal? First Boston came in as a grey knight with a bid of $118, causing the board to extend its deadline for a deal, but the First Boston bid turned out to be poorly financed. So Johnson upped his bid to $101 and KKR bid $109.It acted as an unsolicited bidder in a corporate takeover. A gray knight enters the scene in order to take advantage of any problems between the existing bidders and the target company. Due to their offer the existing bidders had to increase the bid. As for First Boston their Financial were uncertain and were calculated by just analyzing publically available information and they tend to take advantage of tax saving which were quite uncertain. 2. Why Board of Directors wanted KKR to stay? The Board of Directors always looked for what is best for the shareholders interest. They were not happy with the performance of F. Ross Johnson. He was quite unpopular in many circles in Winston-Salem, North Carolina where RJR had their headquarters 3 years back and was moved to Atlanta on the recommendation of Johnson. The resident and local Institutions of Winston-Salem owned stocks of RJR of worth $2.5 Billion at that time. Also at that time due to the initial offer of Johnson the Shareholders were of the perception that he tried to buy the company at a cheap rate. So when Henry Kravis was told that RJR management Bid for $108 in reply of his Bid of $ 106 he wanted to leave as he said he don’t want open end bidding. But the BOD representative negotiated to make him stay by paying him for the expenses to that date that amounted to $ 45 million. If KKR had left at that time they would have left with the only choice of RJR management offer of $108 so to increase competitive bidding they wanted KKR to stay so that it might come up with some higher bid and they will give the decision in favor of KKR as they liked the financial structure of KKR more than that of Management group. 3. Why BOD chose $109 instead of $ 112 per share? As mentioned above about the non-financial reasons for choosing KKR there were also financial reasons for choosing KKR. The financial structure and post buy out schema of KKR was more favorable than RJR management. The BOD wanted to hold the company intact and minimize the negative impact of LBO on employees. The Management intended to sell the entire food business. KKR offered 25% of shares of future company to existing shareholders while Management group offered 15%. KKR was offering $ 500 million more equity to current shareholders in future profits. KKR offered guaranteed severance to the employees who lose their jobs due to layoffs. Management group focused just on giving equity to 15000 employees. This Management Buy-out attempt also have affected organizational culture and performance so BOD wanted stability in the firm KKR gave them new guidelines to make the company more stable by appointing new CEO. Management was of the view to continue Ross Johnson as CEO but due to his poor handling of PR, lavish spending, and greed BOD didn’t go in his favor. 4. Why the management wanted to buy the company? RJR exhibited moderate or consistent growth in the past that made it very attractive for LBO. Its current share price was falling and they were quite undervalued so to make them rise again LBO was a good option. It had good (30%) debt to asset ratio which made it quite. There was an expected increase in the exports of the tobacco market. Ross was also thinking of selling some assets of the company such as food business to make some money for himself.

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