Q. WHAT WAS THE ROLE OF FIRST BOSTON IN THE DEAL?

First Boston came in as a grey knight with a bid of $118 a share. It was the most complex bid and they proposed to buy RJR food business for installment notes which according to Boston group could be turned back into cash by a banking syndicate. According to Allen Michel and Israel shaked (RJR Nabisco: case study of a complex Leveraged buyout) First Boston $118 a share bid was outstanding simultaneously with KKRs $94 a share and managements $100 a share. Furthermore First Boston was conditional upon further review of nonpublic information. Due to the complex bidding of installment notes offer by First Boston, RJR extended one of the bidding contests deadline. Secondly, due to its complex and uncertain bid, First Boston enabled KKR to review its winning strategy. Thirdly, Due to First Boston offer other bidder also increased their offer. Q. WHY BOD WANTED KKR TO STAY? Some of the reasons because of which BOD wanted KKR to stay were 1) KKR invented the LBO and had a strong presence in the field of corporate acquisitions. It was a very professionally managed business with a history of sound decision making. 2) After acquisition, KKR would put an efficient management team in place and sell off the inefficient parts of the business. Share price will increase which will lead to increase in BOD earnings. 3) Johnson appeared to be a Black knight in this deal. His greed stunned everyone. His terms for the LBO were control of the board and 20% of stock himself and seven managers (stock that was projected to be worth almost $3 billion in five years) without putting up any money. After analyzing this BOD wanted KKR to stay and circumvent Johnson to acquire RJR. Q. WHY $109 PER SHARE WAS ACCEPTED IN COMPARISON WITH BID OF $112 OF MANAGEMENT? Some of the reasons because of which BOD accepted $109 a share are as follow; 1) The BOD wanted to keep the company intact and minimize the negative effects of LBO on employees. Management group planned to keep only tobacco business while KKR specified that it would sell only $5 to $6 billion of RJR business which fulfills BOD requirements of keeping the company intact. 2) The BOD wanted to have some percentage of equity. It wanted to keep some portion of the company public. KKR proposed to distribute 25% of the equity in the future company to existing shareholders whereas Management team come up with 15% of the equity distribution. 3) KKRs offer was guaranteed whereas managements offer lacked a reset, meaning that the final share price might have been lower than their professed $112 per share. 4) The analysis made by the boards special committee, KKR was offering $500 more than the management group even though both groups were offering $28 a share for preferred stock, debenture or convertible stock. 5) KKRs have experience with leverage buy-outs, expertise in operations, and maintaining companies as a whole. MG had no experience in such matters and their plan relied wholly upon the sale of Nabisco for the price they had projected. Q. WHY MANAGEMENT WANTED TO BUY THE COMPANY? Management team was made of professionals; they knew that RJR Nabisco has got potential. Some of the reasons that attracted management to buy the company are as follow; Firstly, Successful LBOs are generally characterized by both low business risk and moderate growth. RJR Nabisco was an attractive LBO since it exhibited consistent growth unaffected by business risk. Secondly RJR Nabiscos income statement showed that about 7% of revenues were committed to capital expenditures, showing that company has low capital expenditures. Thirdly company had a low debt level (30% debt to asset ratio).

M. Khalid Zaffar- MBA2k11

( Assignment #01)