Lbo of Rjr Nabisco

LBO of RJR Nabisco

The basic idea behind a leveraged buyout (LBO) is that the acquirer buys the company with a loan collateralized by the company’s own assets. (Wikipedia.com) Management takes over by arriving at an attractive price to pay the stockholders in order to buy out their shares, resulting in complete control by moving a publically traded firm to a private one. The debt incurred in buying the company is paid off through its ongoing operations. It is when the debt is finally paid off that management sees incredible profits. One of the most important LBOs in financial history was the LBO of RJR Nabisco. Not only is it the largest buyout ever, but it remains also the most talked about and perhaps most notorious (Dodging Bullets pg. 121).

Appointed in 1986, F. Ross Johnson was the President and CEO of RJR Nabisco, named after a previous merger between Nabisco and RJ Reynolds (Wikipedia.com). Being a major manufacturer and distributer of tobacco products, there was always the threat of consumers becoming wise to the health threats of smoking. Although RJR Nabisco regularly turned in solid earnings off of its food and cigarettes, the stock price went nowhere. As a result of the looming health issues and inactive stock, millions of dollars was put into the research and development of “Premiers” or the smokeless cigarette (Barbarians at the Gate pg. 154) It was hoped that the innovation of RJR Nabisco would be able raise the value of RJA Nabisco stock. However, the “Premier” project failed miserably and forced Ross Johnson to take the company in a different direction (Barbarians at the Gate pg. 157) With stock remaining unchanged, as well as a combination of greed and power, Ross Johnson decided to buyout the company. One of his major bargaining chips was that an LBO would maximize shareholder value, which is the goal of every corporation (True Greed pg. 123). He persuaded the board of directors to accept a $17 billion LBO at $75 per share bid...