1. a.) RJR Nabisco was an American conglomerate based in the United States in Midtown Manhattan, New York. The company was valued at different prices in relation to the pre-bid, management group and KKR operation strategies. At the pre-bid operation strategy, the company was valued at $17 billion. Each market share was valued at $70.34. The pre-bid valuation was determined by subtracting the company’s debts from the total value of assets. Debts of the company stood at $5.204 billion while the total value of assets was $22.607. The total equity is therefore, $17.403 billion. The total number of shares of the company was 247.4 billion. Value per share is determined by dividing the total value of equity by the cumulative number of shares (Russell, 2013). This is represented as shown: Per share= 17.403 (in billion $)
0.2474 (in billion $)
= $ 70.34
b. The operating strategy of the Management Group was to sell RJR Nabisco’s food enterprise and only maintain the tobacco business. The strategy was formulated at a time when the food industry was experiencing major reevaluation and restructuring. This strategy was based on the assumption that the tobacco business was being undervalued since it raked in large sums of cash (Turco, 2010). The management operation strategy also stated that the food business was not fully valued due to its association with the tobacco business. According to the management group, “selling RJR Nabisco’s food assets and taking the tobacco business private would eliminate the undervaluation and generate substantial gains.” (Ruback, 2006). Analysts estimated the value of RJR Nabisco under the management strategy to be $25.389 billion. This figure was arrived at by subtracting the total debt value of $5.204 billion from the total value of assets $30.593 billion. The total equity is therefore, $25.389 billion with the value per share standing at $102.62.
c. The KKR was formed by three former executives who over time have initiated many takeovers. The three executives Kohlberg, Kravis and Roberts offered to purchase about 87% common stock of RJR Nabisco at a market share price of $90 per share. This was to be done in cash. The remaining shares were to “receive securities with a value of $90 per share, and terms to be negotiated by KKR and the Special Committee” (Ruback, 2006). The total bid was valued at $20.7 billion and offered a market share price of $94 per share. This bid was significantly higher than the pre-bid operational strategy but in sharp contrast with Management Strategy proposal of selling the company’s food business (Turco, 2010). The company had a higher value under the Management Group and KKR plans. The two were however, different since the KKR plan opposed the proposal by the Management plan to sell the food business to increase the gains of the tobacco business (Conybeare & Kim, 2010).
2. The difference in value of the three is determined by their proposals during the valuation process (Russell, 2013). The first bid issued a proposal of $17 billion at a market share price of $75 for each. The Management Group valued the company at about $25 billion with a share price of about $100 per share while Kohlberg, Kravis and Roberts (KKR) valued RJR Nabisco at $20 billion with a market share price of $94 per share. The Management Group advocated for the selling of the company’s food business claiming that this would annihilate the undervaluation of the tobacco business (Russell, 2013). The KKR refuted this and valued the entire company based on their growth projections putting into account the value of the firm’s food business. The difference was also brought about by the financial patterns of the proposals. The First Boston bid aimed at providing employees with a share in the company’s stocks if it became privately owned. The KKR bid aimed at issuing cash to shareholders for fewer shares, while the Management Group aimed at selling the food share of the business. The KKR also aimed at giving 25% of the company to shareholders once it became private. In addition, KKR’s advisors would put up an unexpected short-term loan worth $5 billion that would conclude the transaction.
3. The Special Committee adopted a set of procedures and regulations that would determine the bid and ensure the welfare of RJR Nabisco’s shareholders is maintained. The auction was not aimed at encouraging the sale of the business but rather establishing a set of rules that would set standard for the biddings. The rules were aimed at ensuring only one round of bidding. The best proposal was also to offer the highest bidding price and offer adequate consideration of the shareholder’s interests (Conybeare & Kim, 2010). The rules required that a proposal should not offer the condition of sale of any of the company’s assets, should issue the shareholders a “substantial common-stock-related interest”, it would consist of financial details on all arrangements and non-financial components and approved by the board of directors of the bidding enterprise (Ruback, 2006). The Special Committee and the board of directors had the mandate to terminate or amend the rules, deliberations with bidders or contest any proposals.
The Special Committee resolved to put into consideration new bids for the RJR Nabisco sale. The KKR bid at $75 per share and a value of $11 preferred stock. The KKR proposal also stated that the debts would be converted to common stock, representing 25% of the common stock. The KKR also planned to finance through bank loans worth $12.4 billion, subordinated debt of $3.5 billion and equity of $1.5 billion. The Management Group bid at $90 per share. Their purchase of the company would involve $2.5 billion worth of equity, a bank debt of $15 billion and a subordinated debt of $3 billion. Like the KKR proposal, the Management Group would assume $5.2 billion of the total initial debt. The First Boston Group would begin by purchasing the tobacco business and divesting the food business (Burrough & Helyar, 2010). The food business would be sold at an estimated value of $13 billion and the tobacco business purchased at a value of $15.75 billion. The sale of the food business would include “a right to 80% of the net proceeds of the subsequent sale …in excess of the installment note” (Ruback, 2006). The purchase of the tobacco business would acquire at most 20% of the tobacco business equity. The shareholders would receive cash payments under this bid.
4. The Special Committee should take the KKR bid since it proved to be the most favorable of the three, and it adequately put into consideration the welfare of the shareholders. It also proved to be the lowest bid. The KKR shows evidence of ensuring sustainability of the food business, offers more equity than the management group and guarantees special benefits to employees who lost their jobs. The Special Committee should, however, oversee the payment of the shareholders, inspect the financial and non-financial documents detailing all the transactions and agreements by the selected bidders and the company and ascertain the approval of the proposals by the board of directors of the bidding firm.
Burrough, B., & Helyar, J. (2010). Barbarians at the gate: The fall of RJR Nabisco. London: Arrow.
Conybeare, J., & Kim, D. H. (2010). Barbarians at the Gates: State Control of Global Mergers and Acquisitions. The World Economy, 33, 9, 1175-1199.
Ruback, R. (2006). RJR Nabisco. Harvard Business School, 9-289-056.
Russell, J. (2013). Barbarians at the gate: The fall of RJR Nabisco. S.l.: Book On Demand Ltd.
Turco, C. (2010). Cultural Foundations of Tokenism: Evidence from the Leveraged Buyout Industry. American Sociological Review, 75, 6, 894-913.