Mergers & Acquistions

RJR Nabisco Case

Academic Group 4 Font
Girish Shenoy I Meghna Saluja I Nikunj Daruka I Calibri 12
Saloni Solanki I Vasvika Jain
Summary
Meghna

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Why was RJR Nabisco a great LBO candidate?
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Vasvika

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Approach to valuation followed by different bidders
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Saloni

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 Why did KKR win?
Nikunj
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Risks associated with LBOs
Lower Equity Levels
The LBO process tends to use most
of the equity funds of the company.
On an average, equity levels stand at
ten percent or even less, this makes
it extremely difficult to get sufficient
credit for new projects.
Poor Gross Margins
Considering the higher debt ratios
and interest rates, the gross margins
are bound to fall in near future. The
firm doesn’t have the equity to
borrow additional money and might
even miss multiple profitable
opportunities.
Excessive Debt Proportions  LBO has always been
considered lucrative and a
Most of the investors in LBOs use recipe for success.
massive amounts of debts to
overtake the company. The debt  However, leveraged
ratio may go as high as 70 percent in buyouts face several risks
some cases. and the chances of their
failure are comparatively
higher.
“High Leverage is unsafe,
not just for a company but
the entire economy. LBOs
are reducing the safety.
Management loses the
power to do many things. It
High Debt Servicing Demands has no margin for error and
less margin for additional
These debts are expensive and come risk”.
with high servicing demands directly - Franco Modigliani
impacting the profitability and the
ability to take up new ventures.
Negotiations Approach, Regulatory Hurdles, Stakeholder
Management
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