Case Study Nabisco
Gauguin (2011) suggested “RAJA Nabisco had not been performing well prior to the buyout” but post LOB analysis suggested that shareholder of RAJA Nabisco benefited over Goldberg Kraals & Roberts’ (KIRK) bid winning contest (peg. 298). The paper discusses financial qualities of the RAJA Nabisco pre and post LOB, including what made RAJA Nabisco successful.
RAJA Nabisco accelerated decline after LOB and due to the poor management of KIRK. One option would have been to be bought out by another tobacco business and/or undergo another leveraged buyout.
Case Study: RAJA Nabisco A leveraged Duty (LOB) Is “a Atlanta technique uses Day a variety AT entitles, including the management of a corporation or outside groups, such as other corporations, partnerships, individuals, or investment groups” (Gauguin, 2011, peg. 93). That is, LOB is the acquisition of another company where borrowed money is used to meet the cost of acquisition. This will allow companies to have ability to perform large acquisitions without commitment to a lot of capital.
Lobos have ability to acquire smaller companies that have very little capital and the acquired company can benefit from organization and reform.
Simply, Lobos can prevent shutdown needed of a company. On the other hand, Lobos could possible display hostile takeovers and due restructuring, downsize the acquired company which in turn can have large impact on employees. Moreover, due to management buyout, there could be a conflict of interest among employees and management, including mismanagement by the buyout owners. RAJA was anticipating the increased popularity of tobacco consumption, and in 1913 introduced four new brands, which was a very risky move on their part.
For instance, one of the brands was a Camel and Winston cigarette. Yet, few years later during depression, RAJA was hurt by cheaper brands. Under pressure of cheaper brands competition and economy, RAJA differentiated their products from other brands, started production on the international market, changed cigarette packaging and dressed health issue at home that pertain to cigarette smoking. Taking all of this into conversation, RAJA was very attractive to LOB candidates. Up to 2006 RAJA Nabisco leveraged buyout was the largest LOB of all times.
RAJA Nabisco was outcome of a merger between RAJA Reynolds Tobacco Company and the Nabisco food company.
RAJA Nabisco didn’t perform well before the buyout. In fact, various features did made RAJA Nabisco attractive as LOB candidate. Its operations did project moderate and consistent growth that required little capital investment and had low debt levels. That is, the cash flow from tobacco business made it stable and eradicable and didn’t vary as much. RAJA was the manufactured for very popular brand in its food division which is the Ore.
Moreover, RAJA Nabisco also had low debt levels.
On contrary, return on assets was declining, as well as falling inventory turnover. According to the movie “Barbarians at the gate” RAJA was supposed to launch a new brand of cigarettes. Hence, some demonstrations showed that the product will not succeeded and consumers didn’t care much about the product. As well, RAJA Nabisco has already spent over $350 million in research and development for creation of this new tobacco product.
Company did anticipated that the company would receive negative reaction on the stock with the introduction of a new cigarettes product.
Ross Johnson, CEO for RAJA Nabisco at that time, including some other upper executives had access to the information that the market had not yet received, and therefore decided to take company privately and avoid negative market reaction. Furthermore, going private with the company, management would have more control over the company and eliminate control of the shareholders. As well, RAJA Nabisco would not have to worry about the stock price and could focus on the production of he tobacco and food products.
The combination of high valued products from tobacco and food group “gave the company a high breakup value that Smith Barney estimated to be in $85-$92 per share range compared with the $56 stock price Just prior to ten Inhalant Duty offer” (Gauguin, 2011, peg. 2%).
I Norte, In BY, several companies launched into “war” to control RAJA Nabisco. After series of biding, it ended with Goldberg Kraals & Roberts (KIRK). They won a bidding war with $109 per share offer and took RAJA Nabisco private.
Few factors that were taken into consideration upon decision-making process, is that RAJA Nabisco will continue to be intact and will have some public share owners. Also, in the beginning the plan was to sell part of RAJA Nabisco food due to the fact that this part of the business was undervalued by market.
Four bakeries were to be modernized and other five were to be closed. With this plan, the management believed that could help the tobacco business as well as the food business to recognize true value of the business. Opposing pre LOB plans, the management groups decided to cut the food business and sell to private.
The dead was to remove the undervaluation and produce huge profitability. Elimination and consolidation of the food business would shift the focus on the tobacco business.
Belief with this plan in place is that company would focus on the value and therefore maximize shareholders’ interest. Contrariwise, KIRK shared different opinion upon buyout. For them it was important to keep both food and tobacco business by using LOB. For instance, KIRK wanted to grow tobacco business into North Carolina. Once LOB came into place, the RAJA Nabisco declined even further. KIRK had a poor return on its LOB as well as poor leadership.
CEO that took over RAJA Nabisco had no knowledge how to run tobacco business. In fact, at the beginning of 2003, Or’s sales have dropped 18% from a previous year to $2. 6 billion while at the same time operating income fell 59% which is $275 million. Unfortunately, post LOB and acquisition of RAJA Nabisco by KIRK destroyed the company. RAJA Nabisco would be better off with acquisition of another domestic tobacco company. This would allow company to combine with the U.
S. Subsidiary and be more successful internationally as well. Another option would be to have another leveraged buyout to fix the damage caused after the first LOB.