KKR and RJR Nabisco: Video + Case

“I think Henry might tell you today that part of what was driving him subconsciously was the desire to win. The single most deadliest sin that you could have in the acquisitions business.” —Bryan Burrough, Author “Barbarians at the Gate”

Warren Buffett wrote about RJR Nabisco as a major arbitrage position in the Berkshire Hathaway’s letter to shareholders for fiscal year 1988, as follows:

At yearend, our only major arbitrage position was 3,342,000 
shares of RJR Nabisco with a cost of $281.8 million and a market 
value of $304.5 million. In January we increased our holdings to 
roughly four million shares and in February we eliminated our 
position. About three million shares were accepted when we 
tendered our holdings to KKR, which acquired RJR, and the 
returned shares were promptly sold in the market. Our pre-tax 
profit was a better-than-expected $64 million.

     Earlier, another familiar face turned up in the RJR bidding 
contest: Jay Pritzker, who was part of a First Boston group that 
made a tax-oriented offer. To quote Yogi Berra; “It was deja vu 
all over again.”

     During most of the time when we normally would have been 
purchasers of RJR, our activities in the stock were restricted 
because of Salomon’s participation in a bidding group. 
Customarily, Charlie and I, though we are directors of Salomon, 
are walled off from information about its merger and acquisition 
work.  We have asked that it be that way: The information would 
do us no good and could, in fact, occasionally inhibit 
Berkshire’s arbitrage operations.

     However, the unusually large commitment that Salomon 
proposed to make in the RJR deal required that all directors be 
fully informed and involved.  Therefore, Berkshire’s purchases of 
RJR were made at only two times: first, in the few days 
immediately following management’s announcement of buyout plans, 
before Salomon became involved; and considerably later, after the 
RJR board made its decision in favor of KKR. Because we could 
not buy at other times, our directorships cost Berkshire 
significant money.

RJR Nabisco – 1990, HBS Case

RJR Nabisco – 1990, HBS Case Solutions

A Case Study of a Complex Leveraged Buyout

Collection of RJR Nabisco newspaper articles

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.


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