Rising posture ｜ Rereading the original text of The Barbarian at the Gate and its interpretation by investment banks

[Write in front]

As early as the beginning of 2014, when Vanke implemented the "business partner system", "barbarians at the door" was one of its concerns at that time.

But who is a "barbarian" and what kind of person is a "barbarian"?

"Barbarians at the door" is used by Wall Street in the United States to describe those hostile purchasers.

The Barbarian at the Door describes the cause and effect of RJR Na Beske Company’s acquisition with documentary reports, reproduces the most famous corporate battle in the history of Wall Street, and comprehensively shows how enterprise managers obtain and master the controlling stake of the company.

The Paper (www.thepaper.cn) was authorized by Yong Yang, general manager of Hong Ren Investment, to reprint the book and the M&A case published by Hong Ren Investment Micro Signal.

In 1980s, the acquisition of RJR Beske Company in the United States was called a classic battle of KKR, a veteran PE. Known as the "Great Acquisition of the Century", this transaction shocked the world with a purchase price of $25 billion, making it the largest leveraged buyout in history, which made the subsequent acquisitions far behind.

The acquisition campaign was mainly launched between the senior managers of RJR Na Beske Company and KKR (Kohlberg Kravis Roberts & Co.), a famous acquisition company, but due to its huge scale, many of them were

Direct or indirect participation of investment banks and financial institutions such as Morgan Stanley and First Boston.

Barbarian at the door

Target enterprise: RJR Na Beske Company.

As the largest food and tobacco producer in the United States, Reynolds-Na Beske Company was formed by the merger of American veteran food producers Standard Brands Company and Nabisco Company and RJR Company (manufacturer of Winston, Salem and Camel brand cigarettes), one of the two largest tobacco companies in the United States. At that time, it was the 19th industrial company in the United States, with 140,000 employees. It owned many famous brand products, including Oreos, Lezhi biscuits, Winston and Salem cigarettes, and Life Savers candy, which were distributed in every retail store in the United States. Although the food business of RJR Na Beske Company has expanded rapidly after two mergers, the rich profits of tobacco business still account for about 58% of its main business.

In the first two years after the merger, RJR Na Beske Company’s profit increased by 50% and its sales performance was good. However, with the crash of the stock market on October 19, 1987, the company’s stock price plummeted from the peak of $70. Although the company bought a lot of its own shares in the spring, the stock price did not rise, but fell to $40. In December, although the company’s profit increased by 25%, and the food stocks were also rising, the shares of RJR Na Beske Company were still neglected due to the influence of tobacco stocks, and 60% of its sales still came from Na Beske Company and Delmonte Food Company. The company tried to put the tobacco and food business together, but it didn’t work at all, and the decentralized management lost its effectiveness.

Merger and acquisition: management of RJR Na Beske Company.

The senior management of RJR Na Beske Company headed by Ross Johnson is the initiator of this acquisition. This group includes the head of Reynolds Tobacco Company-Ed Horichgen, Chairman of the Board of Directors of Na Beske Company Jim Welch, General Counsel Harold Henderson, independent director and consultant Andrew G.C. Sage II, etc.

Ross Johnson, who doesn’t have much ability in management, was still unknown in American business at the age of 40. With the help of a headhunting company, he became the president of a sign company. In 1984, Ross Johnson became the CEO of Na Beske Company. In 1985, he completed the merger of Reynolds-Na Beske Company. The next year, he became the CEO of RJR Na Beske Company. Johnson dares to innovate. Under his leadership, Reynolds Tobacco Company produced products with an output value of $1 billion within one year.

However, although this company is rich in cash, it is relatively conservative and closed in culture. The enterprise managers have long lost the creativity and enterprising spirit of the founders, and they are cautious in decision-making and rarely make breakthroughs. Johnson’s arrival didn’t bring much innovation to his management. His biggest hobby is spending a lot of money.

Johnson won’t be noticed if he just stays on extravagant consumption. He has a more ambitious plan, that is, through the management participation in the acquisition, RJR Na Beske Company will be turned into a private enterprise.

Merger and acquisition: Kohlberg-kravis-Roberts Company (KKR).

KKR was founded in 1976. As a PE company, KKR has outstanding performance, and it is good at MBO, which is commonly referred to as "management buyout". However, with the further understanding of leveraged buyout by others, the number of leveraged buyout companies gradually increased, and by 1987, there was a phenomenon of industry crowding. Kravis and Roberts made a decisive decision: lock the business target in the bulk acquisition business of $5 billion to $10 billion. Because few people get their hands on such a big business, KKR has already had such big deals as $6.2 billion for Beatrice, $4.4 billion for Safeway and $2.1 billion for Owens-Illinois.

From June, 1987, KKR began to use all public methods to raise funds. In order to stimulate more investors to join, the company proposed that the management fees of all transactions completed before 1990 could be reduced. By the end of the fundraising, the funds raised had reached 5.6 billion US dollars.

Acquisition process

In October, 1988, the management represented by Ross Johnson, CEO of RJR Na Beske Company, proposed to the board of directors that the management buy the company’s equity. The management’s MBO proposal includes the plan to sell the food business of RJR Na Beske Company after the acquisition, and only keep its tobacco business. Its strategic consideration is based on the market’s underestimation of the huge cash flow of tobacco industry, and the food business is not fully recognized for its value because it is mixed with tobacco. Reorganization will eliminate the unfavorable factors of market underestimation, and then gain huge profits.

Ross Johnson and Hilsen’s leveraged buyout plan hit it off. Both sides agreed that the price of RJR Na Beske’s stock should be around 75 dollars per share, which is higher than the market transaction price of 71 dollars, and the total transaction price reached 17.6 billion dollars. Because Hilsen wanted to complete the transaction independently, they didn’t have the power to introduce junk bonds, and all the funds of about $15 billion needed loans from commercial banks. Trust Bank seized the opportunity to provide financing for leveraged buyouts of blue-chip companies, and raised $16 billion worldwide, but according to Hilsen’s accounting, it was only $15.5 billion.

Investment bankers on wall street still reacted instinctively: this bid is too cheap! Johnson is robbing the company! Just as Johnson and Hilsen were having wishful thinking, KKR’s bid participation made the MBO planners wake up from a dream. In sharp contrast to the spin-off planned by CEO Ross Johnson, KKR wants to keep all its tobacco business and most of its food business, and KKR has made a bid of $90 per share. The contest between Hilsen and KKR began.

Hilsen chose to cooperate with Salomon Company to raise funds, but Hilsen could not confront KKR in terms of intelligence and financing. KKR has drexel and Merrill Lynch as consultants, and introduced a tender to buy PIK preferred shares, the price reached $11 per share, which was close to $2.5 billion. The demand for PIK shares in the world market quickly turned it into junk bonds, which meant that there were $2.5 billion in funds.

However, the exposure of the Johnson Management Agreement and the "Golden Parachute Plan" angered the shareholders and employees of RJR Na Beske Company. 525,600 restricted stock plans worth nearly $50 million, generous consulting contracts and 1,500 restricted shares each made Johnson unscathed in this acquisition, regardless of success or failure. Johnson’s greedy approach made MBO lose the support of the people. Finally, KKR won the battle with a price of $109 per share and a total amount of $25 billion.

In the last round of bidding, the difference between Hilsen’s offer and KKR was only $1, which was $108 per share. But it is not the difference in purchase price that makes the shareholders of RJR Na Beske Company make the final decision. KKR promised to give shareholders 25% of the shares, and Hilsen only gave shareholders 15% of the shares; KKR promised to sell only a small part of Beske’s business, while Hilsen wanted to sell all the business. In addition, shareholders also listed a dozen other differences. In addition, Hilsen failed to prove the reliability of its securities through restructuring, and failed to ensure the welfare of its employees. It is for these reasons that the shareholders of the company finally chose KKR Company.

The purchase price is $25 billion. Besides the syndicated loan of $14.5 billion, Dechong and Merrill Lynch also provide a bridging loan of $5 billion, waiting to be repaid by issuing bonds. KKR itself provided US$ 2 billion (including US$ 1.5 billion in equity), another US$ 4.1 billion in preferred shares, US$ 1.8 billion in convertible bonds and US$ 4.8 billion in foreign debts owed by RJR.

The signing date of the acquisition was February 9, 1989. More than 200 lawyers and bankers attended, and Hanover Trust and Investment Company raised $11.9 billion from banks all over the world. KKR provided a total of $18.9 billion, meeting the cash payment promised at the time of acquisition.

In fact, the cost of the whole transaction reached 32 billion US dollars, including more than 200 million US dollars from Dechong Company, more than 100 million US dollars from Merrill Lynch, more than 300 million US dollars from the financing of the syndicate, and KKR’s own fees reached 1 billion US dollars.

After the acquisition

After Ross Johnson, Luis gerstner became the new CEO of RJR Na Beske Company after the acquisition. He made drastic reforms to the original company and sold a lot of luxury facilities. According to the company’s report, in 1989, the company had a net loss of $1.15 billion after paying off its debts of $3.34 billion, and in the first half of 1990, it had a loss of $330 million. However, judging from the company’s cash flow, everything is still normal.

Beske’s operating profit in 1989 reached 3.5 times the previous cash flow, but Reynolds Tobacco Company is still in a state of preparation. In March 1989, RJR stopped the production of Premier brand cigarettes. Subsequently, the company laid off employees and the number of employees was reduced to 2,300. Under the leadership of the new manager, the company improved the equipment, improved the production efficiency, and at the same time greatly reduced the cost, so that the company’s tobacco profit increased by 46% in the first half of 1990. But when paying off junk bonds with cash brought by tobacco, Reynolds’ competitor Philip Morris increased his sales strength and lowered the price of tobacco. According to analysis, the tobacco market of RJR shrank by 7% ~ 8% in 1989.

The problem left by KKR is not only the poor return on capital, but also the failure of other industry leaders introduced. Whether Lou Gerstner is invited by American Express Company or Charles Harper of ConAgra, they have no experience in tobacco industry and have no enthusiasm for this business. After a continuous decline in performance, KKR had to divest Reynolds Na Beske’s remaining equity in early 1995, Reynolds Tobacco Holding Company became an independent company again, while Na Beske also became an independent food production enterprise, and Renault Company and Na Beske Company returned to their respective starting points. In the first half of 2003, Reynolds’ sales decreased by 18% compared with the previous year to only $2.6 billion, while operating profit decreased by 59% to $275 million.

Brief comment

The control struggle between investment bankers and enterprise managers, the ultimate beneficiary is the shareholders of the enterprise, which can be proved by the rich shareholders of RJR Na Beske Company after the acquisition.

In the form of acquisition. In the general LBO process, investment bankers will reach a consensus with the management of the target enterprise in advance, and complete the acquisition at a price and financing method recognized by both parties. At the same time, they will also make arrangements for the enterprise management and asset restructuring after the acquisition, try to reduce costs and improve efficiency, and sell assets to pay off debts. However, KKR company didn’t know in advance in the acquisition of RJR Na Beske, and there was no communication with the management. They didn’t even know the assets of this enterprise, so they could only participate in it in the form of bidding.

[Interpretation of Investment Bank]

Report on The Barbarian at the Door

-Merger and acquisition of enterprises and corporate governance

1. How was this merger initiated?

Managers are faced with the dilemma of stock appreciation, which makes them look for ways to raise stock prices.

RJR Nabisco’s share price hovered around 40, but it didn’t rise. Ross Johnson faced the pressure from shareholders.

Ross Johnson’s "Prime Minister" cigarette, which will be introduced to the market, is not welcomed and recognized by the market, and Ross Johnson is once again facing the dilemma of stock appreciation.

KKR company has the intention to buy RJR Nabisco, which makes Ross Johnson management team start to think about M&A, a way to safeguard their own interests and raise the stock price.

The huge return after the merger drove Ross Johnson to initiate the merger.

2. What are the motivations of the parties involved in the M&A?

KKR motivation：

Get a higher return on capital value. Because RJR Nabisco’s stock value is undervalued; At the same time, RJR Nabisco has a strong and stable cash flow, which can enhance the company’s capital value.

Enhance RJR Nabisco’s existing corporate strategy to further maximize the interests of shareholders.

The debt level is low.

Huge demolition effort.

A favorable capital structure can save taxes and fees payable.

KKR can get a huge handling fee, and has control over RJR Nabisco, sharing the profits.

Kravis’s individualism: KKR is the founder of LBO, but at the beginning of this merger, he was excluded; Therefore, due to the consideration of face and status in the field, KKR will also participate in the acquisition of RJR Nabisco.

Motivation of professional managers such as Ross Johnson：

The tobacco industry is undervalued by the market.

The influence of tobacco industry and the value of food industry are also underestimated by the stock market.

The management can make huge profits from this acquisition.

First Boston Group：

Get rich rewards in the acquisition to develop the enterprise, revitalize the company’s business and obtain customer sources.

Faustmann：

Ted Faustmann hates junk bonds, while kravis uses junk bonds the most, and Faustmann is angry with kravis. Hilsen has no outstanding talents in leveraged buyouts. This is an opportunity for Faustmann, and he will not miss it.

summary：

1, the stock is undervalued.

2. Make huge profits

3. Revitalize the business

Represented by the management: the business is bigger and the stock price is raised.

3. Who decides the outcome of the merger?

The final outcome is decided by the special committee (shareholder) established by the board of directors; However, the behavior of Ross Johnson management, KKR and other acquisition teams and M&A strategies have an impact on the outcome.

Due to the exposure of Ross Johnson’s "Golden Parachute Project", shareholders saw the greed of management; In addition, the Ross Johnson team can’t keep all the business systems after the acquisition, and can’t guarantee the interests of employees, which makes the special committee set up by the board of directors more inclined to KKR in the later stage of the acquisition.

Compared with Ross Johnson team, KKR is more humanized; They promised to keep the whole business of the company after the acquisition; To ensure the welfare of employees, shareholders can get more equity, thus gaining the support of shareholders.

4. What are the factors that affect the success or failure of LBO?

The development strategy of the company with multi-interests after merger and acquisition put forward by the sponsors.

Purchase price at the time of merger and acquisition

Strong and stable cash flow of M&A sponsors

Analysis and mastery of competitors’ strategies; As the saying goes, know yourself and know yourself.

Get the support and affirmation of the management of the enterprise or the people who have influence on the merger and acquisition results.

Reasonable standardization of operating procedures

The advantages and disadvantages of the special Committee and its influence

Whether the acquired subject matter is suitable: stable cash flow.

Bid, financial planning

5. How is the purchase price formed in the case?

A comprehensive analysis of the target acquisition company

Enterprise development strategy

Company operation

Financial status of the company

enterprise value

Strategic promotion of acquirer and future cash flow forecast

Financing scheme design and value evaluation

6. Who finally benefited from this case? Who is ultimately damaged?

beneficial owner：

The winners of this merger are shareholders, who have realized the stock at a high enough price; With intermediaries, they have gained huge benefits. For example, Dechong provided a $3.5 billion bridge loan and earned $227 million, and the proceeds from selling junk securities were even more; Merrill Lynch provided a bridge loan and earned $109 million; The syndicates of 200 banks provided $14.5 billion in entrusted loans and gained $325 million in income; KKR receives tens of millions of dollars in handling fees from investors; Morgan Stanley and wasserstein each received $25 million in consultancy fees; Goldman Sachs won the auction right of Delmonte Food Company; Lazard: Obtained the auction right of ESPN. According to some sources, this $25 billion merger, in fact, the total transaction cost is $32 billion, and the money is spent like soup. It can be said that M&A is a magic weapon for Wall Street, because whether it is successful or not, Wall Street can earn fees, including consulting fees, business divestiture fees and borrowing fees.

Damaged person：

RJR Nabisco was burdened with heavy debts. In 1989 alone, it paid $3.34 billion in debts, with a net loss of $1.15 billion. Market expenses and research and development expenses have been weakened, competitors have taken advantage of it, and a large number of employees have been laid off.

7. Compared with LBO, what are the distinctive features of MBO?

Specificity of MBO acquisition subject.

The MBO acquirer is mainly the current management of the target enterprise or the legal person or other organization established or controlled by it.

High financial leverage of MBO acquisition financing.

With the help of a large amount of external debt or equity financing, the high financial leverage of the financing scheme determines the high risk and high return of the acquisition itself.

Transfer of actual control right of target enterprise after MBO acquisition.

To a certain extent, the target enterprise has realized the integration of ownership and management rights, and the position of management has changed fundamentally, that is, from a simple enterprise operator to an enterprise owner.

MBO can reduce agency cost.

Compared with LBO, MBO pays more attention to the development strategy of the company, rather than the short-term huge capital return.

8. What behaviors does the case show that the management has deviated from the interests of shareholders?

Management profligacy, private jets, huge subsidies, and these are all holding shareholders’ money to satisfy their own desires.

"Golden Parachute" Project

After the merger, the employee welfare and shareholders’ interests are not considered, and the food business is abandoned.

Only 15% of the shares are reserved for shareholders.

KKR scheme contains less PIK securities and more convertible bonds; Management provides more PIK securities and a small amount of convertible preferred stock.

KKR agreed not to carry out a large-scale layoff plan, and promised to pay the employee severance payment caused by the acquisition, but the management did not agree.

KKR agreed to guarantee the reset terms of all securities to ensure that the bonds would be traded and circulated as originally planned. Hilsen Company, an investment bank hired by the management, refused to guarantee it, so that the management could not bid the full rating during the evaluation.

Start with business, not choose mergers and acquisitions

Ross Johnson donated money from the company to his wife.

9. What measures did the founder take to prevent the control right from falling by? Why is it invalid?

measure：

Launch the merger and acquisition of RJR Nabisco to prevent the delay of stock price from affecting his CEO position.

Refuse to cooperate with KKR and choose Hilsen.

"Golden Parachute" plans to protect itself.

Lay off employees and give shareholders less equity to maximize their own interests.

failure cause：

The exposure of the "Golden Parachute Plan" exposed Johnson’s greed, which made the MBO lose public support.

KKR promised to give shareholders 25% of the shares, while Hilsen only gave shareholders 15% of the shares.

KKR promised to sell only a small part of Beske’s business. But Ross Johnson and Hilsen’s leveraged buyout plan only keeps the tobacco business.

Hilsen failed to prove the reliability of its securities through restructuring, and failed to ensure the welfare of its employees.

KKR agreed not to carry out a large-scale layoff plan, and promised to pay the employee severance payment caused by the acquisition, but the management did not agree.

KKR agreed to guarantee the reset terms of all securities to ensure that the bonds would be traded and circulated according to the original plan. Hilsen Company, an investment bank hired by the management, refused to guarantee it, so that the management could not bid the full rating during the evaluation.

measure：

Indulge in buying, preempted local competitors and became the largest employer in North Carolina.

"Prince Albert" cigarettes, trying their best to find the photo of the Prince of Wales as a cigarette label, vigorously advertising, set off a national advertising campaign. Offer generous rebates to cigarette wholesalers and retailers to encourage them to sell this kind of cigarettes, and those who sell poorly will be punished. The plan to March across the United States was a great success.

The Court of Appeal granted Reynolds Tobacco Company independence: employees hold shares, care about employees’ lives and improve employees’ loyalty.

Reasons for loss of rights：

The eldest son is in politics, the second son is not doing business, and the chairman raises horses.

10. What did you learn from the case? Explain from the perspective of mergers and acquisitions and corporate governance.

M&A perspective：

LBO acquirers use the assets of the acquisition target as debt collateral for financing, and use the money to acquire the target company. The essence of this is to borrow money to buy equity, or to say that you are empty-handed. In fact, KKR’s own funds for this $25 billion acquisition are less than $2 billion, and the rest are from financing.

Compared with LBO, MBO pays more attention to enterprise development strategy, rather than just acquiring the target company to get huge returns in the short term.

Successful LBO/MBO originates from the strategic adjustment of capital allocation, the improvement of operating efficiency and the integration of financial technology;

Adjustment of capital allocation strategy: redefining business scope, new business unit strategy or portfolio strategy;

Operational adjustment and improvement of operational efficiency: changes in sales, cost or asset management methods;

Organizational improvement: organizational structure or business process adjustment (which may involve system or management changes);

Financial strategy: the application of financial technology and financial risk management, a new method to manage the balance sheet, a new financial structure or a new corporate legal structure.

From the perspective of corporate governance：

The internal controller system is easy to lead to the monopoly of management. In order to prevent this phenomenon, it is necessary to set up an external supervision mechanism and strengthen supervision; Mutual restriction

The board of directors should ensure independence and objectivity and safeguard the interests of shareholders.

Formulate a reasonable and long-term company development strategy, so as to ensure the long-term development of enterprises, rather than just pursuing short-term enterprise development and stock rise.