Anecdote RJR Ego and Overpayment

The aforementioned bestseller Barbarians at the Gate, also made into a movie, describes the epic takeover battle for RJR Nabisco between Kohlberg Kravis Roberts (K.K.R.) and RJR management (supported by Shearson Lehman [now Lehman Brothers]). In October 1988, RJR's CEO Ross Johnson and his predecessors had mismanaged the company long enough to allow him to offer RJR shareholders the premium price of $17.6 billion in a leveraged management buyout. This required the resignation of Johnson from the board contemplating the offer, which in turn opened the door to a $20.6 billion counteroffer by KKR. Eventually, KKR purchased RJR for $25 billion, and Johnson got a $53 million golden parachute. This takeover was also probably KKR's biggest miscalculation in that it overpaid for RJR. The prime reasons were personal egos and animosities, which fueled an irrational bidding war—all to the benefit of RJR shareholders.

Figure 23.1: Takeover Activity in the United States

(A) Number of Unfriendly Takeovers (B) Value of Unfriendly Takeovers

Figure 23.1: Takeover Activity in the United States

(A) Number of Unfriendly Takeovers (B) Value of Unfriendly Takeovers

(C) Fraction of Unfriendly Takeovers Relative to All Publicly Traded Firms

iS 1980 1985 1990 1995 2000

Year iS 1980 1985 1990 1995 2000

Year

(D) Value Fraction of Unfriendly Takeovers Relative to All Publicly Traded Firms

(D) Value Fraction of Unfriendly Takeovers Relative to All Publicly Traded Firms

1980 1985 1990 1995 2000

Year

1980 1985 1990 1995 2000

Year

Source: Securities Data Corp. In the upper diagrams, the total number of both types are circles, the hostile type are fat dots. In the lower diagrams, these are reported as a percent of the total number and the total market value of all publicly traded companies on the NYSE, AMEX, and Nasdaq.

In the 1990s, the stock market boomed. General corporate takeover activity also heated up, with Takeover Activity in

25,493 takeovers and $4.4 trillion in total target value. But hostile takeover activity declined, the US in the 1990s.

accounting for only 0.2% of all takeovers (down from 1.4% in the 1980s), and neutral takeovers for only 0.1% (down from 1.2%). In terms of target value, hostile takeovers accounted only for

3.5% (down from 10%), neutral takeovers only for 1.2%. Again, how does this compare to the number and value of all publicly traded firms in the United States? If we look at the year 2000, for example, there were about 8,100 firms with about $16 trillion in market value. There were

8 hostile takeovers with about $20 billion in market value, which accounted for just about 0.1%

of all publicly traded firms.

Does the threat of a hostile takeover discipline managers? It certainly did in the 1980s, and Does takeover activity still probably matters a little today. The sheer visibility and novelty of these takeovers were big matter?

enough to prevent the managers of many firms from engaging in the worst abuses. However, as

Table 23.1 shows, KKR and its colleagues seemed pretty satiated after RJR Nabisco—the hostile takeover threat generally receded after 1990. Any given year now typically sees only about a handful of hostile takeovers. Their dwindling number indicates that they are no longer the sword of Damocles that is hanging over—and thereby controlling—corporate management.

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