Now let's discuss the famous case that- well, this transaction took place in 1988, and this is the legendary leveraged buyout of RJR Nabisco, the food and tobacco giant, that was completed by the very well-known company KKR, that stands for the names of its founders Kohlberg, Kravis and Roberts. And in this example, we will see so many things in just one and the same transaction that it's worth while really going in some detail. Well, this transaction as many of you know, produced a lot of interest to it and then later there were famous books written about that one of which is Barbarians at the gate. So, but now I would take sort of air dryer approach and in just a few numbers, we will wrap up what happened there. So first of, all the company was RJR Nabisco like I said, a large food and giant holding company and their transaction took place in 1988, almost 30 years ago. The main background is like that. There was a battle between the management of this company and the outside buyer KKR. So they were competing and before that all started, the initial price of the stock was $71, then it even went down a little bit but then it started this competitive bidding process. And the result was that KKR won this battle at the bid of $109 a share. Now, the question arises whether it's good or bad, a lot or not a lot, did that produce value or did it destroy value? And in order to illustrate this, we'll take the value drivers for this case that the case was studied at many places including the Harvard Business School. So these numbers are quite well known up there in the Weston book, and for now I will just use these numbers as a model approach. So the value drivers for this company were like this. So x subzero to $850 million. Now, tax rate was about 40 percent. Now, the re-investment rate B 30 percent, and this return on investment was a high 47 percent because the company was doing fine and there was a lot of cash flow and that was supposed to be a certain turn around, the shake up of this company. So the growth forecast was quite optimistic. So, as we can see that results in the growth rate of 14 percent a year and again the model was classic, so the supernormal growth for 10 years at this high growth rate and then the weighted average cost of capital was taken to be 12 percent. That was the fine number for this period and for that kind of company. So that is the whole set of value drivers but that produces the total value of the company. The company had debt, and debt outstanding at that time, that was $5.4 billion, and because here we talk about pure share of stock numbers we also have to keep in mind the number of shares outstanding. So it was 223.5 million of shares outstanding. Here was just debt. Now, all these numbers, they can be used in our classic model that we studied in week three, and they produced the following results. So let me put it here, valuation results. First of all, the total value of the company given these value drivers, it happens to be around $30.2 billion. From this, we have to subtract that, that was 5.4 billion. And that gives us the first important number, equity value. That was in this case about $24.8 billion. Now, we recall that there are 2 to 3.5 million shares. So on a per share basis, we have the next line that's value per share. And that is $111.1. So, so far, we're just doing some valuation and we are not having any idea whether it's good or bad. But, now we combine that with the winning bid, KKR winning bid of 109. And that gives us the key finding which is NPV per share is just $2.1. So we can see that that was a huge transaction, that people were talking billions. They were raising up again. This case also is used when we study Junk bonds or was it financier of about five billion dollars in Junk bonds. Lots of loaves and overview and see how thin a margin is. If KKR went up to 112, it would be a negative NPV project. Now maybe because it was a success and the success still did create value although a modest amount against the background of these huge numbers, but still that shows to you all the things, it nicely illustrates all the key things, issues, and problems that we've discussed so far namely. When you seek competitive bidding, that is potentially value destroying. So that involves some hubris, that involved widow's curse, whatever. And at the same time, you can see that even if you won and there's still positive NPV that translates into hundreds of millions of dollars of made money and very nice returns on this transaction. So here I'm about to wrap up this week, and we discussed not exactly the leash but rather financing in this forth week. And what we found was that financing is not the only, and some times not only primarily the situation in which we just ask the question where can we get this amount of money, and what is the means of payment. When we did find this money, and we enjoyed this or that means of payment namely stock for stock, or cash or whatever else, and then we see that sometimes this very means of payment may indirectly contribute to value creation as has been shown in these LBO cases. And then, we arrive at the question that cannot be even labelled as final because that's with us all the way throughout this course, and to significantly stand throughout this whole specialization is, if there is value created, then where does it go? Who pockets this value? Or in our less enthusiastic words, what is the breakdown of the value arriving at special groups of stakeholders? And in what follows next week, we will discuss some of these value creating strategies in some detail. So what exactly must be done? And then we will see how the value that is being created is distributed between different stakeholders. So that will be along with the whole path of this course. So not only do we try to identify the sources of value, we find the way how we can reach this value creation. And then if we did so, where it goes. I wish you all good luck with the assignments for this forth week, and I'll see you next week.
