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Word Count: 639
What is an LBO LBO occurs when a company acquires a controlling interest in anothercompany using mostly debt to finance the purchase The acquired aremostly used as collateral for the debt being used to finance thetransaction by the targets own assets The leveraged buyouts aims toallow companies to make large acquisitions without requiring a lot ofcapitalWhat is a tender offer Tender offer denotes when an offer is publicly made to theshareholders of a publicly traded company to tender some or all of theirshares It can be offered by 3 ways open offer public or invitationIt is usually made at a premium price to the market price and will existfor a finite period of timeIn general ie not specific to the RJR Nabisco case what is theagency problem between stockholder and mangers Agency problem arises between stockholders and manger when there isa conflict of interest between the needs of the principal and the needsof the agent and it is associated with firm value and financialleverage Acting as an agent for the shareholders the managers makedecisions that will maximize their own wealth instead of theshareholders wealth It is possible to eliminate the agency problemcompletely however to minimize this problem a manager can be motivatedto act in the shareholders best interests through incentives andmanaging their financing debtDescribe some of the agency problems that existed at RJR Nabisco ieRat hole investment perk consumption etc In order to be more cost effective and efficient RJR Nabiscos LBOmaintained a company air force of 10 crafts However the managersoverused and abused the corporates aircrafts for their own personaluse when the shareholders were not capable on monitoring them Thiscase is an example of perk consumptionRoss Johnson Nabiscos chiefexecutive after leveraged buyouts refused to give up the companys airforce This action created a big problem as the excessive consumptionsuggested that the executives were less protective on the assets and itshowed weak governance
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