Many lbos did not live up to original expectations

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Unformatted text preview: wnership and management to sell the company on a leveraged basis is also needed. Many LBOs did not live up to original expectations. One of the largest ever was the late-1988, $24.5-billion buyout of RJR Nabisco by KKR. RJR was taken public in 1991, and the firm continued to struggle under the heavy debt of the LBO for a few years before improving its debt position and credit rating. Campeau Corporation’s buyouts of Allied Stores and Federated Department Stores resulted in its later filing for bankruptcy protection, from which reorganized companies later emerged. In recent years, other highly publicized LBOs have defaulted on the high-yield debt incurred to finance the buyout. Although the LBO remains a viable financing technique under the right circumstances, its use is greatly diminished from the frenzied pace of the 1980s. Whereas the LBOs of the 1980s were used, often indiscriminately, for hostile takeovers, today LBOs are most often used to finance management buyouts. Divestitures operating unit A part of a business, such as a plant, division, product line, or subsidiary, that contributes to the actual operations of the firm. divestiture The selling of some of a firm’s assets for various strategic reasons. Companies often achieve external expansion by acquiring an operating unit— plant, division, product line, subsidiary, and so on—of another company. In such a case, the seller generally believes that the value of the firm will be enhanced by converting the unit into cash or some other more productive asset. The selling of some of a firm’s assets is called divestiture. Unlike business failure, divestiture is often undertaken for positive motives: to generate cash for expansion of other product lines, to get rid of a poorly performing operation, to streamline the corporation, or to restructure the corporation’s business in a manner consistent with its strategic goals. CHAPTER 17 FOCUS ON PRACTICE Sara Lee’s New Recipe for a Trimmer Company Sara Lee Corporation is a conglomerate that sells everything from its well-known bakery products to Chock Full o’ Nuts Coffee, Hillshire Farms packaged meats, Kiwi shoe polish, Hanes underwear, and Wonderbras. With so many diverse product lines, the company was struggling. In May 2000, CEO C. Steven McMillan announced a reshaping program to continue the restructuring begun in 1997 when the company “deverticalized” by selling off yarn-, textile-, and food-manufacturing operations. Through a program of strategic divestitures and acquisitions, Sara Lee would focus on three core nondurable-goods business segments: food and beverage, intimates and underwear, and household products. In deciding whether to sell or acquire a spin-off A form of divestiture in which an operating unit becomes an independent company through the issuance of shares in it, on a pro rata basis, to the parent company’s shareholders. Mergers, LBOs, Divestitures, and Business Failure brand, management considered five criteria: global reac...
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