How the Takeover Began
In October 1988, RJR Nabisco became the center of the biggest takeover battle in American business. The company was huge, famous, and profitable, but its stock price lagged behind what many insiders believed it was worth. That gap between market price and underlying value drew in corporate executives, investment bankers, and buyout specialists who all saw a chance to make history and make fortunes.
A leveraged buyout sat at the center of the struggle. In a buyout like this, the buyers use borrowed money to purchase the company, then rely on the company’s own cash flow and asset sales to pay down the debt. That structure made the deal possible, but it also made every decision more dangerous. A small change in price could mean billions more in borrowing and years of pressure on the business.
The opening move came from inside the company. Ross Johnson, the chief executive of RJR Nabisco, decided to lead a management buyout with backing from Shearson Lehman Hutton. He believed the market undervalued the company, especially its food brands, and he wanted to seize that value himself rather than leave it to outside raiders.
What began as a private plan quickly became public. Once Johnson brought the proposal to the board, the directors had a legal duty to seek the best deal for shareholders, not simply approve the chief executive’s offer. That decision turned a secret plan into an open auction and set off a fight involving Wall Street’s most aggressive firms.
The board formed a special committee to oversee the process and hired outside legal and financial advisers. From that moment, the contest was no longer about one executive’s bold gamble. It became a public battle over price, power, ego, and the future of a company created from two very different corporate traditions.
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