Oschene23
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In an LBO, why is that the firm attempting the takeover (e.g a PE firm) generates fees through its participation in the buyout process? (This is something I have read on several informational websites). This seems counter-intuitive as surely it is not providing any service in particular simply by its intention to takeover another company.

Also, in the famous case of RJR Nabisco why did Ross Johnson stand to gain $100m simply from the LBO? I understand that he had arranged a type of golden parachute deal with the firm, however I thought these kind of deals were only established in the case of an employee's employment contract being terminated.
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surfmonkey
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(Original post by Oschene23)
In an LBO, why is that the firm attempting the takeover (e.g a PE firm) generates fees through its participation in the buyout process? (This is something I have read on several informational websites). This seems counter-intuitive as surely it is not providing any service in particular simply by its intention to takeover another company.

Also, in the famous case of RJR Nabisco why did Ross Johnson stand to gain $100m simply from the LBO? I understand that he had arranged a type of golden parachute deal with the firm, however I thought these kind of deals were only established in the case of an employee's employment contract being terminated.
Could you elaborate on this? What do you mean with "generates fees through the participation"? You mean that the PE firm is getting paid just for bidding or what do you want to say?
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spoli21
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As you said, I think Ross Johnson got 100m as a severance package.
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webuffett
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(Original post by Oschene23)
In an LBO, why is that the firm attempting the takeover (e.g a PE firm) generates fees through its participation in the buyout process? (This is something I have read on several informational websites). This seems counter-intuitive as surely it is not providing any service in particular simply by its intention to takeover another company.

Also, in the famous case of RJR Nabisco why did Ross Johnson stand to gain $100m simply from the LBO? I understand that he had arranged a type of golden parachute deal with the firm, however I thought these kind of deals were only established in the case of an employee's employment contract being terminated.
On the first question, yes you are correct it is "counter-intuitive" (read bull****). The basic reason is that the guys doing the deal are bankers and the logic is that they are getting paid by the fund for organizing the deal.

On the second question, I am not familiar with the exact case (obviously I have read about it...but not recently). However, it is often the case that the new management will get a substantial amount of stock as an incentive. I also believe, although I think it is no longer the case as it is a terrible conflict of interest, that managements were offered bonuses on completion of the deal (in some cases, I am not sure if this is the case here). Finally, if I remember correctly, Johnson was a long time employee and actually owned quite a bit of stock so it might have been this as well (I believe he was fired so this could have been the buyout of his contract). Anyway, I am sure someone more knowledgeable will come along and correct all my mistakes.
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Oschene23
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(Original post by surfmonkey)
Could you elaborate on this? What do you mean with "generates fees through the participation"? You mean that the PE firm is getting paid just for bidding or what do you want to say?
Yes that's what I meant, I don't know if it is correct or not I just wanted some clarification. The exact quote from the website I was reading went '...the PE firm that generates fees from the day the buyout process starts and through holding the stock'.
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