RJR Nabisco LBO: Black Monday, Ross Johnson & The Rise of Private Equity

Black Monday's Impact on RJR Nabisco

• 📉 On October 19, 1987, known as Black Monday, the stock market experienced its single worst day in history, with the S&P 500 falling 22.6%.
• ⚠️ Portfolio insurance, an academic model assuming ideal market conditions, contributed significantly to the crash by triggering mechanical sell orders that overwhelmed buyers.
• 💥 RJR Nabisco's stock plunged 52% in a single day, from $71 to $34 per share, despite the company's strong business performance and a healthy economy.
• 😤 CEO Ross Johnson was deeply frustrated by the market's persistent undervaluation of RJR Nabisco, treating it solely as a tobacco company despite its significant food business.

The Emergence of Leveraged Buyouts (LBOs)

• 💡 Leveraged Buyouts (LBOs) are explained using a mortgage analogy, where a buyer uses substantial debt to acquire an asset, similar to a person buying a house.
• 📈 The Employee Retirement Income Security Act (ERISA) of 1974, specifically its 1979 clarification of the "prudent man rule," was crucial for unleashing institutional capital from pension funds into riskier investments like LBOs.
• 💰 The success of the Gibson Greeting Cards LBO in 1982, which generated 211 times the initial equity investment in 17 months, signaled a