During the 1980s many huge mergers were financed with large amounts of debt. On Decem¬ ber 1, 1988, for example, RJR Nabisco agreed to be purchased for $25 billion by takeover artists Kohlberg Kravis Roberts in a deal that depended heavily on junk bonds, and in late 1989 Time, Inc., merged with Warner Communications in a $14 billion deal, which was financed with $8.3 billion of long-term debt and approximately $5.6 billion of preferred stock. REQUIRED:

a. Explain why it is difficult for the companies that result from such mergers to report prof¬ its in the years immediately following the mergers, yet in those same years report positive cash flow for operations.

b. In the year of the merger what special items would you expect to see on the resulting com¬ pany’s statement of cash flows, and where would they be reported on the statement?

c. Immediately after the merger, RJR Nabisco went on a rampage of asset sales, selling more than $5.4 billion in assets, including Del Monte foods, Chun King oriental foods, and Nabisco’s international brands unit. Why do you think the company sold these assets, and where would such transactions be reported on the statement of cash flows? Consolidated Statements of Cash Flows Dollars in Millions Year Ended June 30 1994 1993 1992 Cash Flows from Operating Activities: Net income $ 231.5 $ 171.3 $ 247.6 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting changes — 115.5 — Depreciation and amortization 171.2 156.9 155.9 Deferred income taxes (7.7) (46.4) —- Restructuring charges and gains on divestitures—net 108.6 20.5 (1.0) Loss on disposition of property and equipment 15.0 23.8 23.1 (Increase) decrease in trade accounts receivable (77.7) 59.1 84.7 (Increase) decrease in inventories (67.6) 41.9 (14.3) (Increase) in other current assets (56.3) (25.8) (10.1) Increase (decrease) in trade accounts payable 44.1 (7.6) 24.0 Increase (decrease) in other current liabilities 6.6 (6.4) 132.5 Change in deferred compensation 15.6 11.0 11.6 Other items 67.5 44.4 (43.1) Change in payable to Fisher-Price — — (29.6) Net Cash Provided by Operating Activities 450.8 558.2 581.3 Cash Flows from Investing Activities: Additions to property, plant and equipment (175.1) (172.3) (176.4) Change in other receivables and investments (6.4) (25.6) (20.0) Purchase and sale of property and business—net (82.1) 1.2 16.5 Net Cash Used in Investing Activities (263.6) (196.7) (179.9) Cash Flows from Financing Activities: Cash dividends (144.6) (140.3) (132.8) Change in short-term debt 83.3 67.0 (19.6) Proceeds from long-term debt 222.2 0.5 1.1 Reduction of long-term debt (100.6) (59.0) (46.2) Proceeds from short-term debt to be refinanced — — 50.0 Issuance of common treasury stock 11.8 23.3 20.3 Repurchases of common stock (214.9) (323.1) (235.1) Repurchases of preferred stock (1.2) (LI) (0.9) Net Cash Used in Financing Activities (144.0) (432.7) (363.2) Effect of Exchange Rate Changes on Cash and Cash Equivalents 36.2 37.0 (17.6) Net Increase (Decrease) in Cash and Cash Equivalents 79.4 (34.2) 20.6 Cash and Cash Equivalents—Beginning of Year 61.0 95.2 74.6 Cash and Cash Equivalents—End of Year $ 140.4 $ 61.0 $95.2