Barbarians At The Gate: The Fall Of RJR Nabisco (2005) - Plot & Excerpts
I just finished reading the iBooks version of “Barbarians at the Gate: The Fall of RJR Nabisco,” at 763 pages in my edition. Written in 1989 by two Wall Street Journal reporters - Bryan Burrough and John Helyar - the book recounts the 1988 leveraged buyout of RJR Nabisco by KKR & Co. L. P. This event represents the pinnacle of business culture in the Roaring Eighties.The book begins with the history of the two sides of the company. I’ll review their early history here, as it’s particularly interesting.NabiscoNabisco [the National Biscuit Company] was founded in 1898 by the Chicago lawyer Adolphus Green through the merger of East and West Coast competitors. Nabisco’s created the first widely-adopted processed food in the US - crackers - and was known as the biscuit trust. It ran an an “associate proprietor” system that allowed employees to buy into the company.RJ ReynoldsReynolds was founded in 1875 by RJ Reynolds in Winston-Salem, NC. It’s employees there were primarily members of the Moravian Church. Reynolds was known to keep busy; “At an 1890 meeting of the Reynolds board, directors authorized spending $240 a year for Reynold’s horse team, the equivalent of today’s corporate jet” [69]. Wachovia Bank was one of their early allies.In 1899, Buck Duke, a NYC guy, bought two thirds of Reynolds. They used the firepower to become the biggest employer in North Carolina.F. Ross JohnsonJohnson is the protagonist of the book. A Canadian, the story follows him through his various positions in the corporate world, eventually landing him as the CEO of RJR Nabisco. Johnson was known as a noncompany man, and had a “personal crusade against specialization” [47]. He would tell his management, "you don’t have a job, you have an assignment" [48]. He also knew the rules of duopoly; "you know, it just doesn’t make sense to have anything that’s not number one or number two in its industry" [61]. His motto was, "a few million dollars are lost in the sands of time," and he was know for his "RJR Air Force" of corporate jets. By the end of the buyout, he’d learned the Three rules of Wall Street: “Never play by the ruse. Never pay in cash. And never tell the truth” [675].Leveraged BuyoutsThe leveraged buyout [LBO]- buying an undervalued conglomerate to be reorganized and sold at a profit while using the company as collateral and creating massive amounts of debt - is the key concept in the book.Although KKR pioneered LBOs, the first famous one that got everybody on the bandwagon was in 1982 - Gibson Greetings. KKR was the king of LBOs, so let’s review their history.KKRKKR was founded in 1976 by Jerry Kohlberg, Henry Kravis, and George Roberts. The three got kicked out of Bear Sterns, a trader, for getting into LBOs into the seventies. So they started their own firm. Kohlberg was twenty years senior of Kravis and Roberts, and served as a mentor to them in their early years. By the mid eighties, things in their partnership were shifting. Kohlberg had some heath issues that took him out for a while, and he was traditional, when Kravis and Roberts were aggressive. Kohlberg was known as “Dr. No,” as he’d always be the brakes on the operation.By the time of RJR Nabisco, Kohlberg had left and started his own thing, although he still had significant financial ties to KKR.Key Terms* Bridge loan - a short-term loan used for capital while longer-term loans are worked out* Merchant banking - providing capital through shares rather than loans* Tender offer - a public form of takeover bid* Toehold investment - when a firm acquires a significant stake in a company that they’re about to attempt to buyout* PIK - Pay-in-kind loans use other forms of securities than cashReflectionsRight before Johnson started things rolling with an LBO, his son went into a coma [due to a car accident]. It’s worth noting that Johnson didn’t have the psychological support or skill set to deal with this trauma in any other way than diving into his work - in this case, laying the groundwork for the biggest LBO in history.I didn’t see any points in this event associated with outlandish greed. What can be found in this story is a description of the concentration of power. So although these people weren’t unusually greedy for the average American, they were dealing with some pretty big numbers that had immediate impact on many peoples lives.Another shortcoming in the development of many of the core characters in the story is a lack of initiation into adulthood. There is some spirit of competition. It’s clear that there wasn’t an interest in the leaders in this book making decisions that are particularly in the “best” interests of themselves or their communities. They just wanted to “win.” This is an adolescent attribute. It’s both sad and irresponsible that our society places people of such deficient maturity in these roles of power.There’s also a disconnect between the personal and professional lives of many people in the story. On the one hand, many people in the book care deeply for quality in their personal life. They might have hand-made Italian loafers, fine art on their walls, and eat at delicious restaurants almost every night of the week. I associate these things with the values of attention to detail, presence, and beauty.On the other hand, their professional lives are a mess. Things are flying all over the place all the times. Deals are thrown together in haphazard jumbles that often require significant restructuring down the road. I’m not sure what the values are here, but they’re not associated with quality.That being said, their lifestyles are pretty genuine. It’s all about relationships. Their schedule looks nothing like the nine-to-five. They spend a lot of their time socializing, and hanging out in cool places. Most Wall Street deals seem to take place over drinks at somebody’s penthouse apartment at 3:00am, or on the golf course, or at a ski resort.There’s an undercurrent of warfare. Whenever somebody in the book served in the military, which many of them did, their history was reviewed, and how it informed their behavior.LBOs definitely operate in a very special ecosystem. Although there were just a handful of people calling the shots, they drew on vast arrays of specialized resources [accountants, lawyers, pension funds, junk bonds, et cetera].In summary, I found the book extremely interesting.
The tale of Ross Johnson, the CEO of RJR Nabisco who sets the book's plot into motion, and the frenzied time leading up to the final decision on who'll win the leveraged buy out (LBO) bid and take ownership of RJR Nabisco is fascinating. The authors do an excellent job of providing background for the many people involved in the final bids, much of which is crucial for understanding their motivations and decisions. For example, the rise of Johnson through the ranks of Standard Brands, the late night drinking brainstorming sessions he has with those whom have risen with him, and his constant need to have change going on around him provide adequate background to explain his somewhat puzzling decision to think up and execute the idea of a LBO of RJR Nabisco: essentially the share price isn't where he wants it and he thinks RJR Nabisco is becoming staid.The resulting frenzy of action unleashed by the (at the time) largest LBO in history, from Henry Kravis's (whom Johnson originally talked to about the LBO) wheeling and dealing to scrap together the money to enter the LBO bid to the surprise introduction of First Boston and their off-the-wall strategy to make a deal happen, kept the story going at a good pace and the authors did a nice job of flipping between different storylines to keep things from going stale.The book also give a great idea of how much the personalities of those involved in the business deal affect the decisions made. For example, Ted Forstmann's hatred of junk bonds caused trouble as others sought to use these as collateral for the LBO while the involvement of Bruce Wasserstein, formerly of First Boston, helped spur First Boston to make a bid. In addition, it provides an overview of different financial devices---junk bonds, securities, and others---that one hears on the news but are not commonly put into context of how they are normally used.Overall, an excellent journalistic endeavor and a non-stop thrill from start to finish. The authors give a highly detailed account of the players' backgrounds and motivations along with enough detail about the events to paint a good picture of events. Even better, they refrain from passing their own judgement during the book, which help the reader draw their own conclusions and allows one to understand (to a degree) why particular decisions were made without pre-conceived biases.Highly recommended.
What do You think about Barbarians At The Gate: The Fall Of RJR Nabisco (2005)?
I try to rate books based on how well they achieve their own objectives, and I think this one nails its goals perfectly. Corporate finance is labyrinthian by nature--to understand what actually happened in any given deal requires being able to track the money, the legal manuverings, and the easily ignored but incredibly critical personal relationships. (When I was a child, I thought that business deals were made based off of what was most profitable for the company. It turns out in real life, far more important factors are who plays golf with who and who is still pissed about not getting onto the board of some third company two years ago.) Barbarians at the Gate involves hundreds of people, with literally dozens of main characters (helpfully listed out by firm in the front of the book, a list you will return to again and again). They interviewed almost all of them personally, and include critical backstory for everyone involved, along with corporate histories, notes on legal ramifications, explanations of obscure financial procedures, and an overview of the history of the financial industry in general. Every bit of it is important.That's not to say I enjoyed all of it, but my discomfort was never boredom. More just that I've been in enough meetings and contract negotiations to watch quite a lot of similar decisions being made, and some of this was close enough to home to raise my blood pressure by proxy.The sheer hubris of some of these people is shocking. The CEO effectively kicks over this hornet's nest because he's bored and anxious about personal problems, and likes to stir things up for the sake of change. His stated reason for starting the LBO is incredibly weak--he's concerned about the stock price and thinks they're undervalued. He says he did it for the stockholders. (The company's stable at the moment and raking in money, which can be either plowed back in to make the company stronger or handed out dividends. As far as I can tell, doing short-sighted things to raise your stock price only benefits your stockholders if they then sell your stock. At which point, they stop becoming your stockholders. Now you have new stockholders, who own artificially inflated stock whose price cannot be sustained, who you have screwed from the very beginning. Honestly, I think trying to raise stock price "for the stockholders" is an asinine policy. The only way that raising the price will continue to benefit your stockholders is if you've done so by actually making your company more valuable--inventing new products, finding new markets, and investing in long term stability. Blowing it up via financial tricks does you no good in the long run--which (spoilers!) is exactly what happens here.) But he's not the only one. The board have their own egos (and financial investments) to protect. Each of the bidding firms cannot afford to lose out on the biggest deal ever, but almost no one factors in their respective desperations, which leads to a spiral of increasing hysteria as each party is surprised when someone else trumps them.There are mysterious leaks to the press, back channel betrayals, ranting Cassandras, and a mad sprint through Manhattan when a traffic jam delays a critical bid. It's completely absorbing and a little sickening at the same time.This is a sausage-making book, as in, the more you know about what goes into high finance, the more horrified you're likely to be. As I'd mentioned, I've been exposed to some similar shenanigans, albeit on a much smaller scale, but it rings true. This is real-life high drama, featuring political manuverings that make and break fortunes as well as destroy jobs and lives across the country. The fallout still influences the behavior of CEOs and investment banks today. One might expect a detailed financial history to be boring, but that ignores the fact that the driving force behind any such deal is the relationships between the people, in all their brilliant, vain, loyal, treacherous, ambitious, flawed glory.
—Rebecca
This book is weird. It's written like a taut spy-thriller, and superficially it's a "page-turner"-- everything on the page seemed very exciting and I kept wanting to read it. But the stuff being written about-- the tale of some investment bankers fighting over who gets to buy RJR Nabisco-- is boring beyond belief. Lots of arcana about leveraged buy outs, endless paragraph-long sketches of interchangeable middle-aged white guys engaged in a financial dick swinging contest, pages upon pages devoted to what this lawyer said to that lawyer... who cares. And yet I more or less read it to the end! It's a conundrum.Did this get made into a movie? I guess I'd watch that.
—Amar Pai
Read this in 1991 just after it first came out. I couldn't put it down. If you don't understand the financial pages of newspapers and the terms they use, this is an easy way to learn about acquisitions, hostile takeovers, liquidity, assets, etc. Perhaps a bit dated now, but the author (a financial journalist) describes what happened here in the States in the 80's, a time when small businesses (and huge ones like RJR Reynolds) were bought out, sometimes just for the land they were built upon. The businesses were cannibilized and then closed after the maximum in profit was obtained. There was no reinvestment in the future. Job losses were viewed as part of business. Profit was their "religion". Strangely it reminds me of my birdfeeders. I fill them daily with solid nutritious feed and enjoy the families of birds who rely on my stewardship in keeping that feeder fed, especially in winter. Then the grackles (crow-like birds) arrive in mass and devour the food in the feeders. Bird-lovers will understand this analogy. One will see a dozen of these ugly birds gorging themselves, spitting out seeds they don't like and often knocking the feeder from its perch. Corporate raiders are like grackles. How does one prevent it? I guess the secret is filling the feeders with a mixture of seed they don't like... Moral of the story...if you build a company up from nothing and allow it to be publicly traded on the stock market, you are at risk for a grackle attack. Make sure you watch your feeders.
—Suzanne
