Johnson orchestrates a secretive, high-stakes leveraged buyout, sparking tension and power struggles within the company.

Johnson is worried about the company's stagnant stock price. He believes the solution is a leveraged buyout (LBO), a process where a company is taken private through debt financing. Johnson secretly collaborates with the investment bank Shearson Lehman Hutton, led by Peter Cohen, to create an LBO proposal. The team at Shearson is thrilled about the potential of this deal, which could be worth a record-breaking $17 billion. Despite the excitement, Johnson insists on a slow and steady approach. This is in contrast to Shearson's preference for a quick "ambush" strategy, which is typically used in LBOs. There are intense negotiations between Johnson and Shearson about how profits and control will be divided. Johnson demands a higher percentage for himself and other executives, which is unusual. In the meantime, RJR director Charlie Hugel senses that Johnson is further along in his plans than he's letting on. To evaluate the LBO plan, Hugel puts together an independent board committee and hires lawyer Peter Atkins. As the board meeting approaches, Johnson grows increasingly nervous but remains determined to propose the LBO. Cohen from Shearson makes last-minute concessions to reach an agreement with Johnson. On the day of the board meeting, several key players come into focus. Ed Horrigan, Johnson's right-hand man, is eager to support the LBO. John Greeniaus, the chief of Nabisco, is shocked to find out he's been left out of the loop. Hugel feels uneasy about Johnson's handling of the situation. The story wraps up with Johnson finalizing his proposal speech, viewing it as the most important performance of his career. In essence, this is a tale of ambition, tension, and secrecy in the world of high-stakes Wall Street deals during the 1980s.

The 1988 RJR Nabisco buyout war was a chaotic frenzy of escalating bids, power struggles, and public scrutiny, marking the largest leveraged buyout in history.

In October 1988, a fierce bidding war erupted for RJR Nabisco. Ross Johnson, who was the CEO of RJR Nabisco at the time, had set in motion a leveraged buyout of the company. He was working with the investment bank Shearson Lehman and other partners. But this move sparked a competition, attracting bids from other major players. These included the investment firm Kohlberg Kravis Roberts (KKR), led by Henry Kravis, and Ted Forstmann's investment firm, Forstmann Little. As the prices started to skyrocket, everyone involved was in a mad scramble to secure financing and put together bids. There were several attempts to negotiate joint deals between the Johnson and KKR groups. However, these attempts fell through due to disagreements on key issues. These included disputes over management compensation and deciding which investment banks would handle the financing. The situation was further complicated by the clashing personalities and motives of the major players. These included Johnson, Kravis, Forstmann, Shearson CEO Peter Cohen, and Salomon CEO John Gutfreund. Behind the scenes, there was a lot of greed and power struggles as each player tried to gain control of the deal. At the same time, the buyout war was drawing a lot of attention. The public and the media were scrutinizing the escalating debt levels and the culture of Wall Street deals. Kravis was particularly bothered by the negative publicity. The bidding war was spiraling out of control. Emotions were running high and relationships were breaking down under the pressure. Some of the key events that took place during this time include Johnson's unauthorized bid of $92 per share, the leak of his extravagant management agreement, and Forstmann's last-minute entry into the bidding war with a consortium. The situation was chaotic, with a frantic pace, gamesmanship, betrayals, and shifting alliances. Everyone was racing against each other to outmaneuver the competition for the largest leveraged buyout in history.

"First Boston's chaotic, last-minute bid for the RJR Nabisco deal underscores the high-stakes brinksmanship of Wall Street in the 1980s."

Another player joins: First Boston Corporation, an investment bank that was trying to get in on this massive deal. At the time, First Boston was trailing behind other major Wall Street firms in the race for the RJR Nabisco deal. The bank had lost its star players, Bruce Wasserstein and Joe Perella, who had left to start their own firm. The remaining bankers at First Boston saw the RJR deal as an opportunity to restore their merger department's reputation. With little time to prepare, they quickly put together a proposal, banking on a complex tax avoidance scheme to make their bid more attractive. The story takes us to the day when the proposals were due. First Boston's bid preparations were chaotic and last-minute. The lawyers had initially drafted a bid letter that was so bad it had to be completely rewritten, and all under intense time pressure. To make matters worse, they had teamed up with a relatively unknown investment group led by Jay Pritzker, who kept questioning whether they should be involved at all. On the other side, the advisors to the RJR board dismissed First Boston's proposal as unworkable. They refused to provide any confidential company data that could help First Boston's bid. This left First Boston in the dark, forcing them to bid without proper due diligence. The bankers spent the day in a frenzy, yelling at lawyers and making last-minute changes to documents. After the 5pm deadline, messengers had to fight through traffic jams to hand-deliver the bid. This story paints a picture of First Boston's desperation and disorganization, and their lack of thorough planning. In contrast, other Wall Street giants like Kohlberg Kravis were submitting slick, well-prepared proposals. First Boston saw the RJR deal as their shot at redemption, but their last-minute bid came across as half-baked.

The final bidding for RJR Nabisco was a high-stakes game of strategy, deception, and miscalculations, where behind-the-scenes tactics proved as crucial as the headline bids.

This story revolves around the intense final hours before the second round of bidding for RJR Nabisco. First Boston's bid was based on a unique tax strategy, the brainchild of banker Brian Finn. Despite their innovative approach, they faced significant challenges in securing financial commitments. Their partners who were supposed to provide equity were on the verge of backing out. However, just in the nick of time, the Pritzkers stepped in to cover a $200 million deficit. Yet, First Boston hit another roadblock when they couldn't convince a bank to support their risky tax plan. On the other side, the Kravis group was in a dilemma about whether to make a robust second bid. George Roberts, a key member of the group, was hesitant to move forward. After a lot of back and forth, they decided to go all in and make a strong bid, abandoning their initial strategy of lowballing. But they played their cards close to their chest. They led their bankers to believe they were pulling out, only to shock them with a $106 bid at the eleventh hour. Meanwhile, the Johnson group, under the impression that Kravis had withdrawn, didn't see the need to significantly up their initial $100 bid. They dismissed First Boston's bid as inconsequential and only slightly increased their offer to $101 per share. Little did they know, this laid-back attitude would be their downfall. It was a high-stakes game of strategy and deception that unfolded during the final bidding. Kravis masterfully manipulated perceptions to hide his true intentions. First Boston, against all odds, managed to put together a risky but potentially rewarding proposal. Johnson, on the other hand, disastrously miscalculated the competition due to overconfidence and incorrect assumptions. The behind-the-scenes tactics played a crucial role in determining the outcome of the bidding war, proving to be just as important as the headline bids.

Despite a higher bid, RJR Nabisco favored KKR's offer in the largest leveraged buyout of the 1980s, sparking controversy and highlighting the risks and rewards of high-stakes financial deals.

In the final round, KKR proposed $106 per share, while the Shearson group raised their bid to $112 per share. The board of RJR Nabisco had the task of evaluating these bids, which were essentially of the same value. Despite the higher offer from the Shearson group, the board unanimously favored KKR's bid. The reasons for this decision were manifold. KKR promised to retain more equity for shareholders, pledged to sell only a portion of Nabisco, and agreed to protect the employees. Additionally, the securities offered by Shearson were perceived as riskier due to the absence of a reset mechanism that would guarantee their value. Upon learning about KKR's selection, Ross Johnson accepted the defeat gracefully. He acknowledged his team's hard work and encouraged them to move forward. On the other hand, Henry Kravis and George Roberts of KKR celebrated their victory after a grueling six-week bidding war. The final price paid was a whopping $25 billion, making it the largest leveraged buyout in history at that time. However, the board's decision to favor KKR was not without controversy. Ross Johnson felt that he was unfairly disadvantaged in the process, despite Shearson's bid being technically higher. There were claims that the board was biased against Johnson due to a Time magazine profile that portrayed him as a symbol of greed. Regardless of the controversy, the record-breaking RJR deal was a significant event in the 1980s buyout boom, which was largely driven by Drexel Burnham Lambert's junk bonds. The astronomical price paid pushed the financial boundaries of the time and highlighted both the potential rewards and risks associated with highly leveraged financial deals.

Home

Barbarians at the Gate - Book Summary (2024)

Bryan Burrough, John Helyar

"Barbarians at the Gate" is a narrative account of the leveraged buyout of RJR Nabisco, a major American conglomerate, in the late 1980s, highlighting the corporate greed, power struggles, and ego clashes involved.

Key Ideas

Ross Johnson climbed the corporate ladder to become the CEO of RJR Nabisco in 1986. His journey began with his early professional life, where he displayed a knack for corporate politics. Johnson had a unique ability to charm directors and outsmart competitors. His strategic moves at Nabisco set the stage for him to assume the role of CEO after orchestrating a merger with RJ Reynolds Tobacco in 1985.

RJ Reynolds, a successful tobacco company based in Winston-Salem, North Carolina, had been thriving for over a hundred years. However, it was grappling with falling cigarette sales. To diversify into the food industry, its CEO, Tylee Wilson, decided to acquire Nabisco. Wilson appointed Johnson as his deputy, a decision he would soon regret. The two had conflicting styles, and Johnson began to undermine Wilson's authority with the board. Wilson's decision to keep Premier, a secret "smokeless" cigarette project, hidden from the board gave Johnson the ammunition he needed to turn the directors against Wilson.

Johnson began to rally board members like Sticht and Hugel, lobbying for their support to become the next CEO. He even threatened to resign, which forced Wilson to propose early retirement. However, Johnson and his allies persuaded the board that Wilson needed to step down immediately. In 1986, Wilson resigned, walking away with a hefty severance package. The board then appointed Johnson as CEO, marking the successful execution of his carefully crafted plan.

This story also highlights the cultural clash between the genteel tobacco culture at Reynolds and the aggressive style Johnson brought from Nabisco. It hints at the future conflicts between Johnson and other executives like Horrigan that would persist in the newly formed RJR Nabisco.

"Barbarians at the Gate" by Bryan Burrough and John Helyar is a thrilling, detailed account of the largest leveraged buyout in history: the takeover of RJR Nabisco. The book provides an in-depth look into the world of Wall Street, corporate strategy, and the high-stakes game of corporate buyouts. It paints a vivid picture of the greed, arrogance, and reckless behavior that characterized the financial world in the 1980s. The authors expose the behind-the-scenes drama, the power struggles, and the personalities involved in this monumental deal.

10 Actions to Implement Learnings:

Understand the Business: Before investing in or taking over a company, understand its business model, its products, its market, and its potential for growth.
Do Thorough Due Diligence: Always conduct a thorough investigation into a company's financials, operations, and market position before making any major decisions.
Be Aware of Market Trends: Stay updated with the latest trends in the market and the economy. This will help you make informed decisions.
Avoid Greed: Don't let greed cloud your judgment. Always consider the long-term implications of your decisions.
Manage Risk: In any business venture, there's always a risk. Learn to manage it effectively to avoid catastrophic losses.
Negotiate Effectively: Good negotiation skills can make a significant difference in business deals. Learn to negotiate effectively.
Build a Competent Team: Surround yourself with competent and trustworthy individuals. They can provide valuable insights and help you make better decisions.
Maintain Ethical Standards: Always maintain high ethical standards in your business dealings. Unethical behavior can lead to severe consequences.
Learn from Mistakes: Mistakes are inevitable in business. Learn from them and use them as stepping stones to success.
Stay Resilient: The business world is full of ups and downs. Stay resilient and keep pushing forward, even in the face of adversity.