Barbarians at the Gate: The Fall of RJR Nabisco
Author: Bryan Burrough and John Helyar
ISBN: 9780061655548
Genre: Business, Non-fiction, Corporate History
Published Year: 1990
Introduction
Barbarians at the Gate is a thorough examination of the historic leveraged buyout (LBO) of RJR Nabisco, one of the largest food and tobacco conglomerates in the world, by the private equity firm Kohlberg Kravis Roberts & Co. (KKR). This book, co-authored by Bryan Burrough and John Helyar, dives deep into the personalities, decisions, and behind-the-scenes drama that led to the $25 billion buyout in 1988. The authors, using extensive research and interviews, narrate the events like a thriller, offering insight into the world of corporate finance during the greed-driven 1980s.
Plot Summary
1. RJR Nabisco: A Corporate Giant
The book begins by introducing RJR Nabisco, a giant in the tobacco and food industries. Formed by the merger of R.J. Reynolds, one of the largest tobacco companies, and Nabisco, the cookie and snack food powerhouse, the company was considered one of the crown jewels of American business. By the 1980s, however, it faced many challenges, including declining cigarette sales due to increasing public awareness of health risks and rising competition in the food industry.
At the helm of RJR Nabisco is F. Ross Johnson, the charismatic but controversial CEO. Johnson is portrayed as a man more interested in personal luxuries than in long-term corporate success. His management style and vision for the company play a significant role in setting the stage for the dramatic events that follow.
2. The Beginning of the Buyout: Ross Johnson’s Gambit
The real action of the book starts when Ross Johnson decides that taking RJR Nabisco private through a leveraged buyout would be the best way to maximize his personal wealth and that of the company's top executives. A leveraged buyout involves borrowing large sums of money to buy out a company, with the acquired company’s assets often used as collateral for the loan.
Johnson initially seeks out Shearson Lehman Hutton, a major Wall Street investment bank, to help him orchestrate the buyout. Shearson, led by Peter Cohen, and Salomon Brothers, another investment bank, are eager to assist, seeing the massive fees they stand to collect if the deal goes through. Johnson’s plan is to raise a significant amount of debt to buy out RJR Nabisco’s shareholders, offering them a premium on their stock in exchange for taking the company private.
3. The Entry of KKR and the Bidding War
As Johnson and his team begin their preparations, news of the impending buyout leaks, attracting the attention of Kohlberg Kravis Roberts & Co. (KKR), a private equity firm known for its aggressive leveraged buyouts. KKR is led by Henry Kravis and George Roberts, two of the most powerful financiers on Wall Street. Kravis, a key player in the world of LBOs, feels personally slighted by Johnson for not involving him in the initial stages of the buyout and decides to mount a competing bid.
What follows is a fierce bidding war between Johnson’s group and KKR, with other players, such as First Boston and Forstmann Little, entering the fray. Each round of bidding drives the price of the deal higher and higher, with both sides employing cutthroat tactics to win control of RJR Nabisco.
The back-and-forth battle is full of corporate intrigue, backroom negotiations, and shifting alliances. Johnson, once confident of his position, finds himself increasingly outmaneuvered by Kravis and his team, who are more experienced in handling LBOs. As the bidding war escalates, it becomes clear that this is not just a fight over a company but a battle of egos between two powerful men.
4. The Impact on RJR Nabisco
As the deal progresses, the authors delve into the effect the LBO has on RJR Nabisco itself. The constant uncertainty around the future of the company causes unease among its employees, and the huge amounts of debt being accumulated to finance the buyout begin to raise questions about the company’s ability to survive once the deal is done. The book paints a grim picture of how corporate greed and short-term thinking can threaten the long-term viability of a major corporation.
Meanwhile, Johnson’s image as a greedy and out-of-touch CEO worsens. His excessive spending on luxuries, such as private jets and a lavish lifestyle, is heavily criticized. In contrast, Kravis and KKR, while just as profit-driven, are seen as more disciplined and financially astute, giving them an edge in the bidding war.
5. The Final Decision: KKR’s Victory
After months of negotiations, RJR Nabisco’s board of directors is left to decide between Johnson’s final offer and KKR’s competing bid. The board ultimately chooses KKR’s offer of $25 billion, marking the largest leveraged buyout in history at the time.
KKR’s victory is seen as a triumph of financial acumen over corporate excess, but the consequences of the deal are far-reaching. The huge debt taken on by KKR to finance the buyout leaves RJR Nabisco with significant financial strain, and in the years following the deal, the company struggles to maintain profitability under the weight of its new financial obligations.
6. The Aftermath: Corporate Fallout
In the aftermath of the buyout, the book explores the fates of the major players involved. Ross Johnson, once one of the most powerful CEOs in the country, is forced out of his role at RJR Nabisco and fades from the corporate spotlight. KKR, on the other hand, solidifies its reputation as one of the most successful private equity firms in the world, but the RJR Nabisco deal leaves a lasting impact on how leveraged buyouts are viewed in the financial world.
The buyout also serves as a cautionary tale about the dangers of corporate greed and excess. The authors argue that while the executives and investment bankers involved in the deal walked away with huge profits, the company itself and its employees were left to deal with the consequences.
Themes in Barbarians at the Gate
1. Corporate Greed and Excess
At its core, Barbarians at the Gate is a story of corporate greed. The central characters, especially Ross Johnson, are portrayed as being driven primarily by a desire for wealth and power, often at the expense of the company and its employees. Johnson’s lavish lifestyle, filled with private jets and extravagant perks, serves as a symbol of the excesses of the corporate world in the 1980s.
The book also highlights how the investment bankers and private equity firms involved in the deal were motivated by the massive fees and profits they stood to make, often with little regard for the long-term health of RJR Nabisco.
2. The Power of Leverage
The concept of leverage—borrowing money to finance a buyout—is central to the story of RJR Nabisco. The authors provide a detailed look at how leveraged buyouts work, explaining the risks and rewards involved. While LBOs can generate huge profits for those who execute them successfully, they also come with significant risks, as seen in the case of RJR Nabisco, which was left with crippling debt after the buyout.
3. The Role of Ego in Business
Much of the drama in Barbarians at the Gate comes from the personalities involved in the deal, particularly the clash between Ross Johnson and Henry Kravis. Both men are portrayed as driven by ego as much as by financial incentives, with Johnson seeking to cement his legacy and Kravis seeking to maintain his dominance in the world of LBOs.
The book shows how personal rivalries and vendettas can have a significant impact on corporate decision-making, often to the detriment of the companies involved.
Conclusion
Barbarians at the Gate is not just a book about a business deal—it’s a compelling narrative that reveals the inner workings of corporate America during the 1980s. Through meticulous research and vivid storytelling, Bryan Burrough and John Helyar bring to life the characters and events that shaped one of the most infamous leveraged buyouts in history.
The book serves as a cautionary tale about the dangers of corporate greed, excess, and the risks associated with leveraged buyouts. While the players involved walked away with vast fortunes, RJR Nabisco and its employees were left to pick up the pieces.
In the end, Barbarians at the Gate remains one of the definitive works on corporate finance, offering readers both a gripping story and valuable lessons on the darker side of business.