Republished from the old blog.
Barbarians at the Gates- The fall of RJR Nabisco is the story of the buyout of RJR Nabisco. This was the biggest deal in US history in 1988. It was also the direct ancestor of the modern private equity takeover, financing, and even how businesses are run.
This book is a New York Times #1 bestseller, a business classic, and core reading for any form of business training worthy of the name. There’s another thing which this book explores like no other- American management. Fortunately for American history, the authors and the readers, the players in the RJR Nabisco buyout are ultra-diverse.
The authors, Burrough and Helyar, were Wall Street Journal reporters. They spent a very long time doing hundreds of interviews with the people involved in the buyout. They then had the nearly impossible task of taking this gigantic, unspeakably complex subject and putting it into some sort of order. Both authors thank their wives for making the book happen at all. When you’ve read the book, you’ll be as appreciative as they are.
The story starts with the decision of company president F. Ross Johnson to do a “leveraged buyout” or LBO of RJR Nabisco. Johnson was watching the company stock languish well below valuation price, and the working option was to acquire the company for himself. The stock was in the timid low $50 range at the time he made an offer of $75 per share.
There were two surprising things about this offer from the minute it was even suggested-
- Johnson had made himself a corporate legend by a series of mergers. He wasn’t a buyout expert. He was an A grade corporate politician. A merger, he could have done standing on his head, and improved his own position in the process, as he’d done before, without external interference. Why a buyout?
- RJR Nabisco was a group of very diverse companies- RJ Reynolds Tobacco and Nabisco, makers of the famous Oreo cookies among other iconic brands. These were Old Businesses, in the same sense as Old Money. Johnson was a cultural shock, and not, at times, a very popular one as he readjusted RJ Reynolds, alienating the company town of Winston Salem and getting on the nerves of the equally staid Nabisco people. This was the culture Johnson was both trying to buy out and remodel. At times he was as popular as a fox in a chicken coop.
The story continues, after providing a lot of valuable scene-setting for readers, as a challenge to the buyout appears. A firm called Kohlberg Kravis Roberts, (KKR) emerges as an alternative buyer. These people are LBO experts, highly successful and highly professional. It’s Johnson’s LBO, handled by a firm called Shearson Lehmann Hutton vs. KKR. KKR sees very high values in the buyout, and knows how to make capital out of its acquisitions, having a long string of successful buyouts behind it. Shearson fights back, hard.
The original LBOs in the 80s were financial obstacle courses. Raising money and managing debt on this scale was neither easy nor necessarily safe. Many of these LBOs were financed with the notorious “junk bonds” which turned into the curse of the 1980s. This deal, which started at $75, soon rose to $90 when KKR got involved. A second round of bids was required. Then more bids come in. It’s a mess on a scale the Bible never envisaged.
I won’t spoil the story for those who don’t know it. It’s like a whodunit/who didn’t do it/ who should have known what/ who obviously knew nothing story. Fiction simply can’t get into this league, and probably just as well. The story is counterintuitive to the point of psychosis, in some ways.
(For those who feel like cheating and just looking up the story online, you’d be doing yourself a real disservice and missing a lot of the most critical issues in the book. The deal making, deal breaking, and other elements are truly nail biting reading. If you have any business knowledge, it’s also sometimes maddening reading. The sheer number of blind alleys, motormouth saboteurs and new characters which enter the story line make gossip columns look like they took a vow of silence.)
Barbarians at the Gates is somewhat of a miracle as a writing exercise. The authors have managed to make comprehensible a situation which was nothing less than chaotic most of the time. Even the key players rarely had much of a picture, most of the time. The book has managed to convey humanized, not demonized, characters. (I’ve often said that Americans are polite to the point of needing vaccination, and these guys more or less prove my point.)
The language varies from genteel to coarse, and so does the logic of the business. The thinking ranges from personalities to hardnosed business options being done quite literally over the severely burned nervous systems of all involved. There are stonewalling players, saboteurs, idealists, baffled businesspeople, hordes of extras- and a very appropriate, ethical treatment of individuals, noting denials of incidents on the part of participants.
The legacy of Barbarians at the Gates
Just about everybody on Earth wonders why corporate America does what it does and acts the way it does. Barbarians at the Gates is an excellent introduction into the psyche of a world most people don’t even know exists. Even if you’d rather not know, you’ll find it a truly fascinating experience.
There are questions-
Why didn’t the RJR Nabisco board establish some ground rules for the LBO, just to make its own job easier?
Whose arithmetic didn’t stack up?
Which was the better LBO in terms of quality?
Could or should the prices of the buyout have been better organized?
Could a consortium have made an unbeatable offer?
Which opportunities went begging?
How many different ideas of financing just didn’t make the cut?
Did the difficulty of getting information about RJR Nabisco affect the outcome? If so, how, and what could have gone wrong?
The questions tend to multiply, the more you read. The answers, ironically, have become clearer in the last 10 years. These days, it’s private equity groups, the direct evolutionary descendants of the LBOs, who are taking over corporate America. In the 80s, an LBO was like an alien invasion. Today, if you’re sitting innocently in your office and you hear a private equity group would like to talk to you, it’s like being told you have a price on your head by a professional assassin.
The new methods are deadly, effective, and they handle huge money. The results, however, are similar, and the methods of financing, if incorporating other options, include equally tough calls on buyers and their targets. Buyouts mean changes, sales of assets, downsizing, restructuring, and a raft of effects at the coal face.
This is the new reality of the global business world. This is the world the story of Barbarians at the Gates created.
If you only intend to read one more book in your life, make it this one. If you intend a career in the upper echelons of the corporate sphere, brick yourself in to your room for a few days and read it. Don’t get casual and start breathing or indulging in similar luxuries. Just read.
(Not breathing will also put you in the same state of mind of most of the big names in the book, so it’s good practice, too.)
Full title- Barbarians at the Gates- The fall of RJR Nabisco
Authors: Bryan Burrough and John Helyar
Edition: Collins Business Essentials (paperback)
Price: See Amazon link on pic at top, around $10.