Barbarians at the Gate summary

In 1982, a company called Gibson Greetings was sold for $80 million to an investment group that had paid just $1 million of the cost themselves. A year and half later, the firm went public and was resold, this time for $290 million.

The primary individual investor had put down $330,000 and had turned it into $66 million; in other words, the LBO craze was in full swing. It was clear to investors how profitable this tactic was and, by 1983, ten times more LBOs were taking place compared to just four years earlier.

In the 1950s, a man named Ross Johnson entered the Canadian business scene at the bottom of the corporate ladder. He would go on to become a prime example of a new breed of businessman, one that eagerly moved from firm to firm, pledging allegiance to investors rather than to a company.

Playing the game this way turned out to be quite lucrative, and Ross was no stranger to luxury – he was fundamentally driven by a love for travel, celebrities and the finer things in life. He never stopped seeking the thrill of buying new properties, eating at world-renowned restaurants and meeting stars.

Johnson benefited from his relationship with Peskett, but it wasn’t long before he was applying his mentor’s knowledge on a much grander scale. Johnson’s big chance came in 1976 when he became the CEO of the Canadian packaged goods company, Standard Brands. Finally, he was in a position where he called the shots.

In this role, Johnson was already living the high life, but his insatiable thirst for bigger and better things made him set his sights on a merger with a much larger company: Nabisco. In the end, Nabisco technically took over Standard Brands – but in practice, quite the opposite happened.

So, Ross Johnson was famous for shaking up businesses, but a new kid on the scene would challenge his burgeoning power. His name was Henry Kravis, a Wall Street banker who was making millions through LBOs. Ross had a distinct approach and, while most other traders were closing deals in hours or days, it could take years for him to seal an LBO.

Naturally, Kravis’s higher-ups at the investment bank Bear Stearns weren’t so keen on this protracted timeframe. For example, Kravis was at one point made the interim CEO of a stationery company during an LBO, prompting a furious call from his boss at Bear Stearns who wanted to know what one of his senior traders was doing at the helm of a crumbling paper company.

Professionals like the Kravis cousins were largely responsible for refining LBOs – but with so much money to be made, just about everyone wanted in on the action. So, while Johnson didn’t have any need to carry out an LBO, he knew that if he didn’t, he would look back on the moment as an opportunity lost.

But Johnson knew that his greed would put off any serious players from touching RJR Nabisco, KKR included. As a result, his only option was to go with an outsider in the LBO world, the investment banking company Shearson.

Johnson’s LBO bid was doomed to failure from the get-go. Here’s how it played out:

He and Shearson intended to offer a price of $75 a share for RJR Nabisco, $4 per share higher than the company had ever sold for. After the numbers were crunched, this came out to a total price tag of $17.6 billion, double the amount that any bank had ever loaned for a takeover. In fact, it wasn’t even initially clear if there was that much money available in the world.

If you were a part of Ross Johnson’s gang, you could count on leading a pretty charmed life – but other people were basically irrelevant to him. That’s why, when the LBO came before the board, it was already obvious that Ross was utterly indifferent to everyone else. In the end, the fact that he viewed each person in the company as expendable would drive the board’s decision against him.

It didn’t help Johnson that his management deal became emblematic of corporate greed. All it took was a single New York Times article, which laid bare the lucrative deal Johnson’s team was aiming for, to unleash a national cascade of criticism.