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Zusammenfassung von Barbarians at the Gate

Name: Barbarians at the Gate
Rating: 4.1 (43 reviews)
Author: Bryan Burrough, John Helyar

Bryan Burrough, John Helyar

The Fall of RJR Nabisco

4.1 (43 Bewertungen)

19 Min.

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Crises & Scandals US History Socialism & Capitalist Critique US Economics

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What’s in it for me? Learn about of one of the 1980s’ most infamous business deals.

When we think of the 1980s, the yuppie is an archetype that comes to mind for many people. These flashy big spenders, who strove at all costs to maintain their glamorous and luxurious lifestyle, have come to epitomize the excesses of that decade.

Few stories embody these traits and the general atmosphere of the 1980s as well as that of RJR Nabisco and its CEO Ross Johnson. But it’s not just a story of one company – it’s the story of how a once fairly benevolent business practice, the leveraged buyout, transformed into something much more sinister.

In these blinks, you’ll find out

why leveraged buyouts became so common;
how Johnson rose to his prominent position; and
why RJR Nabisco was such an attractive target for a hostile takeover.

Wall Street’s modern-day modus operandi started out as a work-around to avoid estate taxes.

Have you heard the term leveraged buyout, or LBO? Well, by the 1980s, the LBO had become a dirty word, synonymous with corporate greed and the unhinged nature of Wall Street. But at its inception, the LBO was simply a way to preserve family wealth.

These transactions were devised by clever lawyers who were looking for ways to help wealthy business owners skirt estate taxes and pass money onto their heirs. Not coincidentally, LBOs first came on the scene in the late 1960s, when a generation of people, some of whom had built massive business empires, were getting ready to retire.

Because of the way estate taxes function, if business owners wanted to retire and pass their companies on to their heirs, they would have had to pay huge sums of money in taxes.

Under these circumstances, they generally had three options: first, they could pass the company on to an heir and pay their taxes in full; second, they could sell the company, relinquishing control of it in the process; and finally, they could go public, putting the business – and its stock price – at the mercy of the market.

Naturally, none of these three choices were especially appealing. So, a lawyer by the name of Jerry Kohlberg developed a solution, albeit a rather slow-moving and lengthy one.

Say Mr. Big was retiring. His lawyers would found a shell company and bring in a number of investors who would take out massive loans to buy Mr. Big’s company out. Mr. Big would still keep a stake in his business, thereby maintaining some control, while the investors would have gotten the target company for a much lower price than if they acquired it at the end of a bidding war with other prospective buyers.

The money for these buyouts would come from bank loans, insurance bonds and the personal funds of the investors. As a result, the investors involved only paid about ten percent of the cost, while getting 30 percent from insurance bonds and 60 percent from bank loans.

In other words, the investors acquired the target company for almost nothing, while the shell company took on a massive amount of debt, the effects of which would be mostly felt by the target company.

In the 1980s, LBOs were turned into money-making machines, prompting both impassioned praise and critique.

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.

A cutthroat businessman with an insatiable appetite for change and luxury transformed the very nature of business.

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’s power grew through a series of mergers.

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.

A young Wall Street upstart transformed the nature of LBOs.

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.

When Ross Johnson got into the LBO game, his greed resulted in calamity.

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.

An initially low offer from Johnson caused other bidders to throw their hats into the ring.

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.

The LBO deal would be the end of Ross Johnson’s stint at Nabisco but not the end of his career.

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.

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Worum geht es in Barbarians at the Gate?

Barbarians at the Gate (1989) tells the story of one of the largest corporate deals in US history, the leveraged buyout of RJR Nabisco. These blinks provide a gripping portrait of the extreme and extravagant behavior in corporate America during the 1980s.

Bestes Zitat aus Barbarians at the Gate

When Kohlberg came up with the LBO, it was known as a bootstrap deal.

—Bryan Burrough, John Helyar

Wer Barbarians at the Gate lesen sollte

Anyone working in finance or business who wants to learn about a legendary deal
Citizens appalled by the excesses of corporate America
Anyone enthralled by hostile takeovers and cutthroat dealings

Über den Autor

Bryan Burrough and John Helyar are investigative journalists who covered the story of RJR Nabisco’s buyout as it happened. Their in-depth research and extensive interviews paint a fascinating picture of a unique period in the history of Wall Street.

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