Barbarians at the Gate: The Fall of RJR Nabisco [Paperback]

There are some criticisms of this book. The authors, despite their finanical backgrounds, seem to prefer story-telling to financial details. Hence, they have written a tale of personalities, with an especial interest in Ross Johnson and Henry Kravis, to the detriment of really explaining the financial and business details. The reader can learn intricate details about Johnson and the Wall Streeters preferences in cars, apartments, drinks, wives, schoos, etc. The authors seem to think we need a biographic account of all minor players, starting with their grade-school years, and the end result is 528 pages and still minimal financial explanation.

The other main criticism here, reading this now, is how dated the material has become. The authors would do well to provide some new material on how the deal has worked out. From other sources, I learned that KKR renegotiated the deal in the early 1990's (the resets were nearly toxic after all) and sold out their position entirely in 1995, more or less breaking even, depending on whose numbers you use.

The story of the final bids and the final final bids is truly riveting and meticulously researched here. The Johnson group ultimately presents a bid that is slightly higher than the KKR bid, but the board discounts the Johnson bid since it does not guarantee the bond pricing, and calls the whole thing a tie, much like the 2000 election. At that point, the Board accepts the KKR bid, for non-economic reasons, mostly bad publicity related to Johnson's greed. Ironically, Johnson had already given up much of his payout in order to boost the total value of the bid to the shareholders.

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I would like to put this book into perspective for you. 20 years ago our firm did a survey of CEOs and found that 99 percent felt that trying to improve stock price was unethical and immoral, and involved doing manipulative things.

After the takeover wars of the 1980s, most CEOs believed that improving stock price was an important task and could be done in an ethical way. There is nothing more disruptive to a company than to go through a hostile takeover, whether the bid succeeds or not. Raw greed and lust for power hold sway at such times, and many people will pay the price for having attracted the sharks into their swimming pool.

Prior to the RJR Nabisco purchase by KKR, many large companies felt safe because of their size. They were suffering from "stalled" thinking, because it was widely believed that a deal of this sort could not be financed with debt at the time the takeover occurred. That was wrong: For a price, the money is always there.

For those who have not been in these bruising ego battles, what you will not realize is that these contests are a lot like those you will remember from grade school on the playground when the teachers were not around. Bullying, threats, and naked power carry the day in a lot of situations. But because this is about ego, a lot of mistakes are made. RJR Nabisco continued to strain under mountains of debt for years, even after lots of refinancings because of the LBO.

KKR's track record looks a lot different now than it did before buying RJR Nabisco. A lot of the fever behind the LBO's is gone, for now. Bring back a bear market for a few years, and this whole phenomena will recur. Some smart lawyer will find a way around the defenses that so many rely on for now. The only ultimate defense against the circling sharks is to have a high-priced multiple stock. That is the only timeless lesson for companies.

If you are wondering how accurate this book is, it is more right than wrong. The authors did, however, miss some of the most intriguing ironies of the situation. Perhaps someday, someone with inside knowledge will write the sequel or unveil the whole, delicious irony. That should be a great story that will outsell GONE WITH THE WIND.

With the benefit of this context, I do recommend you read the book. You'll find it stranger than fiction in many ways, and very exciting to watch. The authors have captured the emotion of the moment very well. It's a whale of a story.

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Burroughs and Helyar tell the story of the leveraged buyout of RJR Nabisco in gripping fashion, showing how greed and shortsightedness contributed to the biggest and worst-managed corporate takeover in history. The players: Salesman F. Ross Johnson of RJR vs. Henry Kravitz of KKR. Everything from a wild, rip-roaring potboiler novel is here: Secret deals, stock market manipulation, flouting of laws, surprise plot twists. All of it almost unbelievable, but all of it true.

The next time you wonder about how people could have been taken in by internet companies with insane stock prices who blew through venture capital as if it were funny money, read this book. It's well worth your time, effort, and energy.

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