Barbarians at the Gate

Barbarians at the Gate: The Fall of RJR Nabisco (ISBN 0-060-16172-8), 1990, by Bryan Burrough and John Helyar, chronicles both the 1988 leveraged buyout of RJR Nabisco by KKR (Kohlberg, Kravis and Roberts) and the rise and fall of RJR Nabisco’s CEO F. Ross Johnson, one of the most flamboyant business characters of the epoch. It complements Michael Lewis’ Liar’s Poker, and Tom Wolfe’s Bonfire of the VaniIes, very nicely. All three books examine the testosterone- charged world of 1980s Wall Street and the invention and evolution of the debt instruments that fueled the much of what’s happened in finance (good and bad...the 2008 crisis being the worst) since then.

Key points of the book for me were:

1. Bidding wars for assets generally end up destroying value for the winner, in this case KKR. The winning bid is often, in the final analysis, driven by the clash of massive egos, not by rational investment criteria. Hostile bids, in particular, are handicapped by lack of information and, thus, paryiicularly prone to overpayment.

2. There are positive and negative aspects of corporate raiders/LBO artists/private equity firms (which are all basically the same thing).

   1. They keep management of public companies on its toes, forcing them to return cash to shareholders if they don’t have decent, defendable investment opportuniIes, especially if the company’s share price is languishing.

   2. While shareholders may get a huge one-off payout from a takeover, the changes that are, of necessity, wrought by the acquirers on the acquired company, in order to squeeze cash out and get payback, can be devastaIng to employees, communiIes, etc.

3. The boards of many (if not most) American companies are weak and basically in management’s back pocket. They only consider the shareholders best interest in the final instance, when they have no other choice.

4. Ross Johnson’s rise to the top using schmoozing, partying, purposeful sowing of doubt and confusion, liberal applicaIon of flahery, cajolery, bribery and, when necessary, betrayal, to achieve his ends is enlightening and surely just as common a path up the ladder as intelligence, creaIvity and competence. In the end Ross’ priority was maintaining his extravagant lifestyle and securing a massive windfall for himself and his cronies at any cost. The management agreement he cut with the Shearson team to try and secure both of these ended up being a major embarrassment for them. All that said, he would be an entertaining guy to have a beer with!

5. The back channels of communicaIon during any sensitive negotiation (like the bid for RJRN) are just as important as the front channels. They can be used to great advantage by clever parIcipants to further their own ends and, thus, must be viewed with just as much caution and skepIcism as the front channels.