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Barbarians at the Gate: The Fall of RJR Nabi

Barbarians at the Gate: The Fall of RJR Nabisco

Bryan Burrough, John Helyar
1989
T1 550 pages · about 9h 10m to read Open Librarygoodreads

KKR's defining deal, told from all sides.

Summary

Burrough and Helyar, Wall Street Journal reporters, reconstruct the 1988 leveraged buyout of RJR Nabisco, at twenty-five billion dollars the largest takeover to that date. The book is built from extensive interviews with participants on every side and reads as narrative.

The sequence begins with chief executive Ross Johnson's proposal to take the company private at seventy-five dollars a share, which he made partly because the market would not value the tobacco business separately from the food business. His management group underestimated the response. Kohlberg Kravis Roberts entered a competing bid, then Forstmann Little, then First Boston with a tax-driven structure, and the auction ran the price to one hundred and nine dollars a share.

The most instructive material concerns the mechanics: how the special committee ran the auction, how the financing was assembled with bridge loans and junk bonds, how the management agreement Johnson negotiated for himself became public and destroyed his position, and how KKR won with a bid that was not the highest on a simple cash basis but was judged superior on the securities included. The book documents the fee structure across banks, lawyers and advisers, which totalled over a billion dollars.

Burrough and Helyar report rather than analyse, and readers wanting an assessment of whether leveraged buyouts create value will not find one. The reconstructed dialogue is a method some object to. The subsequent performance of RJR Nabisco under the debt load is covered briefly, and the company underperformed badly. It remains the standard account of how a large contested takeover actually proceeds and of the incentives acting on each party.

Key takeaways 8

  1. A management buyout proposal starts an auction that the management team cannot control, and Johnson lost the company by initiating the process.
  2. The special committee of independent directors takes control of the sale once a management bid exists, which removes the chief executive's authority over the outcome.
  3. The management compensation agreement Johnson negotiated became public and destroyed his standing with directors and with the public.
  4. Leveraged buyouts work by using the target's own cash flows to service the debt raised to buy it, which requires predictable cash generation.
  5. The winning bid was not the highest on simple cash terms and was judged superior on the composition of the securities offered.
  6. Advisory, financing and legal fees exceeded a billion dollars, which aligned every intermediary with completing a transaction rather than with any particular outcome.
  7. Conglomerate structures that combine businesses the market values differently produce a discount that invites exactly this kind of transaction.
  8. RJR Nabisco performed poorly under the resulting debt load, which the book covers only briefly.

Who should read it

Investors and executives who want a detailed account of how a contested large-scale takeover runs and what incentives act on each participant.

Who recommended it 3 · 2 direct

Similar books 6

Chosen by shared topics, the entries that hold them, and the people who recommended both.

Connie Bruck · 1988

How Milken's Drexel junk-bond desk financed the 1980s buyouts and hostile takeovers.

Recommended by: Mohnish Pabrai

George Anders · 1992

KKR from 1976 through the RJR Nabisco buyout, and what debt did to its companies.

Richard Kluger · 1996

A century of the American cigarette industry, from mass marketing to 1990s lawsuits.

Moira Johnston · 1986

Contemporary reporting on the raiders, including his Phillips Petroleum fight.

Where it sits in the reference 6

Companies
Companies
Business models
Industries
Investment styles
Financial history

Topics

Company HistoriesFinancial History