Barbarians at the Gate: The Fall of RJR Nabisco by Bryan Burrough and John Heylar
I love books about business. I also love books on history. When I unwrapped this book at Christmas, I knew my son had me pegged. This was a great book for me. I devoured all 624 pages in two weeks. It reads like a thriller, almost as much a page turner as Tom Clancy, better than his later novels. Even though the outcome is history and I even vaguely remember it happening, I was on pins and needles to see how the last moments were going to evolve.
Barbarians traces the history of RJR Nabisco, the separate beginnings as the National Biscuit Company, makers of the Oreo and other snacks, and the R J Reynolds Tobacco Company, makers of Winston and Salem cigarettes. It covers each company’s histories, the men who created them and the CEOs through time who brought them to a giant merger that resulted in RJR Nabisco in 1985. Nabisco CEO Ross Johnson, a driven, deal maker Canadian, took the helm of the new company.
With all the bad press smoking was receiving, RJR Nabisco stock was taking a beating on Wall Street, despite strong profits. Johnson tried everything he knew to get the stock price to rise to the levels he felt it deserved. All during the three years after the merger, he was adamantly opposed to the sexy, new Wall Street fad: the Leveraged Buy Out or LBO. LBOs target companies with tremendous cash flow, but for whatever reason, poorly performing stock prices. In an LBO, the management of the company partners with banks and investments companies and raises enough capital to buy out all the stockholders of the publicly traded company, essentially taking it private. The “leveraged” part means they do it by taking out loans and selling bonds, often “junk” bonds, to raise the necessary capital. This essentially saddles the new company with enormous debt. The management then uses the cash flow in addition to selling off large parts of the company to retire the debt, clean up the books and then take the company public again. In the process, everyone involved usually makes boatloads of money in fees, bonuses and such.
After years of trying everything possible, Johnson gave in to the idea of doing an LBO. The problem was he didn’t move fast enough and other players, particularly Kohlberg, Kravis, Roberts and Company, were able to jump in on the action and bid against the management team. Suddenly a bidding war erupted and over the next 6 weeks, the world watched as the prices spiraled higher and higher. Bad press on all sides came out and the event quickly became the poster child of corporate greed, with Time Magazine revealing the $100 million Johnson stood to make on the buyout.
In the end, KKR prevailed and bought RJR Nabisco. However, the price was so high and tobacco’s future so troublesome, the deal never quite worked out as they had planned. They cover the resulting struggles in an afterword, written for the 20th anniversary edition of the book.
Burrough and Heylar are excellent writers, both having worked journalism for many years. They took on the task of explaining complicated finance topics and explained them exceedingly well. Their piecing together the story through hundreds of hours of interviews yielded a very detailed portrayal of the events, right down to the dialogue. When they weren’t sure or some accounts differed, they noted it.
I highly recommend this book to anyone wishing to learn more about corporate greed and the decisions that drive it. Well meaning efforts often turn into things unintended when large sums of money are in the balance. This book serves as a cautionary tale that has not yet been learned. I know of several universities who use it as a textbook in their business classes. There are many lessons businesses should learn, particularly tying CEO incentives to stock price and quarterly earnings. Often these short-term indicators drive quick behavior that seriously damages the company in the long-term. Consequently, we end up with the situation we have in corporate business today.