Barbarians at the Gate: The Fall of RJR Nabisco

by Bryan Burrough

Why are you doing this? Goldstone had asked. You’re chief executive officer of one of America’s great companies, you don’t need any more money. Yet you’re about to start a transaction in which you could lose it all. Don’t you realize all the pain and suffering you’ll cause?

Everyone in the room knew about leveraged buyouts, often called LBOs. In an LBO, a small group of senior executives, usually working with a Wall Street partner, proposes to buy its company from public shareholders, using massive amounts of borrowed money. Critics of this procedure called it stealing the company from its owners and fretted that the growing mountain of corporate debt was hindering America’s ability to compete abroad.

“The minute you establish an organization, it starts to decay.” Johnson, who carried that idea to every business he ever ran, boiled it down into a personal philosophy called “shit stirring”: a love for constant restructuring and reorganizing.

“All right,” Johnson liked to convene problem-solving meetings, “whose cock is on the anvil on this one?” The fraternity house mien extended to all levels.

But line managers had to scramble from quarter to quarter to make their numbers. The unofficial motto of the day was “Get through the night.”

Sales flagged, and by 1980, Reggie! was sent to the showers. (Jackson, however, was not: For years Johnson kept him ensconced in a company apartment, complete with a company car and a personal-services fee of $400,000 a year.)

Nabisco Brands, as the new company would be called, was formed in a $1.9 billion stock swap in 1981,

Then along came Ross Johnson. It was, one wag noted, as if Hell’s Angels had merged with the Rotary Club.

production of Prince Albert grew from 250,000 pounds in 1907 to more than 14 million by 1911.

America’s love affair with tobacco went largely unopposed until 1964, when surgeon general Luther Terry issued his landmark report linking cigarette smoke with cancer. Cigarette sales, which had risen an average of 5 percent a year, fell sharply.

Horrigan hired a public relations firm to get him nominated for the right kinds of business and humanitarian awards to enhance his résumé.

cigarettes at the new, higher prices. Reynolds loved it because it cleared away unwanted inventory, kept the factories humming, and, most important, produced large, artificial, end-of-quarter profits. The problem, of course, was that loading was as addictive as nicotine. In order to top profits aided by loading, the company had to load even more

He had agreed to buy a company named Heublein for $1.2 billion. What he got was a good liquor business (Smirnov, Inglenook Wines), a mediocre fast-food business (Kentucky Fried Chicken), and Heublein’s chief executive, Hicks Waldron,

In Washington, RJR Nabisco created two political action committees, one for Reynolds, one for Nabisco. Nabisco employees didn’t want their contributions going to the tobacco lobby.

When it was finished, RJR Nabisco had the Taj Mahal of corporate hangars, dwarfing that of Coca-Cola’s next door. The cost hadn’t gone into the hangar itself, but into an adjacent three-story building of tinted glass, surrounded by $250,000 in landscaping, complete with a Japanese garden. Inside a visitor walked into a stunning three-story atrium. The floors were Italian marble, the walls and doors lined in inlaid mahogany. More than $600,000 in new furniture

Kravis, whose name was practically synonymous with LBOs, was a legend on Wall Street. Kohlberg Kravis controlled more than two dozen companies it had acquired, using borrowed money, since its founding in 1976. It wasn’t every day, Johnson mused, you got the chance to meet a legend.

More takeovers were attempted during the first half of 1988 than in all of 1985, itself a very good year. Wall Street, in short, became addicted to deals.

Orten Boren, then in his early seventies, didn’t have much use for Yankees or, for that matter, Jews.

Shearson Lehman came to be marked by a peculiar blend of elegance and streetwise chutzpah: brass knuckles in a velvet glove.

By the mid-1980s competitors such as Morgan Stanley and Merrill Lynch were thrusting into LBOs and, in efforts to compete with Drexel’s junk-bond capabilities, had begun lending their own money in interim takeover financings known as “bridge loans.” These loans were typically refinanced, or bridged, by the later sale of junk bonds. The trend was collectively known as merchant banking, a highfalutin term that basically meant investment banks were putting their money where their mouths had been for years.

The final run of Shearson’s raider express began on Black Monday, October 19, 1987. As the market crashed, scores of pending takeovers unraveled, and Cohen and Sheinberg panicked. For the first time they realized that the firm could actually lose the hundreds of millions of dollars it was lending.

M&A alone could count on tens of millions in fees from the divestitures they planned as RJR Nabisco’s unwanted businesses were chopped up and sold to meet debt payments.

A couple of secretaries even consulted psychics. “Your job does not look secure,” a seer told one. “I would recommend applying to something more stable, like the government or IBM.”

Wall Street had always been split into two, sometimes warring, camps: investment bankers—smooth, dapper, trained at Andover and Harvard—and traders—red-faced Jewish and Irish kids who went to City College and made their living hollering at each other on the trading floor.

Buffett advised. Once one of RJR’s largest shareholders, he knew tobacco and liked it. “I’ll tell you why I like the cigarette business,” he said. “It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”

Once more, Henry Kravis was using a thimbleful of cash and a wheelbarrow load of debt to attempt the takeover of a great American company.

To Forstmann the junk bond was a drug that enabled the puniest acquisitors to take on the titans of industry, and he held it responsible for twisting the buyout world’s priorities until they were unrecognizable.

Perelman won out when a Delaware court, in a precedent-setting move, ruled that key components of Forstmann’s merger agreement unfairly discriminated against Pantry Pride.

“They’re the heads of Merrill Lynch, Shearson Lehman, and all the other big brokerages. In walks a hooker. It’s Milken. The debutantes wouldn’t have anything to do with a woman who sells her body for a hundred dollars a night. But this hooker is different. She makes a million dollars a night. Pretty soon, what have you got? Eleven hookers.”

The backbone of any successful LBO is a set of projections: profits, sales, and, most important, cash flow. Because they dictate the amount of debt a company can safely repay, projections are the key to formulating a bid. And the right bid means everything to an LBO: The higher the price, the higher the debt. Too much debt can crush the healthiest companies.

As the shotgun marriages of America’s largest companies spurred Wall Street’s growth through the 1980s, one Wall Street firm initiated more major takeovers and created more tactical innovations than any other. First Boston, founded in 1934 and until the late 1970s a sleepy, second-tier underwriter, rocketed to the fore of major investment banks thanks largely to the brains and chutzpah of Bruce Wasserstein and Joe Perella.

Several key documents the lawyers carried were incomplete, so the four attorneys were to pencil in the remaining numbers in the cab.

Most deals were put on hold, as all eyes turned to RJR Nabisco. The information-starved arbitragers, flush against their trading limits, could do little but wait and watch. More than one trader was reminded of an old Western where townspeople cleared the streets so the outlaws could fight.

this wasn’t the real world. This was Wall Street.

The management group’s decision to “pile on the PIK” in place of cash still boggled his mind.

It totaled $18.9 billion, the amount needed to pay the cash portion of the buyout. It was the biggest river of money ever to course through the U.S. financial system. The Federal Reserve Bank couldn’t wire money in amounts over $1 billion, so the banks moved it around in increments of $800 million to $950 million.

With Drexel’s demise, and the guilty pleas of financial titans Ivan Boesky and Michael Milken in the insider-trading scandals, popular opinion turned strongly against Wall Street and the unfettered greed of the 1980s. That backlash, combined with deteriorating financial fundamentals, effectively spelled the end to an era unlike any Wall Street has ever seen.

With that currency, the CEOs of the ’90s reaped sums to make even Ross Johnson blush—and make greed as commonplace on Main Street as Wall Street.

“the triumph of the barbarians,”

Even nobodies like Henry Samueli and Henry Nicholas, cochairmen of a company called Broadcom, reaped $800 million apiece, cashing out stock in their company while telecom was still hot. Compared to that, Ross Johnson’s once-outrageous $53 million golden parachute is parsimonious.