Barbarians at the Gate: The Fall of RJR Nabisco

by Bryan Burrough

“For the soul to survive, the head belongs with the heart.”

Months later, when friends would ask him why he chose his ultimate course, Johnson would speak of stock multiples and capital structures. He would recite all the steps he had taken to get the stock up: the profit gains, the pristine balance sheet, the stock buy backs, and Premier. It was all true, but it was intellectual window dressing for something much deeper. He could never leave well enough alone. There was shit to be stirred.

“The market is never going to give us its due,” Henderson complained. “The equity markets just aren’t a suitable capital structure for some companies.” Arguing to take stock from public hands was in fact the intellectual basis for an LBO, although no one openly advocated it at the time.

Cohen allowed himself to rest somewhat easy, having wrested from Johnson the understanding that the pact would be renegotiated if the price topped $75 a share, as it almost certainly would. For the moment, though, both sides got what they wanted. Johnson had history’s richest management agreement. Cohen kept the ball rolling and was able to tell his colleagues that nothing was final.

There was a surreal, Alice-in-Wonderland quality about the procession Goldstone led for three blocks to Davis Polk’s offices at Chase Manhattan Plaza. For Johnson, the whole thing had become a bad dream. He couldn’t shake the feeling they had left the real world behind in Atlanta. They had stepped through the looking glass to a place where reality was suspended, where the old numbers, the old rules, the old financial reasoning, simply didn’t apply. Money was paper, and paper was money, and people got paid $25 million for lying to you.

In one way, an LBO is a lot like buying a used car. A target company’s annual report and public filings can be compared to a classified ad. Like an advertisement, they contain useful information, although a savvy buyer knows the numbers can convey anything a clever accountant needs them to. The car buyer wants to know more than just what’s in the ad. He wants to talk to the owner, check under the hood, go for a ride around the block. For LBO buyers, a thorough inspection is equally crucial. More so than any takeover artist, the LBO buyer must know his prey. His success depends on determining exactly how much debt the target company can take on, and figuring precisely what budgets can be cut and what businesses sold to pay down that debt quickly. To take the used car analogy a step further, the LBO buyer must estimate, in precise detail, how many miles the car has left, how many spare parts he will need, and how much maintenance will be required. His margin of error is so thin that a worn crank shaft or a blown gasket could prompt the bank to call his loan. Similarly, in an LBO, a wrong calculation or an inaccurate projection can bring both buyer and seller down in an avalanche of debt. But what if you’re Henry Kravis, and the fellows driving the car won’t even let you kick the tires?

It was as frustrating as anything Cohen had attempted. A man who prided himself on his stamina, Shearson’s chief had to admit he was exhausted. For two weeks he had been fighting nonstop. He needed sleep. Negotiating the most important issues of history’s largest takeover at two in the morning—it made no sense. Why were they here?

Johnson dubbed the three rules of Wall Street: “Never play by the rules. Never pay in cash. And never tell the truth.”