Barbarians at the Gate: The Fall of RJR Nabisco

by Bryan Burrough

“If you’re on time, no one notices you,” he would say. “If you’re late, they pay attention.”

“To Ross,” said Paul Kolton, a former Standard Brands director, “the nature of any organization was that it got fat, dumb, and happy. He never took the line, ‘If it ain’t broke, don’t fix it.’ To him, something’s always broke.”

“Recognize that ultimate success comes from opportunistic, bold moves which, by definition, cannot be planned.”

Anyone who could sell a product linked with cancer, Reynolds executives were fond of saying, “can sell anything.”

“People who smoke don’t give a shit about their health.”

The basics of an LBO were relatively simple and familiar to all three men. A firm such as Kohlberg Kravis, working with a company’s management, buys the company using money raised from banks and the public sale of securities; the debt is paid down with cash from the company’s operations and, often, by selling pieces of the business.

The businessman, his father explained, had 50,000 employees to watch over, a long, tiring workday, and could expect a pension of several hundred thousand dollars on retirement. The wildcatter, on the other hand, had maybe 30 employees, several dozen oil wells that pumped away while he slept, and was probably worth $5 million.

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.