Barbarians at the Gate: The Fall of RJR Nabisco

by Bryan Burrough

But if it’s an LBO, not only do you not have to bring it, you don’t have to see it, you don’t know where you’re going to get

This is a business for people who don’t have money, but who know somebody who has money, but who doesn’t put it up either…

“The only way to recognize these values, I believe, is through a leveraged buyout.”

The man who would come to represent the new age of business was born in 1931

“He was convinced that all of the decisions got made by the senior people in the accounts. He thought he could leverage that money pretty well.”

arrived twenty minutes late, punctually, to everything. “If you’re on time, no one notices you,” he would say.

“you always tell people how badly you’ve been running the goddamned company, so they’ve got some upside.”

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

Reynolds’s ideal marriage partner was Nabisco Brands, headed by a

breezy, likable Canadian named Ross Johnson.

$4.9 billion, at the time the largest merger ever to take place outside the oil industry.

deep differences in the two organizations were soon apparent.

Michael Milken,

Johnson remained a prude about corporate debt, the core of any LBO.

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.

Good, bad, or indifferent, you’re always thinking, you’re doing, you’re extending yourself. If you don’t do that, the place becomes a bore. You’ve got to create some excitement.

Wall Street turned to its one guaranteed source of income: takeovers.

“The problem with the company going private,” he said to himself, “is that nobody would pay any attention to him.”

charts Martin didn’t appear to wield much power, but he had Johnson’s ear, and he began acting as his gatekeeper. Nobody was more jealous of Martin’s rise than Horrigan,

“golden parachutes”

Johnson suggested a joint venture instead.

Morris and RJR Nabisco combine their respective food businesses—Nabisco and General Foods

“What are the practical realities of operating under an LBO structure?” Johnson asked.

First, could you raise the kind of money it would take to buy

capital base.

Practically unknown just five years before,

never, forgot that lesson about the importance of being your own boss.

The two estimated how much money they could make at Bear Stearns over the next decade, compared to going their own way. Bear won. Kravis left anyway.

Kohlberg Kravis was able to use a company’s own strengths to acquire

When Simon took Gibson public eighteen months later, it sold for $290 million. Simon’s $330,000 investment

was suddenly worth $66 million in cash and securities.

in effect subsidized the trend.

What made them soar was junk bonds.

Michael Milken,

by his targets, competitors nipping at his heels, Kravis

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.

“gun-to-the-head” strategy.

although not by much. The $75 a share worked out to $17.6 billion, nearly three times the size of the Beatrice deal.

LBOs are not democracies: each executive in a Kohlberg Kravis-owned company answers to Kravis and Roberts.

Was there, as Jim Stern had already wondered, enough takeover money in the world to do it?

Shearson, which would invest hundreds of millions of dollars in an RJR Nabisco buyout, wasn’t hired help; it was a full partner.

merchant-banking game:

shifting allegiances is a misstatement. They have no allegiances,

And believe me, you don’t want to be the new man at a poker game that’s been running for years.”

LBOs, defensive recapitalizations, poison pills, spin-offs, everything.

bear hug letter to the board.

discuss a joint bid.

tender offer,