Barbarians at the Gate: The Fall of RJR Nabisco

by Bryan Burrough

The real money these

days was in merchant banking.

He couldn’t trust his advisers, men to whom Kohlberg Kravis would ultimately pay well over $500 million.

Wall Street had been taken over by a cartel, Forstmann believed.

the entire LBO industry had become the province of quick-buck artists.

Sooner or later, Forstmann knew, the economy would turn down and all the junk-bond junkies would go belly-up when they couldn’t make their mountainous debt payments.

reputation, reputation, reputation.

the firm would end up controlling the bidding group.

he was interpreting it correctly, Johnson’s seven-man group was entitled to $1 billion, maybe more, free of charge.

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.

best ways to improve cash flows and reduce overhead.

An image began to form in Forstmann’s mind. The junk-bond hoards are at the city gates, Forstmann thought. We could stop them, once and for all. This is where we could stand at the bridge and push the barbarians back. Wouldn’t that be phenomenal?

It was a trader’s instinct: Bid fast, top the other guy by a fraction of a point, and wait to see what happened next.

As they discussed it, Kravis found himself rationalizing the benefits of a joint bid.

Kravis didn’t know it, but the tides of public sentiment were about to shift, strongly, in his favor.

LBOs were generally “unethical,”

name: Paul Sticht.

Johnson, meanwhile, was growing despondent. Nothing

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.

The “Other Uses of Cash” now headed the list of mysteries Stuart had four days to solve.

could increase its operating income 40 percent in a single year if necessary. Profit margins could be taken to 15 percent from 11. Cash flow, he said, could be taken to $1.1 billion a year from $816 million.

release, bowing out of the bidding for RJR Nabisco with nary

First Boston, founded in 1934

First Boston was the only major investment bank not involved in the RJR Nabisco deal.

the stomach. His worst fear now seemed unavoidable: First Boston was to be the only major Wall Street firm left out of the deal of the century.

First Boston could take those notes to a major bank and receive money for them, a process known as “monetization.”

First Boston and other corporate buyers a brief window of opportunity. Finn proposed to drive the largest takeover in history right through that window.

Billionaires have a way of making friends.

installment note loophole

Would it be an LBO or a restructuring?

That meant one of two things: The bids were too close to call or there was no winner.

“Peter Atkins wants you to come in and sign a confidentiality agreement. We’ve got our foot in the door!”

Henry Kravis had a plan.

would head the team analyzing Nabisco to estimate how much First Boston could get selling Nabisco’s businesses.

Finn would free-lance, advising all the groups.

true. He had lost his own board’s support.

It would involve a big, one-time payout to shareholders financed by borrowings and asset sales.

million there. It was pocket change. An hour before bids were

Standing to one side, Dick Beattie would never forget the bankers’ reaction when the charade was unveiled. “You could see the dollar signs light up in their eyes,” he would recall. “It was like ‘Whooo! We’re back in the ballgame! Yeah!’”

The fatal flaw was the monetization letter; First Boston had nothing resembling a solid bank commitment to back it.

By adding “paper” and cutting cash, they could boost the face value of their bid without boosting the actual money they would pay out.

Wednesday morning, November 30.

low cash, high PIK.

Roughly 20 percent of the company’s assets would be sold.

$108 to $106.

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

“The vote,” Hugel said, “is unanimous.”

he was to be the next chief executive of RJR Nabisco.

For the first time in years, Ted Forstmann was the toast of the town.

Why did these people care so much about what came out of their computers and so little about what came out of their factories?