In late 1988, the corporate takeover frenzy reached its ultimate pinnacle: The $25 billion acquisition of RJR/Nabisco by the celebrated "leveraged buyout" firm Kohlberg Kravis Roberts & Co.
The acquisition followed a protracted, vicious bidding war, and the sheer size of the deal set it apart. The final price was twice as large as anything that had come before. It defied conventional Wall Street wisdom at the time that mega-companies the size of RJR were immune from such ownership battles. And well before it was over, the fight galvanized public criticism of debt-financed takeovers in a way that all of the previous deals hadn't.
In retrospect, it's clear that the RJR battle was a watershed event in the history of deal madness; it was the beginning of the end. The transaction was so large that for months it absorbed the energies of every Wall Street investment bank of consequence. The ensuing lull in takeover activity provided a pause during which reality finally caught up with some of the shakier deals that had gone before. Defaults and bankruptcies by debt-laden companies led to the collapse of the "junk bond" market and the current sustained drop-off in takeover activity.
Much has been made of the role of greed in the buyout phenomenon, and greed there was. A secret agreement between the RJR management group and its investment bankers, leaked in the middle of the fight, showed that if they had won, a handful of top RJR executives would have received close to $2 billion from a 20% stake in the post-buyout company, in exchange for virtually no investment of their own.
But what emerges most clearly in these two books about the mammoth battle for RJR was the role of individual egotism. Winning was essential; bankers and buyout specialists were out to establish themselves as the biggest carnivores on Wall Street. Jealousy and pride wrecked a compromise that would have been extremely beneficial to the two main opposing groups. In the end, the underlying value of the company and the price paid for it became all but irrelevant.
"Barbarians at the Gate" is a superlative book, a reconstruction of awesome proportions. Bryan Burrough and John Helyar covered the RJR fight for The Wall Street Journal. (Helyar now works for Southpoint Magazine.) In the ensuing months, the secretive investment-banking world was thrown open to them; they were given privileged access to nearly all of the major and minor figures in the bidding war. This included days of interviews with KKR partner Henry Kravis, and with F. Ross Johnson, the fallen former chief executive of RJR whose bid to take the company private touched the whole thing off.
They have put this wealth of raw material to good use. The writing is unflawed. Because they go out of their way to point out where recollections differed, the verbatim reconstruction of conversations and amazing level of detail--down to the color of the bathrobe someone wore on a particular morning, or the fact that a KKR partner at a Plaza Hotel dinner pushed his steak away because it was too peppery--all ring true. It is a tribute to the writers that even though the final outcome is well known, Burrough and Helyar weave their narrative in a way that steadily builds suspense until the very end. This, therefore, is the book for armchair investment bankers dying to vicariously relive the biggest deal of all time.
Johnson, the chronically restless chief executive of the tobacco and food conglomerate, triggered the bidding war in October, 1988, when he surprised his board of directors with an offer to buy in all of the company's publicly held stock and take the company private for $75 a share. His official motive was that shareholders had been disadvantaged because the stock market had "unfairly" kept down the value of tobacco companies' stock.
Even at that price, the deal would have been by far the largest ever; Johnson and his band of investment-banker advisers couldn't conceive that anyone would attempt to top it. They failed to foresee, however, that Wall Street rivalries and the egos of men like Kravis, who had a reputation to preserve as the king of LBOs, wouldn't allow them to sit by. Rival bids soon came from Kravis and others. By the time RJR's board declared KKR the winner, stockholders were paid $109 a share, a price 53% higher than the company's stock had ever traded before the bidding war began.
Members of Congress, prominent economists and the press were angrily questioning the wisdom of deals that were loading corporate America with debt and which seemed to have no economic purpose other than to generate huge fees for investment bankers and sudden enormous wealth for a handful of executives.