Key Messages
The 1980s: The Story of RJR Nabisco and the Rise of Leveraged Buyouts
In the 1980s, one of the most infamous business deals happened with RJR Nabisco and its CEO Ross Johnson.
It was a battle between two different corporate powerhouses, each striving to get their hands on the same company.
The leveraged buyout was an attractive move for many involved in the deal.
Learners will find out why this became so popular and what drew people to these kind of acts against RJR Nabisco.
This is also a story of how a usually beneficial business practice became something more ruthless in nature.
This book summary looks at this infamous moment in time and those involved, giving readers a better idea as to why this particular deal captured people’s attention and just how it shaped business practices at the end of the 1980s.
The Rise of the Leveraged Buyout: A Way for Wealthy Owners to Preserve Their Family’s Assets
Wall Street’s modern-day modus operandi of leveraged buyouts was invented as an innovative way to help wealthy business owners avoid big taxes and pass money on to their heirs.
This all started in the late 1960s when a generation of individuals were getting ready to retire and had three possible options: they could hope their companies would remain operational while they passed it down, they could sell it with no control over who bought it, or they could go public in a risky but possibly lucrative move.
None of these solutions seemed ideal for this purpose, however, until entrepreneurial lawyer Jerry Kohlberg came up with the idea of ‘Leveraged Buyouts’.
His concept was to found a shell company and bring in investors who would take out massive loans from banks that added up to the cost price of Mr.
Big’s business (the business owner).
Mr Kohlberg’s strategy meant that the investors only had to pay 10% upfront and received 30% from insurance bonds and 60% from bank funds.
This method allowed the target company (Mr Big) to not only keep a certain ownership stake but also keep most of its profits despite the imposed debt incurred by the shell firm that took part in this particular LBO.
In short, Wall Street’s modern-day modus operandi of buying businesses with leverage started out as a work-around to side step estate taxes as well as secure family wealth for many generations.
The Pros and Cons of Leveraged Buyouts: Exploring the Causes and Effects of the LBO Craze
In the 1980s, leveraged buyouts (LBOs) were becoming increasingly popular and transforming into money-making machines.
Thanks to the US Internal Revenue Code allowing deductions of interest tax, but not dividends, companies were encouraged to go into debt and pay interest – leading investors to recognize how profitable this tactic could be.
The appearance of junk bonds also enabled firms to raise a massive sum of money in a short period.
However, an LBO sparked both impassioned praise and critique simultaneously.
Supporters argued that these transactions made firms leaner and increased their value while antagonists declared it industry-destroying due to the immense debt burden involved.
Government officials even warned that a leveraged takeover one day meant a bankruptcy the next which naturally left employees of the target companies jobless.
Original shareholders also faced losses since their investment plunges as soon as all new debt was taken on.
The Rise of Ross Johnson: A Cautionary Tale of the Dangers of Pursuing Change for the Sake of Change
Ross Johnson was an ambitious businessman, whose insatiable appetite for travel and luxury led him to become a revolutionary figure in the business world.
He embraced change as a way to reap rewards, leaving behind a lasting impact on the nature of corporate business.
Starting from the proverbial “bottom of the ladder” in Canada, Ross quickly rose up the ranks thanks to his knowledge of business strategies and tactics.
He advocated for constant change, reorganizing departments, relocating whole sectors, and capitalizing on any chance that came his way.
To add to his success story, Ross also grew a knack for rubbing elbows with celebrities; he kept many on his payroll to promote his company or commodities and indulged in golf tournaments stocked full with stars.
The Bold Experimentation of Ross Johnson: How A Maverick CEO Upended Decades of Conservative Monoliths
When Johnson became CEO of Standard Brands in 1976, he had arrived at the level of power he’d been seeking – and this was only the beginning.
Using what he learned from his mentor, Peskett, Johnson decided to go bigger and better by merging with the much larger Nabisco.
This decision would prove to be a major turning point for Johnson, as it created many more growth opportunities for him.
Through this merger, Standard Brands overtook Nabisco’s sales and efficiency protocols, which shifted the company culture significantly.
In addition to spending more time on ideas than meetings, Johnson’s team delighted in heckling their colleagues and even taunting Johnson himself (who was surprisingly amused by it all!).
This ultimately led to yet another merger with RJR Reynolds – one of America’s largest cigarette producers – giving Johnson far greater control over both groups of companies.
By connecting these firms together under his direction, Johnson gained immense power.
Through careful planning and risk-taking that sought after bigger and better returns, his ambition paid off.
With a series of successful mergers under his belt, Johnson was now living the high life!
Henry Kravis and His Pioneering Influence on Leveraged Buyouts (LBOs)
When Henry Kravis entered the world of Wall Street as a banker, he brought with him a revolutionary vision that would ultimately transform the nature of leveraged buyouts (LBOs).
His distinct approach saw LBOs changing from innocuous tax workarounds to powerful corporate takeover vehicles.
Kravis formed a partnership with his cousin George Roberts and Jerry Kohlberg, the originator of LBOs.
Together in 1976, they created the influential private equity firm of Kohlberg Kravis Roberts (KKR).
Unlike others who closed deals in mere days or hours, it could take years for Kravis to successfully seal an LBO.
This longer timeframe wasn’t appreciated by many at Bear Stearns – such as when he effectively became interim CEO for one crumbling paper company.
Therefore, he eventually left along with his cousin George, forming KKR and creating a new way of approaching these transactions.
Johnson Tries to Cash in on LBOs With Disastrous Results
When Ross Johnson decided to join the LBO game, his greed put him at a disadvantage from the start.
After all, experienced professionals like the Kravis cousins were largely responsible for refining LBOs, and Johnson’s ambition likely scared off any serious players.
As a result, he had no choice but to go with an outsider in the LBO world – Shearson Investment Banking.
Unfortunately, this led to some disastrous consequences.
For example, because Shearson was desperate for their own piece of the LBO pie, they agreed to insane terms including maintaining certain departmental budgets and retirement packages – concessions which ultimately jeopardized the austerity measures necessary for success.
Additionally, being new to the scene meant that the deal was not handled with sufficient discretion or ruthlessness; info was let out too soon and it cost them dearly.
It’s a lesson Johnson surely wishes he’d learned before getting involved in an LBO – that when greed leads you down a path like that of RJR Nabisco’s takeover attempt, calamity is sure to follow.
The Battle Over RJR Nabisco: How Johnson’s LBO Bid Came Up Just Short
When it came to the bidding for RJR Nabisco, the board of directors was initially unsure when Johnson and Shearson offered $75 a share, which was $4 higher than what the company had ever sold for.
The total cost of this bid would be a whopping $17.6 billion – twice as much as any bank had ever loaned out before for a takeover.
This initial low offer from Johnson caused other bidders to throw their hats into the ring in an attempt to secure the deal for RJR Nabisco.
KKR offered up $94 a share, while First Boston sought to make use of a tax loophole, offering anywhere from $105 to $118 per share.
But before they had the chance, Shearson jumped in by increasing its bid to $100 a share in an attempt to outbid KKR’s offer.
The stakes were raised higher when First Boston proposed an impressive offer prompting another round of bidding where both Shearson and Kohlberg Kravis increased their bids between $108-$109 while First Boston failed to secure sufficient financing.
In effect, this left Johnson and KKR in dead heat with the board having to choose between them – either handing victory to Johnson or falling prey to KKR’s iron grip.
The Legacy of Ross Johnson: Corporate Greed in Excess, But Few Regrets
The LBO deal would be the end of Ross Johnson’s time with RJR Nabisco, but it wasn’t the end of his career.
Despite the fact that he was viewed as completely expendable by the board and caused a massive surge in public criticism due to his corporate greed, Johnson still continued to thrive in his career throughout the 1980s and even into semi-retirement.
His legacy is undeniably one of corporate excess, but Johnson himself laughed off all of it.
After leaving Nabisco, Johnson formed a consulting firm with an old friend and began offering up advice to others, regardless of needing the money or not.
Ross was lucky enough to escape whatever consequences there might have been for his actions and made a name for himself as a shrewd salesman — whether it necessarily translated into success or satisfaction remained undetermined.
So in conclusion, while the LBO deal ultimately put an end to Ross Johnson’s reign at RJR Nabisco, it did nothing to stop him from having an extremely prosperous career moving forward while laughing at the whole affair without any regrets from himself.
Wrap Up
The Barbarians at the Gate book can be summarized as a story of businessmen and corporate takeovers driven by bold strategies and powerful personalities.
The narrative follows how leveraged buyouts blossomed from an estate-planning technique to facilitate hostile corporate takeovers, showcasing the winners and losers in a game defined by their differences.
Ultimately, it’s a cautionary tale of ambition and acquisition, underscoring the high stakes involved in corporate mergers and acquisitions.
