Quick Summary
The book chronicles the 1988 leveraged buyout of RJR Nabisco, the largest corporate takeover in history at the time. It details the intense bidding war between CEO Ross Johnson’s management group, Kohlberg Kravis Roberts (KKR) led by Henry Kravis, and other formidable financial players like Ted Forstmann. The narrative exposes the lavish corporate culture under Johnson, the cutthroat tactics of Wall Street, and the clash of egos and financial philosophies. Ultimately, KKR emerged victorious after a dramatic auction, but the deal's immense debt led to a sharp decline in the junk bond market and a fundamental shift in American corporate leadership toward equity-driven self-interest.
Key Ideas
The 1988 RJR Nabisco leveraged buyout was a landmark event that reshaped American corporate finance.
The battle involved fierce competition, clashing egos, and unprecedented sums of money.
Ross Johnson's leadership style prioritized personal perks and deal-making over traditional corporate stability.
The deal highlighted the rise of junk bonds and aggressive takeover strategies on Wall Street.
The aftermath of the buyout led to a re-evaluation of corporate governance and executive compensation, fostering a culture of self-interest.
Introduction to the RJR Nabisco Leveraged Buyout
This section introduces the book, based on extensive Wall Street Journal reporting about the 1988 struggle for RJR Nabisco. Authors conducted over a hundred interviews to reconstruct private sessions and decision-making processes. They document the birth of a massive leveraged buyout (LBO), acknowledging the difficulty in judging its long-term success but aiming for an accurate historical account.
The book documents the birth of a massive leveraged buyout, though the authors state that it is too early to judge the long-term success of the transaction for the company.
The Key Players and Initial Moves
The conflict involved several factions: Ross Johnson's management group with Shearson Lehman Hutton, competitive bidders like Kohlberg Kravis Roberts (KKR), Forstmann Little, and First Boston. A special committee of the board oversaw the process. Ross Johnson initiated a buyout, believing the company's stock was undervalued. Despite warnings about losing control, he sought board permission for a cash bid of seventy-five dollars per share, aiming to raise seventeen billion dollars.
Ross Johnson's Leadership and Corporate Mergers
Ross Johnson built his career as a "noncompany man," prioritizing deal-making and personal perks. After orchestrating a boardroom coup at Standard Brands, he fostered an informal culture with high salaries and a loyal inner circle. He sought a new venture, leading to a merger with Nabisco in 1981. This created a cultural clash between Nabisco's structured environment and Johnson's aggressive style, which he leveraged to seize control and purge the old guard.
Ross Johnson’s career was defined by his role as a noncompany man who prioritized deal-making and personal perks over corporate tradition.
The Genesis of the LBO and Johnson's Strategy
R.J. Reynolds Tobacco Company, a pillar of Winston-Salem, expanded into food after the 1964 Surgeon General's report. Paul Sticht modernized the company, leading to Tylee Wilson's appointment as CEO. Wilson acquired Nabisco for 4.9 billion dollars, and Johnson secured a high-ranking position. Tensions over "Project Spa" led Johnson to maneuver Wilson's ouster. By late 1986, Johnson became CEO of RJR Nabisco, consolidating power and moving headquarters to Atlanta, prioritizing extravagant corporate culture over operational stability.
Henry Kravis and the Rise of KKR's Aggressive Tactics
Henry Kravis rose to become a powerful acquisitor on Wall Street, known for his refined social standing and ruthless business persona. Along with George Roberts and Jerome Kohlberg, he refined the leveraged buyout (LBO), allowing aging owners to exit. KKR grew more aggressive, seeking larger transactions. Following Kohlberg's departure, Kravis and Roberts focused on megadeals, including toehold investments, despite mixed results, eventually considering the tobacco industry after previous reservations.
The Escalation of the Bidding War
Peter Cohen, head of Shearson Lehman, saw the RJR Nabisco buyout as a chance to elevate his firm. Ross Johnson rejected a traditional ambush LBO, insisting on a public announcement despite warnings of competition. He confidently assumed Henry Kravis would not interfere. Kravis, outraged by Johnson's bid, felt betrayed and quickly enlisted Drexel Burnham, Merrill Lynch, and Morgan Stanley to launch a counter-offensive. A lightning-fast tender offer of ninety dollars per share was initiated, escalating the conflict.
Competing Bids and Financial Maneuvers
Ted Forstmann of Forstmann Little criticized the junk-bond market, viewing Kravis's bid as dangerous. He saw the battle for RJR Nabisco as a moral crusade against modern greed, positioning himself as a rescuer with "real money." Meanwhile, attempts at peace between Peter Cohen and Henry Kravis failed. Kravis then sought to sideline Shearson. As the bidding intensified, Johnson’s lucrative management agreement leaked, sparking public outrage and making him a symbol of corporate greed, isolating him further.
Ted Forstmann of Forstmann Little viewed the unfolding battle with a mix of disgust and professional resentment.
The Final Auction and Board's Decision
The board grew hostile towards Johnson due to his controversial compensation package. A new auction round was initiated, with First Boston proposing a higher, tax-driven value. Kravis and Roberts feigned disinterest while secretly refining their bid. Johnson's public image suffered from a Time magazine story. The management group submitted a conservative bid, mistakenly believing KKR was out. Ultimately, KKR increased their cash component, making their bid financially equivalent to the management group’s, allowing the board to unanimously choose KKR based on non-financial factors.
Aftermath and Legacy of the Historic Deal
The historic RJR Nabisco LBO concluded with KKR's victory. The financial closing involved a massive nineteen-billion-dollar transfer of cash. The deal led to a sharp decline in the junk-bond market, bankrupting Drexel Burnham and ending the LBO boom. RJR Nabisco struggled under debt, requiring refinancing. Ross Johnson retired to luxury, indifferent to public vilification. The authors note the deal's legacy: a shift in corporate culture valuing equity and stock options over salaries, fostering greater self-interest among leadership and fundamentally altering the American corporate landscape.
Frequently Asked Questions
What was the main reason Ross Johnson pursued a leveraged buyout?
Ross Johnson believed RJR Nabisco's stock was significantly undervalued despite strong profits. He thought an LBO was the best way to realize the company's true worth for shareholders and to maintain his lavish corporate lifestyle.
How did Henry Kravis and KKR revolutionize corporate takeovers?
Kravis, with George Roberts and Jerome Kohlberg, refined the leveraged buyout concept. They allowed aging business owners to exit while retaining autonomy, eventually embracing aggressive tactics and larger, debt-financed deals to transform companies and generate massive returns.
What was the significance of the "junk bond" market in the RJR Nabisco LBO?
The junk bond market, led by Drexel Burnham, provided the massive financing necessary for these unprecedented LBOs. It allowed bidders like KKR to raise enormous capital, transforming corporate finance but also fueling concerns about excessive debt and financial instability.
Why did the RJR Nabisco LBO become such a landmark event?
The RJR Nabisco LBO was the largest corporate takeover at the time, involving an extraordinary clash of personalities and financial titans. It highlighted the era of corporate excess, the power of Wall Street, and significantly impacted how corporate wealth and management incentives were structured.
What was the long-term legacy of the RJR Nabisco deal on corporate culture?
The deal fundamentally shifted corporate culture, teaching executives that immense wealth was best achieved through equity and stock options rather than traditional salaries. This fostered a pervasive culture of self-interest among leadership, influencing corporate governance for decades.