Book Summary: Barbarians at the Gate by Bryan Burrough

From the 1980s to the present, Wall Street’s largest firms have been hit with wave after wave of scandal. These scandals show that when it comes to finance, a lack of rules and regulation can lead to catastrophic consequences for society as well as individual investors. In Barbarians at the Gate: The Fall Of RJR Nabisco, Bryan Burrough examines one such story from this era- how Wall Street made an audacious bid for corporate control over America’s most iconic company in its least comprehensible deal ever during which billions were gambled on paper deals negotiated by people like junkies in a casino.

“Barbarians at the Gate” is a book that tells the story of how two titans of Wall Street, Michael Milken and Ivan Boesky, took over the world’s most powerful company. The book begins with a detailed history of Drexel Burnham Lambert, which was one of the most important investment banks in America during the 1980s. It then goes on to explore how Milken and Boesky became partners in what would become one of the largest financial scandals in history.

Are you seeking for a synopsis of Bryan Burrough and John Helyar’s book Barbarians at the Gate? You’ve arrived to the correct location.

I completed reading this book last week and took notes on several significant points from Bryan Burrough and John Helyar.

If you don’t have time, you don’t have to read the whole book. This description will give you a general idea of what you can learn from this book.

Let’s get started without further ado.

I’ll go through the following points in my Summary of the Book Barbarians at the Gate:

What is the plot of Barbarians at the Gate?

The leveraged buyout of RJR.Nabisco is the subject of this book, which relates the narrative of one of the greatest business transactions in US history. The book presents a vivid picture of corporate America’s expensive and wasteful conduct in the 1980s.

Barbarians at the Gate is written by who?

Investigative journalists John Helyar and Bryan Burrough followed the acquisition of RJR Nabisco from start to finish. 

The writers’ meticulous research and interviews result in a compelling depiction of a unique moment in Wall Street history.

Who are the Barbarians at the Gate?

Not everyone will like Barbarians at the Gate. If you are one of the following folks, you may like the book:

• Those working in finance or industry who want to learn about a famous transaction
• Corporate America’s abuses have enraged citizens.
• People who are interested in aggressive takeovers and shady business deals

Summary of the Book Barbarians at the Gate

Introduction

When many people think of the 1980s, the yuppie is the stereotype that comes to mind. These large spenders’ flamboyant and expensive lives have become a symbol of the decade’s excesses.

RJR Nabisco CEO Ross Johnson’s story encapsulates these features and the broader climate of the 1980s like few others. It’s not simply the narrative of a single firm, however; it’s the story of how leveraged buyouts grew from a benign corporate practice to something considerably more dangerous.

Lesson 1: Modern Wall Street strategies were developed to avoid inheritance taxes.

Do you understand what a leveraged buyout (LBO) is? Throughout the 1980s, the LBO was considered a filthy term, a symbol of corporate greed and Wall Street’s irrationality. The LBO was conceived as a means of safeguarding family wealth.

Lawyers used these arrangements to assist affluent company owners in avoiding inheritance taxes and passing money to their heirs. This was not a coincidence development, since LBOs first appeared in the late 1960s, when many individuals were preparing to retire after building large corporate empires.

Due to the way inheritance taxes operate, company owners who wished to retire and leave their firms to their heirs would have had to pay exorbitant taxes.

In such cases, they had three options: first, they could pass their enterprises on to an heir and pay all of their taxes; second, they could sell the firm, losing control; and third, they could go public, exposing their businesses to the market.

None of the three choices seemed really enticing. So lawyer Jerry Kohlberg developed a solution, but it was long and drawn out.

Assume Mr. Big has decided to retire. Mr. Big’s lawyers set up a shell company and brought in investors who took out enormous loans to purchase Mr. Big’s business. While Mr. Big would maintain some control over his firm, the investors would have paid a lesser price for the target company than if they had purchased it following a bidding battle with other interested parties.

Bank loans, insurance bonds, and investor capital would be used to fund buyouts. As a result, the investors used insurance bonds and bank loans to fund the project, saving them a total of ten percent on the cost.

As a consequence, the shell company paid nearly nothing for the target firm, while the investors paid almost nothing for it, resulting in a tremendous amount of debt that would primarily damage the target company.

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Lesson 2: In the 1980s, LBOs became money-making machines, eliciting both acclaim and condemnation.

Gibson Greetings, a firm that was sold for $80 million in 1982 to an investing group for $1 million. The corporation went public again after going public and selling for $290 million a year and a half later.

The LBO mania was in full swing, and the guy who put down $330,000 was able to transform it into $66 million. By 1983, there had been 10 times as many LBOs as there had been four years before, as investors realized the strategy’s viability.

Why was there such a frenzied reaction?

This was due to a number of things. Interest tax deductions are allowed under the US Internal Revenue Code, however dividend tax deductions are not. As a result, many businesses ran into debt and had to pay interest instead of making a profit.

Second, junk bonds, high-risk investments with a high default rate, allowed companies to swiftly obtain significant sums of money. LBOs may become rapid-fire, aggressive takeovers instead of sluggish, ambling procedures when using junk bonds.

As a consequence of this adjustment, LBOs were criticized as aggressively as they were promoted. An LBO, according to its proponents, might revolutionize a firm by making it leaner and increasing its value. Investors simplified the firm to the utmost extent feasible due to the large debt load, reducing expenditures wherever possible.

LBOs, on the other hand, have been chastised for their debt load. Leveraged takeovers, the government has warned, might lead to bankruptcy in the future. Employees of the target firms would surely lose their jobs as a consequence of such events.

The original stockholders, however, suffered a loss as a consequence of the extra debt; their investment value collapsed.

Let’s not get caught up in the details. We’ll look at a guy who was behind one of the biggest leveraged buyouts in history now that you know what an LBO is.

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Lesson 3: A businessman with an unquenchable need for change and luxury transformed the face of business forever.

Ross Johnson, a Canadian, descended the corporate ladder from the bottom in the 1950s. He would eventually become one of the earliest instances of a new type of corporate leader, one who enthusiastically jumped from company to company, vowing devotion to investors rather than a firm.

Ross, an enthusiastic traveler, celebrity watcher, and lover of the better things in life, found this method to be fruitful. He felt greater thrill every time he attempted to purchase a new house, dine at world-class restaurants, or meet celebrities.

He had celebrities on his payroll at all times to promote the firm of his choosing. Former American football player Frank Gifford and great tennis player Rod Laver are two outstanding examples. Ross also loves visiting celebrity-filled golf events.

Ross, on the other hand, enjoyed the better things in life while paying little regard to the ramifications of his business decisions. For tactical considerations, he may liquidate whole departments or shift entire departments to another city on a whim. Ross is prepared to part with pawns in exchange for a bishop.

What led to his ascent to such prominence?

He started off as a salesman in his own nation of Canada. He eventually found employment at T Eaton, a historic Canadian department store, under the direction of Tony Peskett, a legendary people manager. Peskett’s disciples were urged to maintain business and management in a state of flux at all times, causing firms and the market to shake cheval cheval.

Even though detractors said it was change for the sake of change, Johnson’s employment of such a method created a path of turmoil and damage. Johnson, on the other hand, gained greatly from it. He started making devious maneuvers over a short amount of time, allowing him to ascend the corporate ladder.

Lesson 4: Through mergers, Johnson rose to power.

Johnson benefited much from his friendship with Peskett, but it wasn’t long before he put what he learned to use on a far bigger scale. Johnson got his big break as CEO of Standard Brands, a Canadian packaged products firm, in 1976. Finally, he had the authority to make choices.

Johnson’s unquenchable desire for bigger and better things drove him to explore a merger with Nabisco, a far larger corporation. Standard Brands was formally taken over by Nabisco, but the outcome was quite the reverse.

Nabisco, which was renowned for crackers and cookies like Ritz and Oreo at the time, was already a global corporation. Nabisco had become an efficient, conservative monolith by the early 1980s, thanks to the popularity of its products. Employees were never allowed to work beyond 5:00 p.m. They never had to worry about losing their employment.

When Standard Brands joined with Nabisco, Johnson’s turmoil contrasted with Standard’s established procedures. Standard Brands’ team spent less time in dull meetings and more time throwing ideas at one another. Johnson even encouraged their boisterous conduct.

Johnson’s method expanded to Nabisco, and when the business merged with RJR Reynolds, one of the world’s biggest cigarette corporations, the same thing happened. For many years, RJR Reynolds was the most popular cigarette brand in the United States. This firm dominated the market owing to its founder’s inventions, which included the first pre-rolled cigarette and a well-known pipe tobacco brand.

A merger was a consequence of the growth prospects that it would create for both companies. However, the flamboyant conduct of Nabisco, a northern American firm, collided instantly with that of RJR, a southern company. For example, RJR plant workers had never seen a limousine, although Nabisco executives enjoyed it.

Lesson 5: A young Wall Street upstart changed the way LBOs were done.

When a new child challenges Ross Johnson’s rising power, he challenges Ross Johnson’s burgeoning power. Henry Kravis, a Wall Street banker, was earning millions by investing in mergers and acquisitions. Ross used a different approach to trading than most other traders, and whereas most others closed agreements overnight or within a few days, it may take him years to close a deal.

Of course, Kravis’ investment bank, Bear Stearns, wasn’t thrilled with such a long schedule. For example, when Kravis was chosen temporary CEO of a stationery firm during a bankruptcy sale, his Bear Stearns employer was outraged and demanded to know what a top trader was doing at a failing company.

Kravis and his cousin George Roberts departed the business shortly after, forming a partnership with Jerry Kohlberg, a pioneer in leveraged buyouts. Kohlberg Kravis Roberts (KKR), the private equity firm they co-founded in 1976, is one of the most well-known names in the industry.

Through this business, Kravis was important in changing LBOs from harmless tax loopholes to significant corporate takeover vehicles. Jerry, on the other hand, was more interested in big transactions than Henry and George. They didn’t want to waste time since a $100 million contract would take them the same amount of time as a $10 billion one.

By 1987, investors had amassed enough capital to support all of the main players’ LBOs. The Kravis cousins, on the other hand, had their eyes set on something much grander. By organizing a vast investment fund, they would demonstrate to everyone that they had the greatest authority and controlled the biggest deals.

After finalizing its transaction with Chicago-based Beatrice Foods, KKR sought funds for a fresh war chest in order to fulfill this aim. Management costs were eliminated for the first several years of the fund to attract additional participants. They raised $5.6 billion in only a few weeks, more than twice as much as their opponents.

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Lesson 6: When Ross Johnson got into the LBO business, his greed produced disaster.

Although the Kravis cousins are largely recognized for improving LBOs, everyone wanted a piece of the action due to the large sums of money at stake. As a result, Johnson was under no need to carry out an LBO, but if he did, he would regret it as a squandered opportunity.

Johnson was well aware, however, that his greed would drive any serious participant, including KKR, away from RJR Nabisco. As a result, he had little choice but to hire Shearson, an investment banking firm outside of the LBO market.

This corporation was ready to accept utterly absurd terms in order to grab a piece of the LBO pie, including giving Johnson a large share of the transaction and ensuring the protection of particular department budgets and retirement plans.

Of course, such concessions would jeopardize the austerity measures that a successful LBO relies on, such as department reduction to repay debt accrued via the acquisition.

The transaction itself, however, was not the only concern; since it was managed by numerous LBO rookies, it lacked the prudence and ruthlessness necessary to succeed. In fact, before everyone knows it, an effective LBO has already ended.

To do this, top executives and investors collaborate to create a buyout package. After everything is in order and the executives have achieved an agreement, a share price offer is presented to the board.

The agreement has progressed to the point that the board has no option but to approve it. If the board of directors votes no, the firm will be susceptible to corporate raiders who will acquire enough of its stock to seize it.

Johnson’s agreement, on the other hand, backfired because a lack of expertise caused knowledge to circulate faster than it should have.

Lesson 7: Other bidders were lured to Johnson’s first modest offer.

Johnson’s LBO idea was bound to fail from the outset. This is how it turned out:

They intended to offer $75 per share for RJR Nabisco, which was $4 more than the business had ever sold for before. The entire cost was $17.6 billion, more than twice as much as any bank has ever borrowed to purchase a firm. It was impossible to determine at the outset if the world possessed that much money.

When the board learned of Johnson’s offer, they were understandably keen to broadcast it and welcome further proposals. The board did not like Johnson and his managerial style, and they were eager to get rid of him if they could.

Offers came flooding in in reaction to the announcement. A special committee tasked with finding the best deal for shareholders came up with two proposals:

KKR offered $94 per share, while First Boston offered somewhere between $105 and $118 per share, because to a tax loophole. Shearson increased its proposal to $100 per share to outbid Kravis, who had previously put his hat in the ring.

Nonetheless, First Boston’s astronomically high price prompted a second round of bidding. All parties were asked to submit a new offer, and First Boston was obliged to explain how the money would be obtained.

Shearson and Kohlberg Kravis both boosted their offers to between $108 and $109 apiece after First Boston was unable to get the necessary finance. As a consequence, the two companies were tied. The board of directors had to choose between giving in to KKR’s iron grasp and handing Johnson the triumph.

Lesson 8: The LBO agreement brings Ross Johnson’s career at Nabisco to a close, but not his time there.

If you were a part of Ross Johnson’s group, you could expect to have a reasonably good existence – but other people were basically inconsequential to him. When the LBO came before the board, Ross had already shown his complete disregard for the board. The board of directors eventually pushed him to quit because he saw every employee as disposable.

Johnson’s management contract typified corporate greed, which didn’t help matters. It only took one New York Times piece detailing the rich agreement Johnson’s team was looking for to spark a national outcry.

The board saw the media event as another another smear on RJR Nabisco’s already tarnished image, which is why the special committee picked KKR, a firm that pledged to put the company’s and workers’ interests first.

Ross Johnson was out of RJR Nabisco in minutes, and everyone, from rural employees to board members, was relieved to see him depart. The organization would gain much-needed order by using KKR’s expertise in purchasing companies without demolishing them. Because of its scale, the transaction didn’t break KKR, even if it wasn’t the pot of gold everyone anticipated.

The narrative of Ross Johnson has come to a conclusion. His reputation is one of corporate greed gone wild, but he enjoyed himself along the way and had few regrets about his tenure at the corporation.

In truth, he had a successful career in the United States throughout the 1980s as a result of his sales talents and lack of ethics.

The RJR Nabisco LBO transaction may have made or broken some people’s fortunes, but Ross is now semiretired and joking about it. While neither he nor his old buddy needed the money, they kept themselves busy by giving pals cheap counsel.

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Final Thoughts

Leveraged buyouts evolved into leveraged takeovers from their roots as a cunning tax evasion method. 

These transactions are full of compelling personalities, and the winners and losers were determined by varied techniques.

Additional Reading

If you enjoyed Barbarians at the Gate, you may be interested in reading the following book summaries:

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