Barbarians at the Gate: The Fall of RJR Nabisco
True Greed: What Really Happened in the Battle for RJR Nabisco
Reading these two books, an exhausting and not altogether agreeable diversion, invites recollection of Newton’s statement that if he had seen far, it was because he stood on the shoulders of giants. The takeover of RJR Nabisco, the multi-billion-dollar food and tobacco enterprise, is the story of a number of men of no particular wit or distinction (most of whom, ironically, are also small physically, which may have a bearing on the story’s psychological subtext) who were enabled to see further, as it were, because they were perched atop a mountain of liquidity—cash and credit available for hire.
This volcanic eminence first erupted in the mid-1970s when, in the wake of the oil-price shocks, the world’s banks, led by Walter Wriston of Citibank, preempted the hitherto monopoly power of the Federal Reserve to print dollars. By 1988, when the RJR Nabisco takeover began, the peak had grown to Everestian heights. The world was awash in exponentially more liquid capital than it needed to conduct its business. Capital now concentrated in relatively few hands, so that tens of billions of dollars could be electronically marshalled in a few days to finance all sorts of commission-paying mischief. The RJR Nabisco transaction can be seen as the logical, revolting culmination of a process that began some fifteen years earlier.
Of the transaction itself, what can be said? In 1988, the chairman of RJR Nabisco, Ross Johnson, an adept corporate politician with as finely developed an understanding of executive perquisites as there has ever been, hatched the idea of buoying up his company’s languishing share price by “doing”—as the vernacular has it—a management buyout.
The process would be simple. Johnson and a band of six associates would borrow $17 billion and use the money to buy in the outstanding shares of Nabisco at a price substantially exceeding that at which they were quoted in the public stock market. At the end of the day the shareholders, many of whom were large, tax-exempt fiduciary institutions (pension and benefit plans), and a goodly number of whom were citizens of Winston-Salem, North Carolina, the “company town” where Reynolds Tobacco (“RJR”) was born and based before it was conjoined with the Nabisco Brands food conglomerate, would pocket handsome profits, profits higher than they would ever expect to realize through the “normal” workings of the stock market. Johnson and his group would then control the company and themselves become rich beyond dreams.
The canny divestment of certain parts of the business, together with the cash profits generated by the retained businesses, would in time pay off the debt. Once again, as we were so often told in the course of the Roaring Eighties, greed would be married with financial ingenuity to produce an entrepreneurial masterstroke emblematic in the finest sense of the high calling which is finance (Wall Street) capitalism.
Alas, it all went badly for Johnson. A combination of ineptitude, carelessness, egotism, and indiscretion undid his not so well-laid plans. Badly advised, and himself by turns guilty of a hubris remarkable even for a tobacco tycoon and an equally confounding puckish indifference to strobelike changes of fortune, Johnson alienated his board of directors, in whom was vested ultimate responsibility for deciding to whom, and on what terms, RJR Nabisco would be sold. By then, the experienced, deep-pocketed leveraged buyout (LBO—another term for the sort of credit-heavy transaction Johnson was attempting) firm of Kohlberg Kravis and Roberts (KKR) had entered the fray. The simple fact is that KKR were better at this sort of thing to begin with; and the firm also had the benefit of the Johnson side’s errors of judgment and presentation, and the growing inclination of Johnson’s formerly captive board of directors to bite the hand that had lavished private jets and six-figure consultancies on them (and expected their unquestioned loyalty in return). KKR’s ultimate victory seemed beyond doubt.
Nevertheless, in this auction there was more on the table than money; indeed, the potential profits from the deal were quickly subsumed in a head-banging clash of egos involving some of the best-known, most widely (although, thanks to this transaction, no longer) respected people and institutions on Wall Street. When the smoke had cleared, KKR’s winning bid had been run up to $25 billion—a price which assured that the prize itself would be squeezed and sliced beyond recognition in an effort to eke out sufficient cash to pay interest and principal on this sum. The irony in all of this is that, at the outset, it had been Johnson’s intention to keep RJR’s tobacco operations and hive off its food businesses, while KKR—a firm of non-smokers—intended exactly the opposite. Common sense argues that a meeting of the minds might have been arranged, at a considerable saving in costs to the buyer, but anyone with the slightest knowledge of Wall Street will realize that common sense is valued far, far behind such other attributes as publicity and pride of placement.
This, in a nutshell, is the story told by the two books under review. On the whole, they tell it well and engagingly—they are, after all, largely based on after-the-event interviews with the same cast of characters and they follow the same script. Barbarians has the broader scope, tracing the history of the companies which became RJR Nabisco up to the point at which Ross Johnson despaired of the share price and set in motion the events which culminated in the $25 billion buyout. Beyond that, the differences between the two books are largely matters of detail, frequently having to do with chronology, and inessential to the greater scheme of things. For example, Ms. Lampert presents Martin Davis, the chief executive of Paramount, as the principal force for truth and virtue among RJR Nabisco’s non-affiliated directors. Burrough and Helyar bestow the laurel on Charles Hugel, chief executive of Combustion Engineering. It is hard to say that Ms. Lampert (Greed) “scoops” Messrs. Burrough and Helyar (Barbarians) on any important angle of the story, or vice versa, or that one or the other has a clear superiority when it comes to telling anecdotes or reflections that open the reader’s mind to heretofore unconsidered aspects or levels of meaning of this often sordid, generally tiresome, yarn about little men grubbing for enormous sums of money.
That said, it is clear that Barbarians is having all the best of it in the market, to an extent deservedly. For one thing, measured strictly quantitatively—which seems appropriate for a book on finance—it is a much better bargain. Messrs. Burrough and Helyar have been splendidly served by their publisher; Ms. Lampert miserably by hers. Barbarians cuts a much more imposing figure in bookstore displays. For a mere 21 percent increase in price, the purchaser of Barbarians gets twice as many pages (a clear advantage in readability as well as material), an index (indispensable to Wall Streeters seeking mention of themselves), and a rogues’ gallery of photographs. Moreover, when it comes to getting attention for the book, Barbarians has enjoyed the impressive combined backing of its authors’ employer, The Wall Street Journal (which excerpted large portions), and its publisher, a unit of the Murdoch empire. (A tendentious but attention-getting excerpt about LBO baron and Kravis rival Theodore Forstmann was published in New York magazine, another Murdoch creature.)
Most important, considered, as it must be, as a market-driven product, Barbarians is much more in touch with its potential audience and its times. It is briskly written and engagingly smartass, qualities it shares with its fellow financial best seller, Michael Lewis’s Liar’s Poker, and it displays a mastery of a journalistic technique perfected by Tom Wolfe: the utter (partly deserved) self-destruction of each of its dramatis personae through words and deeds imaginatively reconstructed by the writers. Character assassination is thus passed off as suicide, with the useful secondary effect of convincing readers that these people belong to another race living on another planet, and are not human beings with whom they presumably have certain traits in common.
Burrough and Helyar’s “take” is resolutely and perversely nonjudgmental on the “issues” raised by RJR Nabisco; by contrast, one cannot help but feel that Ms. Lampert’s nagging—well, moral doubts about the entire business prevent her from digging into the story with the zest an audience accustomed to People magazine demands. Still, fairness requires acceptance of the fact that business transactions, even the largest, essentially are made by people studying figures, attending meetings, and making lists, and that a generous addition of dirt about personalities may be the only ingredient capable of transforming what otherwise would be somewhat dry into a best seller.
In order to beat each other to the market, both books were obviously written more hastily than they might have been, which in large measure—to be generous—accounts for their failure to confront larger issues of personality and policy. For example, while it is easy to say that a taste for celebrity or a thirst for wealth and influence and esteem may drive such people as Henry Kravis or Peter Cohen, the Shearson Lehman executive who was one of Ross Johnson’s allies, there is usually more to a person than that. A novelist can imagine character into being; a journalist must dig out the facts and the background and then try to make sense of them. Ross Johnson is the most investigated character in both books, and not surprisingly he emerges as the most fully drawn, most complex figure—largely because in his case close attention is paid to what my old prep-school English teacher H. D’Arcy Curwen called: “who we are, what we are, and how we got that way.” The other chief personages in the RJR Nabisco story are given few inner attributes apart from greed, and that I think does them an injustice.
It is easy to decry the RJR Nabisco deal, and the entire leveraged buyout phenomenon, with buzzwords like “junk bond” and “greed,” or to continue to beat such already lacerated horses as the estimated one billion dollars in “advisory” fees and financing commissions creamed off the top by investment bankers and related parasites such as law firms, public relations consultants, and accountants. Nevertheless, while I assume that most readers will have a fair idea of how greed looks and sounds, few will ever have seen a junk bond. It may be instructive, therefore, simply to list, without comment, the types of obligation KKR caused to be issued to finance its acquisition of RJR Nabisco:
RJR Nabisco Holdings Corporation payment-in-kind senior converting debentures, RJR Nabisco Holdings Group Inc. payment-in-kind subordinated exchange debentures, RJR Nabisco Holdings Capital Corporation guaranteed payment-in-kind subordinated debentures, guaranteed subordinated discount debentures, guaranteed subordinated debentures, guaranteed subordinated extendable reset debentures, guaranteed subordinated notes, guaranteed senior subordinated increasing rate notes.
What is significant about the foregoing instruments, which intriguingly combine elements of Rube Goldberg and Lewis Carroll, is that they constitute a giant fraud upon ordinary taxpayers carried out with the willing connivance of Washington. This is the real point of the RJR Nabisco story, not whether Peter Cohen is a charmless and insecure man, whether Ross Johnson’s dog flew on his corporate jet, or whether Lazard Frères pinched a clever tax gimmick whose author was a banker at rival First Boston.