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.
That the “auction” process by which RJR outbid Ross Johnson’s group may have been rigged against Johnson’s side, as has been pointed out by financial columnist Robert Metz, is fascinating, but in the end does it mean very much? Not really. There is a certain fascination to the accident of choice by which the chairman of the RJR Nabisco special committee chairman, Charles Hugel, chose one Peter Atkins to serve as his committee’s special counsel. Atkins, smarting from a judicial rebuke on another, similar matter, forced Johnson to disclose his intentions to launch a buyout, perhaps prematurely, and changed, if you will, the course of history. Good stuff—but not the main story.
There is a wonderful irony in the howls of outrage emanating from the Metropolitan Life Insurance Company when, after KKR’s takeover of RJR Nabisco, RJR Nabisco’s already existing bonds, of which the Met held some $300 million, had their credit rating reduced. What in the world, one might well ask, is a life insurance company doing holding a third of a billion dollars of a cigarette company’s bonds? Good stuff—but not the main story.
Finally, there are questions why so-and-so is spared while so-and-so is virtually drawn and quartered. I was told early on in the deal by investment banker (to KKR) Eric Gleacher, who will doubtless not remember the conversation, that the transaction was cooked up by Ross Johnson and American Express chairman James Robinson III, and that Peter Cohen was essentially ordered to get the deal done, but (in the Burrough, Helyar book especially) Robinson is shown as little more than a marginally involved bystander. Interesting rumors that raise all sorts of questions about “sourcing,” to which I shall return—but not the main story.
The main story is the cost of these deals to society at large—the cash cost, to begin with, and this goes largely unmentioned and unanalyzed by both books, unless you count as “analysis” Burrough and Helyar’s clever defusing of the serious core of Theodore Forstmann’s argument against LBO junk financing by mocking, not without some justification, Forstmann’s willingness, invited or uninvited, to state and restate and restate his position on the issue.
The reason junk financing is a fraud is twofold. To begin with, the existing tax law permits the notional interest cost of this kind of debt to be deducted from taxable income as if paid, even though not a penny actually changes hands. Taxable income is thus sheltered, and Uncle Sam’s tax take, at a time of debilitating deficits, is reduced. It is as if the readers of this review found a mortgage lender willing to lend without interest, or to defer interest, on the purchase of a new house and yet were able to take a tax deduction against their salaries. He has more money to spend for other things, but not a penny for government. And, naturally, with such no-cost financing available, the price of houses would rapidly rise.
Equally important, but not discussed in either of the two books, is the question of who buys junk bonds. We now know that huge junk-bond investments figured in the more outrageous debacles in the savings and loan crisis, which will need a minimum of $200 billion of taxpayers’ money to straighten out. What we also know, and which will surely have an enormous price, is that junk financing has also permeated, and to some extent poisoned, the nation’s private, but federally guaranteed, pension system. It has done this in two ways. During the LBO/merger mania of the 1980s, corporate pension and employee benefit plans were frequently used to help finance takeovers. Cash and securities deemed in excess of near-term actuarial requirements were withdrawn and used to help pay for the takeovers and LBOs. In their place, to maintain an image of fiscal propriety and integrity for the benefit plans in question, were substituted single-premium annuity plans offered by companies which, like mushrooms after a rainfall, sprang into existence to satisfy this exciting new market. The largest of these new companies, First Executive Corporation, is known to have backed its annuities with junk bonds largely sold by Drexel Burnham Lambert, who served as KKR’s financiers in the Nabisco takeover; indeed, First Executive Corporation was a significant purchaser of the RJR Nabisco junk debt described above.
As the junk market has collapsed in the wake of the bankruptcies of Robert Campeau and Drexel Burnham Lambert, so has First Executive Corporation, whose fortunes are now a day-to-day affair. Should it default on its annuities, pension plans backed by them will likely also fall actuarially short, and once again the load of making good will be thrust squarely on the shoulders of innocent taxpayers, us federal guarantors of last resort. Finally, even those pension plans which have stayed out of the annuity business have participated in the junk-bond market, including some of the largest state employee plans in the country. Here, too, since the implied or actual existence of ultimate guarantees is taken for granted by those plans’ beneficiaries, we taxpayers might well start taking for granted the likelihood that once we have finished paying the bills for the S & L crisis, we may be called upon to pay the bills for a crisis in pension funds. The bottom line is that nearly all of the $25 billion in financing used to pay for RJR Nabisco, from bank loans to the lowest-ranking junk, may in one way or another be backed by some kind of federal, for which read “taxpayer,” guarantee.
Will this deal collapse? Not a chance, say the proponents of leveraged buyouts, including not a few business school professors who do handsomely providing theoretical justifications for every fatly profitable new game Wall Street cooks up for itself. Perhaps not, but without waxing too technical, if certain reasonable assumptions are made about the future of interest rates and the consumer economy, it does appear that RJR Nabisco’s post-LBO cash flow will have to grow at a compounded annual rate of 30 percent to meet its obligations when the time comes to make heavy cash payments in 1993. Such a rate of growth is not impossible to achieve, but when a senior RJR official is quoted as predicting a 15 percent rate of future growth annually, a certain skepticism seems permissible.
Beyond these cash costs, moreover, RJR has rendered other invoices to society. Some are economic (compare the price of a box of Ritz crackers, a prized RJR Nabisco brand, today, post-LBO, with what it was pre-LBO). Others might more properly be called “societal,” involving community disruptions, job loss, and the like, as various RJR Nabisco businesses are sold, closed down, or broken up. For these, too, there is a real cost, although it is more difficult to calculate.
Such questions are seldom addressed in books patently rushed to market to catch the rising tide of topicality. Even so, within the limitations of the form, the Burrough, Helyar book gives rise to serious questions about the current state of journalism. The fact is, the authors themselves were part of the story as it unfolded, indeed the outcome of the contest was determined largely by carefully orchestrated leaks—to Burrough and Helyar, among others. One of these leaks, about KKR’s still secret intentions to bid $90 a share for RJR Nabisco, has been the subject of much discussion in the financial press. The information was considered theoretically damaging to the KKR interest because it forced KKR’s hand and therefore demands were made for the leak to be fixed.
The finger was duly pointed first at now discredited investment banker Jeffrey Beck, and then, following Beck’s fervent denial, at investment banker Bruce Wasserstein. Wasserstein, in a letter to The Wall Street Journal (January 11, 1990), has denied being the culprit, and points out that since it was to Burrough that the information was leaked, he of course knows whose voice it was on the other end of the telephone. Burrough has refused comment.
In fact, however, if one thinks about it, the leak could be interpreted as a clever ploy to create a momentary disadvantage that could be easily converted into a longer range psychological edge, in view of the RJR Nabisco special committee’s rising paranoia about litigation—which created an obvious intention on the part of the special committee to keep the bid process so “fair” that there would be no way for the now-alienated “insider” Ross Johnson to prevail.
For that reason, my own surmise is that this leak, as with one or two crucial others, most likely originated with none other than Henry Kravis. Indeed, one reads both books with growing admiration for Kravis’s skill as a poker player, his mastery of the bluff, his sense of when to check and when to raise. Better than any of the others, he understood this game—and game it was to all of them, the huge money stakes simply made the pot bigger. Kravis played it like poker, for certain others the takeover was a bloodless metaphor for battle, like those war games in which grown men scramble among the trees in camouflage and shoot each other with paint pellets. For Johnson, it would appear, the whole thing was an elevated form of craps. Indeed, the transaction resembled, and was played as if it were, some giant board game only passingly connected to real, or shall I say “ordinary,” life. This consideration of itself gives rise to another set of troubling questions which, once mentioned, need no further gloss from me.
Since Watergate, Woodward and Bernstein, and “Deep Throat,” much big-topic journalism, especially of the kind that can be converted into best-selling books, has become dependent on leaks. The possibilities for manipulation are staggering. Indeed, in the best recapitulation of the press coverage of the deal (in the January 1989 issue of The Journalist and Financial Reporting), one experienced financial reporter, Newsweek editor Carolyn Friday, is quoted as saying, “I felt the press was manipulated by a lot of people who would not talk on the record. I felt strongly that they should have the guts to go on the record.” What is one to say now, when a reporter himself refuses to go on the record to set straight an imputation which, even for a preeminent merger practitioner like Bruce Wasserstein, could be extremely costly in a profession where discretion is whatever fraction of the law that money isn’t? Still, since going for the gold seemed to be the order of the day, who can fault Mr. Burrough, obviously a young and ambitious man, for doing so himself?
The first fallout of any big transaction is the gossip, and essentially that is what has been collected and arranged—in Burrough and Helyar’s case, seductively enough to bring them a movie deal—in these two books. Drama sells. How much better to depict as a hand-of-fate “accident” Hugel’s selection of Peter Atkins, with his looming private concerns for the appearance of propriety, as the special committee’s special counsel, notwithstanding that The Wall Street Journal (December 2, 1988) reported at the time that Atkins had previously done work for Hugel at Combustion Engineering.
The real, as opposed to the gossip-driven, story of RJR Nabisco will take longer to be revealed, several years at least, longer than the short attention span of the public will permit. RJR Nabisco has only just begun to claim its victims, most notably Peter Cohen, in whose coffin Barbarians is assumed to have been the final nail, and most meaningfully all those anonymous souls on whose behalf fiduciaries bought the RJR junk bonds, which have since sold down drastically in the market after their rating was lowered by a leading credit agency, as well as the two or so thousand RJR Nabisco employees who have been “terminated,” and anyone whose supermarket bill (especially in KKR-controlled Safeway stores?) has risen.
However the story works out, raging success or desperate failure, the reasons why will not be found in either of these books, except that the deal got done. The public wants personalities, vivid, in conflict, glamorous, and preferably detestable (the publishers of Barbarians have emphasized the book’s likely appeal to fans of Tom Wolfe and Dominick Dunne). But when all is said and done, deals like this stand or fall on their true costs, and I’ve yet to see a balance sheet bought for a miniseries.
March 29, 1990