Barbarians at the Gate: The Fall of RJR Nabisco

Nonfiction | Biography | Adult | Published in 1989

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Summary

Background

Chapter Summaries & Analyses

Chapters 1-3

Chapters 4-6

Chapters 7-9

Chapters 10-12

Chapters 13-15

Chapters 16-18

Key Figures

Themes

Index of Terms

Important Quotes

Essay Topics

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Discussion Questions

Chapters 10-12Chapter Summaries & Analyses

Chapter 10 Summary

Johnson began to display cracks in his “sunny façade” as he attempted to identify what went wrong in the situation with Kravis (244). In Cohen’s view, the problem was that every single firm Kravis hired (Morgan Stanley, Drexel, and Wasserstein Perella) “had its own reasons to want Shearson’s big deal crushed” (244). For example, Morgan Stanley considered Shearson’s bid on RJR Nabisco “a challenge to its own growing power in the LBO market” (245). For Shearson to stay in the fight, the firm would have to top Kravis’s $90 per share. However, Kravis’s bid was $79 per share in cash and $11 per share in securities, meaning he only topped the cash component of Shearson’s offer by $4 per share. Johnson’s lawyer Steve Goldstone told Johnson that his interests did not necessarily match those of Shearson, thus not everything was lost. Still, “for Johnson, the whole thing had become a bad dream” (245). The added debt from a $90 share price would translate into big cuts, including Johnson’s beloved corporate jets.

Meanwhile, The Wall Street Journal ran headlines like “Offers for RJR Pit KKR and Shearson in a Battle for Turf” (251). Cohen and Kravis met to seek an amicable resolution to the RJR Nabisco situation. Cohen sought a 50/50 deal, while Kravis offered Shearson 10% of the company and $125 million as a fee. Cohen was insulted and considered it to be “a bribe” (263). Meeting again later, in the middle of the night, Cohen and Hill informed Kravis that RJR Nabisco management had decided to stay with Shearson, “The threats were unmistakable” (268). Shearson and KKR “were getting nowhere” (271). Shearson then proposed that they would purchase RJR Nabisco and sell the food business to KKR. But KKR considered their offer of $15.5 billion too high.

After consulting Jim Robinson of American Express, Johnson agreed to meet with Kravis. Johnson was worried about how future cost cutting might affect his corporate perks. Kravis and Roberts assured him that they did not “mind people using private jets to get places, if there’s no ordinary way” (255). Johnson wanted to retain control of the company, but Kravis informed him that KKR is “not going to do any deal where management controls it” (255). Later, Johnson informed the RJR Nabisco people that “the odds of winning with Shearson were hardly any better” than working for Kravis (260). Later, Johnson called Kravis twice to emphasize that he would not be working with KKR and that his offer to Shearson was “lousy” and unfair (263). Kravis assumed that “[s]omeone was pulling Johnson’s strings” (264).

Johnson went on to meet Ted Forstmann at Forstmann Little. Forstmann could not believe that Johnson had met with Kravis or even entertained the idea of talking to him at all. Indeed, he sought to join forces with Shearson to challenge Kravis. Forstmann went on a tirade against both junk bonds and Kravis himself, but the conference room suddenly became empty. He was confused about everyone leaving but decided to stay. Later, disappointed that Johnson had remained in communication with Kravis, Forstmann wanted to leave, but Geoff Boisi of Goldman Sachs convinced him to stay to see whether Shearson needed them and whether things might turn in their favor. Indeed, when talks between Shearson and KKR fell through, Shearson did require Forstmann’s help. At the same time, there was internal conflict, as Boisi did not want to work with Peter Cohen.

Chapter 11 Summary

Unable to arrive at an agreement with KKR, Shearson “prepared for war” by overhauling its initial $75 bid and working to secure $15 billion from banks (277). However, Shearson found itself “badly outmaneuvered” and “outmatched by the financial sophistication of Kohlberg Kravis and its advisers, Drexel and Merrill Lynch” (277). Cohen also decided to make Salomon a full partner in the deal and asked Johnson for permission to do so. After all, he argued, Salomon would add $3 billion in capital.

Much effort would be needed, however, to also work with Forstmann Little. Meeting in the 48th-floor offices of RJR Nabisco in New York City, Salomon, Shearson, Forstmann Little, and a Goldman Sachs group headed by Geoff Boisi brainstormed their options. Each banker had his own ideas. Boisi, for instance, argued that more RJR assets needed to be quickly sold. The situation seemed like a turf war. At the same time, several bankers had reasons to detest Kravis. His former friend Tom Strauss of Salomon “couldn’t believe Kravis’s gall” and thought that “KKR had shit on Salomon for years” (281). Eventually, Cohen began to suspect that “Goldman wanted to make a run at RJR Nabisco itself,” and that Boisi was a mole (287).

Cohen adjusted the proposal to more closely meet Forstmann’s capital-structure requirements. For example, Forstmann Little would take 50% of the group’s equity, while Shearson and Salomon would take 25% each. The company would be controlled according to the same ratio. Forstmann was very pleased with the changes. However, the next day, Cohen proposed a different structure and apologized for misspeaking: “The changes were enormous” (297). For instance, Forstmann was demoted to junior debt. The management contract for Johnson’s people was close to $2 billion. There were also many fees, including a “success fee” for Shearson and Salomon of $120 million and a projected $103 million in fees for selling off the assets of RJR Nabisco after the LBO went through. In the end, Forstmann was fed up and considered leaving the deal.

Meanwhile, Kravis decided to overcome the disadvantage of not having RJR Nabisco management on his side by finding someone else who knew the company. Smith Bagley, a member of the R. J. Reynolds family and owner of 1 million shares of RJR stock, was angry about what Ross Johnson had been doing to the company. He did not want the company sold at all but could not challenge the sale on a legal basis. Therefore, he opted for attempting to pursue a competing bid. Bagley and Kravis decided to meet. Bagley also involved the company’s former chief Tylee Wilson, “It galled Tylee Wilson to see that breezy playboy trashing a fine American company” (284). As a result, Bagley flew to Jacksonville to meet with Wilson.

RJR Nabisco’s director Charlie Hugel warned Kravis against dealing with Wilson and suggested that he would find him “a lot of good people” in the company instead (285). Kravis sent a jet for Wilson into Jacksonville and met with him the day after Bagley. He and Roberts “found his knowledge of the company outdated and his zest for revenge apparent” (285). KKR believed Wilson to have been the source of the leaks and his “career as a Kohlberg Kravis consultant was over before it started” (286).

Linda Robinson, “a force to be reckoned with” (293), managed Johnson’s group’s public relations during the LBO. Robinson communicated with reporters as the chief spokesperson. Her involvement was a departure from the norm, as Kekst & Co. had dominated public relations on Wall Street for several years. Robinson started off as a deputy press secretary for Ronald Reagan in 1980. At the same time, Robinson and her husband were close friends with Henry Kravis: “Robinson’s conversations with Kravis were a closely guarded secret” (295).

Chapter 12 Summary

Kravis was concerned that Cohen and Johnson were at a significant advantage because they had “access to every piece of confidential information” (301). For this reason, Kravis worked with bankers from Lazard and Dillon who analyzed RJR Nabisco for him as part of due diligence. The special committee, comprised of the company’s directors and their legal advisors, set up interviews with RJR Nabisco executives for Kravis on October 31, 1988, at the Plaza Hotel in New York City. His objective was to encourage the executives to remain in the company after its purchase and to grill them individually. Some executives were compliant; others, like Ed Robinson, acted in a hostile manner. The media was critical of Kravis for using state pension funds for a hostile bid, and “the press attacks deeply wounded Kravis” (310).

Meanwhile, Forstmann was leaning toward abandoning his cooperation with Cohen and challenging his nemesis, Kravis, on his own. Johnson’s management group also moved to make its own bid. The RJR Nabisco CEO was aware that the company board was “deathly afraid the management group would cut a deal with Kravis” (307). RJR Nabisco PR specialist Linda Robinson believed that Shearson and Salmon could still work with her friend Kravis.

Johnson supported Robinson’s idea. As a result, a secret meeting was arranged, involving Johnson, Cohen, Jim Robinson (the chief of American Express and Linda Robinson’s husband), Roberts, and Kravis. The men debated several issues, from major ones like Drexel’s handling of the bond question, to minor ones like the order in which names would be listed in the announcement of the deal. According to Tom Strauss of Salomon Brothers, the importance of this seemingly trivial issue “lay in the esoteric world of the bond trader” (325). A lead bank in a bond offering gets to have its name on the left side of an advertisement in publications like The Wall Street Journal. The positioning had “powerful symbolic significance in the bond world” (325). After an hour, they arrived at an agreement, “The logjam was broken!” (318). Later, however, looking over the management agreement, Kravis and his legal team including Richard Beattie were shocked by a paragraph in which Johnson retained significant power, “The control, a veto in Johnson’s hands, and, most alarming of all, the astronomical returns Shearson was promising Johnson” (322).

However, this agreement started to fall apart over what Johnson considered minor issues such as who got the most fees. He had a hard time understanding the “Wall Street gobbledygook” (332). In his view:

Nobody gives a shit about the company. Nobody gives a shit about the employees. Jesus, we’ve got a goddam company to run. I’ve got 140,000 people to worry about. We’ve got to get going! (332)

At this time, Frank Benevento, Johnson’s consultant, requested a $24 million fee for his “financial engineering,” which Johnson found outrageous (336). The management group ended up bidding $92 per share. Linda Robinson attempted to get everyone to cooperate again, but Kravis “was resigned to the fact; it was over” (336).

Yet soon public opinion shifted in Kravis’s favor. The excesses of the management agreement hit major media outlets such as The New York Times. Linda Robinson attempted to do damage control but told Johnson that his problem was not with public relations, “You can’t just tough this out. You’re going to get killed on this thing” (341). Johnson suspected Ted Forstmann was the NYT story’s leaker. At this stage, “Johnson had no intention of joining forces with Ted Forstmann’s new group, which he labeled ‘the five-legged elephant’” (345). When Forstmann attempted to contact Johnson’s house directly to deny that he was the leaker, Johnson’s representatives told Forstmann “to stop annoying them” (347).

Chapters 10-12 Analysis

These chapters explain the technical aspects of the battle over RJR Nabisco, outlining how each of the key players—Johnson’s management group (including Salomon and Shearson), Forstmann Little, and Henry Kravis’s KKR—put together its financing and arrived at a bid. A challenge for the authors here is to make complex financial concepts accessible to a general audience while continuing to emphasize the interpersonal drama that makes for a compelling narrative. By explaining the intricacies of Wall Street bidding—noting, for instance, that because Kravis was planning a hostile bid, he did not have access to RJR Nabisco’s confidential information as Shearson’s Peter Cohen did—the authors enhance the general public’s understanding of the process.

The media continues to play a key role here, with Burrough and Helyar’s Wall Street Journal shaping public opinion and affecting the behavior of individual players in the narrative. Because stock valuations rise and fall on the perceptions of stakeholders, it becomes nearly impossible to describe events in the financial world without inadvertently changing the course of those events. As Burrough and Helyar reported on this story, they found themselves becoming players in it. The media coverage first hurt Kravis by questioning his use of state pension funds for a hostile takeover, then benefitted him by targeting Johnson’s corporate excess. Specifically, the leak of Johnson’s self-dealing management agreement to such publications as The New York Times shaped public opinion in a negative way and impacted the behavior of the key players as they sought to identify the leaker.

On a related note, public relations were also important to the narrative. It was Linda Robinson’s job to represent Ross Johnson and RJR Nabisco and to contact the media. Robinson was the wife of Jim Robinson, the chief executive of American Express, which was part of the management group’s bid. At the same time, she was close friends with Kravis. The authors seem to imply that Robinson’s close communication with Kravis may have represented a serious conflict of interest. Similarly, Kravis did not consider his Shearson rival, Peter Cohen, a friend, whereas Cohen described Kravis as a friend to the media. This group of friends, some of whom were business rivals, highlights The Human Factor in Business. There are other examples of this theme in this section. For instance, RJ Reynolds’ ex-CEO Wilson, and RJ Reynold’s grandson Bagley, held such a strong grudge against Johnson that they attempted to work with Kravis to challenge Johnson’s control of the company.

The authors rely on two key motifs in this section. First, they continue to draw parallels between RJR Nabisco’s buyout attempts and war. Here, they mention that Shearson was prepared to go to war against KKR over this LBO, while Kravis was “deeply wounded” by the negative media coverage (310). Kravis himself describes his actions as follows: “[W]e were charging right through the rice paddies, not stopping for anything and taking no prisoners” evidently drawing an explicit comparison to the wars in Korea or Vietnam (252). This motif, which doubles as a theme, is discussed further in The RJR Nabisco Buyout as War. In addition to the war motif, which recurs throughout the book, a new motif emerges in these chapters as the authors compare the events they cover to Lewis Carroll’s Alice in Wonderland. The objective of this motif is to highlight the surreal nature of the situation. In the previous section, Ted Forstmann used an Alice in Wonderland analogy to describe junk bonds as “phony” money. Here, it was Johnson who found himself inside Alice in Wonderland: “For Johnson, the whole thing had become a bad dream” (245, 252).