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Business. Nonfiction. HTML: "One of the finest, most compelling accounts of what happened to corporate America and Wall Street in the 1980's." �??New York Times Book Review A #1 New York Times bestseller and arguably the best business narrative ever written, Barbarians at the Gate is the classic account of the fall of RJR Nabisco. An enduring masterpiece of investigative journalism by Bryan Burrough and John Helyar, it includes a new afterword by the authors that brings this remarkable story of greed and double-dealings up to date twenty years after the famed deal. The Los Angeles Times calls Barbarians at the Gate, "Superlative." The Chicago Tribune raves, "It's hard to imagine a better story...and it's hard to imagine a better account." And in an era of spectacular business crashes and federal bailouts, it still stands as a valuable cautionary tale that must be heeded.… (more)
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The climax is as good as any thriller (I completely missed my stop on the tube, finally snapping out of a daze thinking, "hey I haven't been this excited since Jodi Foster went head to head with Buffalo Bill in Silence Of The Lambs!").
Secondly, and maybe not intentionally, Barbarians at the Gate is a piercing social/historical commentary - just by "telling it like it was" the narrative skewers the eighties, Wall street and the Reagan years so brutally it might as well be a spit roast.
On this level it is leagues ahead of the celebrated fictional works which purport to do the same thing. In particular, Brett Ellis' "American Psycho", and Tom Wolfe's "A Man in Full", fare badly against Burrough's genuine article. I would be amazed of either Ellis or Wolfe hadn't read this book, but the novels of both are anemic and implausible in comparison. Barbarians at the Gate is more deadly accurate, it doesn't exagerrate or caricature the wall street banker like American Psycho does (and what value is there in caricaturing something which is so patently ridiculous in itself?), and the plot - needless to say - has a ring of credibility which is singularly lacking from A Man In Full.
Oddly, the one area where the book falls down a little bit is in its aspiration (if it has one) to present a sensible, clear, commercial analysis of what was going on. But that's a trade off - had the Burroughs taken that route, then surely some of the dramatic impact would have been lost.
As it is, he's produced a cracker.
Burroughs, a former Wall Street Journal reporter, knows this territory intimately and seems much more comfortable relating this story than he was talking about John Dillinger's escapades in "Public Enemies." It helps that he knows that he's got a terrific yarn on his hands and he works to keep the book's tempo on "high" from start to finish. This isn't to say that this story's always easy to keep track of. The financial transactions that Burrough describes are complex, and some of the financial slight-of-hand employed by this book's protagonists is positively Byzantine. I often found myself turning to the much-needed "Cast of Characters" that's included in the book's first few pages. Still, Burrough is careful to explain the basics of LBOs and other esoteric financial transactions in language that the average reader can understand, and he's not afraid to let his readers know when the details of a certain deal are best left to the real experts. His privileging of plot over financial nuance pays off handsomely: "Barbarians" is as addictive a book as I've ever had the pleasure to read. Burrough and Helyar's book is a fantastic piece of journalism and is highly recommended.
The book begins with the history of the two sides of the company. I’ll review their early history here, as it’s particularly interesting.
Nabisco
Nabisco [the National Biscuit Company] was founded in 1898 by the Chicago lawyer Adolphus Green through the merger of East and West Coast competitors. Nabisco’s created the first widely-adopted processed food in the US - crackers - and was known as the biscuit trust. It ran an an “associate proprietor” system that allowed employees to buy into the company.
RJ Reynolds
Reynolds was founded in 1875 by RJ Reynolds in Winston-Salem, NC. It’s employees there were primarily members of the Moravian Church. Reynolds was known to keep busy; “At an 1890 meeting of the Reynolds board, directors authorized spending $240 a year for Reynold’s horse team, the equivalent of today’s corporate jet” [69]. Wachovia Bank was one of their early allies.
In 1899, Buck Duke, a NYC guy, bought two thirds of Reynolds. They used the firepower to become the biggest employer in North Carolina.
F. Ross Johnson
Johnson is the protagonist of the book. A Canadian, the story follows him through his various positions in the corporate world, eventually landing him as the CEO of RJR Nabisco. Johnson was known as a noncompany man, and had a “personal crusade against specialization” [47]. He would tell his management, "you don’t have a job, you have an assignment" [48]. He also knew the rules of duopoly; "you know, it just doesn’t make sense to have anything that’s not number one or number two in its industry" [61]. His motto was, "a few million dollars are lost in the sands of time," and he was know for his "RJR Air Force" of corporate jets. By the end of the buyout, he’d learned the Three rules of Wall Street: “Never play by the ruse. Never pay in cash. And never tell the truth” [675].
Leveraged Buyouts
The leveraged buyout [LBO]- buying an undervalued conglomerate to be reorganized and sold at a profit while using the company as collateral and creating massive amounts of debt - is the key concept in the book.
Although KKR pioneered LBOs, the first famous one that got everybody on the bandwagon was in 1982 - Gibson Greetings. KKR was the king of LBOs, so let’s review their history.
KKR
KKR was founded in 1976 by Jerry Kohlberg, Henry Kravis, and George Roberts. The three got kicked out of Bear Sterns, a trader, for getting into LBOs into the seventies. So they started their own firm. Kohlberg was twenty years senior of Kravis and Roberts, and served as a mentor to them in their early years. By the mid eighties, things in their partnership were shifting. Kohlberg had some heath issues that took him out for a while, and he was traditional, when Kravis and Roberts were aggressive. Kohlberg was known as “Dr. No,” as he’d always be the brakes on the operation.
By the time of RJR Nabisco, Kohlberg had left and started his own thing, although he still had significant financial ties to KKR.
Key Terms
* Bridge loan - a short-term loan used for capital while longer-term loans are worked out
* Merchant banking - providing capital through shares rather than loans
* Tender offer - a public form of takeover bid
* Toehold investment - when a firm acquires a significant stake in a company that they’re about to attempt to buyout
* PIK - Pay-in-kind loans use other forms of securities than cash
Reflections
Right before Johnson started things rolling with an LBO, his son went into a coma [due to a car accident]. It’s worth noting that Johnson didn’t have the psychological support or skill set to deal with this trauma in any other way than diving into his work - in this case, laying the groundwork for the biggest LBO in history.
I didn’t see any points in this event associated with outlandish greed. What can be found in this story is a description of the concentration of power. So although these people weren’t unusually greedy for the average American, they were dealing with some pretty big numbers that had immediate impact on many peoples lives.
Another shortcoming in the development of many of the core characters in the story is a lack of initiation into adulthood. There is some spirit of competition. It’s clear that there wasn’t an interest in the leaders in this book making decisions that are particularly in the “best” interests of themselves or their communities. They just wanted to “win.” This is an adolescent attribute. It’s both sad and irresponsible that our society places people of such deficient maturity in these roles of power.
There’s also a disconnect between the personal and professional lives of many people in the story. On the one hand, many people in the book care deeply for quality in their personal life. They might have hand-made Italian loafers, fine art on their walls, and eat at delicious restaurants almost every night of the week. I associate these things with the values of attention to detail, presence, and beauty.
On the other hand, their professional lives are a mess. Things are flying all over the place all the times. Deals are thrown together in haphazard jumbles that often require significant restructuring down the road. I’m not sure what the values are here, but they’re not associated with quality.
That being said, their lifestyles are pretty genuine. It’s all about relationships. Their schedule looks nothing like the nine-to-five. They spend a lot of their time socializing, and hanging out in cool places. Most Wall Street deals seem to take place over drinks at somebody’s penthouse apartment at 3:00am, or on the golf course, or at a ski resort.
There’s an undercurrent of warfare. Whenever somebody in the book served in the military, which many of them did, their history was reviewed, and how it informed their behavior.
LBOs definitely operate in a very special ecosystem. Although there were just a handful of people calling the shots, they drew on vast arrays of specialized resources [accountants, lawyers, pension funds, junk bonds, et cetera].
In summary, I found the book extremely interesting.
These are Wall Street Journal reporters. They outline the financial intricacies well enough so the story hangs together. What we never really get is any kind of reflection on the significance of the wild story. The extravagance, the waste... this is a much earlier phase of the kind of crazy financial engineering and concentration of wealth, the trend that has continued and grown over the twenty five years since this story unfolded. The book came out quite soon after the events so that already limits what kind of historical reflection would have been possible.
Definitely worthwhile snapshot of corporate craziness!
Fascinating account of the LBO of RJR Nabisco which was the largest of its day. The offers were driven by competing egos and arrogance for the sake of pride and greed. Great win for shareholders. Only fair return for investors. Utter destruction of a company culture with the fall of RJR.