Barbarians at the Gate Summary

“Greed is good” – does this mantra justify the turmoil and excesses of the 1980s Wall Street? Discover the story of ambition, corporate takeovers, and a colossal business deal that defined an era.

1. The Birth of Leveraged Buyouts (LBOs)

Leveraged buyouts began as a tax-saving strategy for wealthy business owners. During the late 1960s, lawyers developed LBOs as a way for retiring entrepreneurs to pass their companies to heirs without hefty estate tax penalties. Companies were sold to shell corporations funded largely by borrowed money, with only a small portion coming from investors.

This approach utilized loans from banks and insurance bonds, ultimately making acquisitions affordable for the buyers while offloading the debt onto the acquired company. The process benefited business owners by allowing them some continued control over their firms, and investors found themselves securing companies at rock-bottom prices.

However, the structure of LBOs placed enormous debt burdens on target companies. This left them financially vulnerable, particularly during economic downturns or mismanagement. The debt's weight often led to bankruptcy or a considerable restructuring of the company’s operations.

Examples

• Jerry Kohlberg pioneered LBOs, starting with small family businesses looking to avoid estate taxes.
• Shell companies allowed investors to pay only 10% of costs while borrowing the rest.
• The target companies were often saddled with debt, which exposed them to operational risks.

2. LBOs Transition into Aggressive Takeovers

By the 1980s, LBOs became a lucrative strategy for Wall Street firms aiming for fast profits. Favorable tax codes incentivized companies to take on debt rather than maintain profitability. Around the same time, junk bonds—high-risk, high-yield securities—emerged as a key tool for quickly accumulating capital.

LBOs became a lightning rod for criticism. Advocates praised them for maximizing company value by enforcing cost-cutting measures and restructuring inefficiencies, while critics argued they endangered businesses with excessive debt and led to job losses. Proponents like Wall Street banker Henry Kravis capitalized on the trend, as LBOs turned the financial landscape into a ruthless battleground.

Though the short-term gains could be extraordinary, the costs were steep. Many companies became unrecognizable after the expense-cutting measures that followed, and employees bore the brunt of these adjustments.

Examples

• Gibson Greetings was bought for $80 million, largely with borrowed money, and later resold for $290 million, generating huge profits for investors.
• Debt-friendly tax policies and junk bonds enabled aggressive LBOs.
• Critics blamed leveraged takeovers for bankruptcies and massive layoffs.

3. Ross Johnson’s Rise: A Business Maverick

Ross Johnson, an ambitious salesman turned CEO, embodied the 1980s corporate ethos. Johnson was a new kind of executive—he cared more about financial gains for himself or his investors than about loyalty to a specific company. His charismatic and celebrity-focused image reflected his love of luxury and insurgent management style.

Throughout his career, Johnson moved through the corporate world with confidence. His time at Standard Brands and T. Eaton primed him in a business culture that favored perpetual flux. He championed a philosophy of constant change, often at the expense of stability for employees and local communities.

While Johnson thrived in this cutthroat environment, his decisions were often controversial. His penchant for spectacle and disregard for consequences disrupted established company practices, enabling him to climb the ranks with audacity rather than adherence to traditional corporate values.

Examples

• Johnson kept celebrities like Frank Gifford on retainer to promote his businesses.
• At T. Eaton under Tony Peskett, Johnson learned to prioritize chaotic change.
• Johnson’s luxurious lifestyle included private jets, elite travel, and extravagant meals.

4. Power Consolidation Through Mergers

By 1976, Johnson became the CEO of Standard Brands, where his unorthodox approach started to take root. A merger with Nabisco gave Johnson the chance to inject dynamism into its traditional, stable operation. Though Nabisco was successful, Johnson brought his philosophy of constant disruption, reshaping its culture.

The merger clashed two corporate styles. Nabisco valued stability and conservative operations, while Johnson’s tactics encouraged experimentation and upheaval. Later, when Nabisco joined forces with RJR Reynolds, another culture clash unfolded, this time between Johnson’s brash Northern ethos and RJR's Southern traditions of decorum and modesty.

Johnson relished the drama of these mergers, leveraging power while fostering dissent and resistance from those accustomed to different norms. Each merger furthered his influence and created new opportunities for indulgence and upheaval.

Examples

• Johnson’s merger with Nabisco clashed corporate cultures, upsetting Nabisco’s conservative efficiency.
• The Nabisco-RJR Reynolds merger contrasted Nabisco’s flashiness with RJR’s traditional Southern values.
• Luxury limousines symbolized the division between the two corporate worlds.

5. Henry Kravis Revitalizes LBOs for High-Stakes Takeovers

While Johnson thrived in corporate disruption, Henry Kravis revolutionized LBOs by turning them into high-stakes acquisition tools. Kravis, along with his cousin George Roberts, founded Kohlberg Kravis Roberts (KKR) in 1976, aiming for massive deals rather than incremental gains.

KKR sought unprecedented investment funds and displayed unparalleled determination. By building an enormous $5.6 billion fund, they underscored their dominance over Wall Street competitors. Kravis also showcased how LBOs could expand beyond cautious tax workarounds to harness the full scale of capital markets.

KKR's systematic use of investor pools, backed by aggressive leverage, shifted the balance of economic power. Their calculated moves set the stage for larger and more publicized buyouts.

Examples

• Kravis and Roberts left Bear Stearns to form KKR with Jerry Kohlberg.
• Beatrice Foods acquisition showed the scale of KKR's ambitions.
• KKR’s $5.6 billion war chest outpaced all rivals in the LBO arena.

6. Johnson’s Misstep: An Overreach with RJR Nabisco

Despite his corporate maneuvering skills, Johnson faced a monumental challenge when he considered an LBO for RJR Nabisco. Driven by greed, Johnson wasn’t prepared for the competition his maneuver would spark. He partnered with Shearson Lehman Brothers, a firm inexperienced in LBOs, which weakened his chances.

The lack of discretion led to leaked information, triggering a bidding war. Johnson’s opening bid of $75 a share was astronomically high and doubled the previous record for leveraged deals. Yet, this drew ire from the board and opened the gates for other suitors, including Henry Kravis’s KKR.

Poor planning and exorbitant demands cemented Johnson’s failure. The chaotic bid demonstrated the dangers of prioritizing personal gain over sound strategy.

Examples

• Johnson’s team sought excessive benefits for themselves, alienating board members.
• Media leaks undermined the necessary secrecy of the LBO process.
• The $17.6 billion offer was unprecedented and difficult to finance.

7. The Bidding War: Kravis vs. Johnson

Johnson’s LBO attempt became a public spectacle, culminating in bids from multiple players. The RJR Nabisco board disliked Johnson’s leadership and the chaotic terms of his deal. As news spread, Henry Kravis emerged as an alternative, offering stability and experienced management.

KKR’s offer of $94 per share rivaled Shearson's revised bid of $100 per share, but both were overshadowed by a $118 per share proposal from First Boston. However, First Boston failed to secure funding, leaving the competition between Shearson and KKR.

Ultimately, the board opted for KKR, seeing them as the lesser risk. The resulting deal ended Johnson’s reign at Nabisco but cemented KKR's reputation for LBO supremacy.

Examples

• First Boston’s proposal was derailed by financing issues.
• Shearson pushed its bid to $109 per share but lacked credibility.
• KKR prioritized long-term corporate stability, winning over the board.

8. The Consequences of a High-Stakes LBO

The RJR Nabisco LBO became a symbol of corporate greed. The deal’s record-breaking size shocked the financial world and sparked public outrage. Articles in The New York Times lambasted the excesses, portraying Johnson as an emblem of avarice.

After relinquishing Nabisco, KKR implemented measures to stabilize the company. While the deal strained resources, it didn’t bankrupt KKR, as some feared. For Johnson, leaving Nabisco marked the end of an era, but he remained unapologetic about his controversial career.

This scandal solidified the dangers of unchecked ambition, underscoring the risks associated with acquiring companies for personal gain.

Examples

• A media frenzy labeled Johnson’s ambitions as greed run rampant.
• KKR stabilized RJR Nabisco by restructuring its operations post-buyout.
• Employees celebrated Johnson’s departure, signaling relief for the workforce.

9. Ross Johnson’s Legacy

Despite his fall from Nabisco, Johnson remained a formidable figure. He leveraged his reputation to remain active in business, forming a consulting firm with an old ally. Without worrying about money, he transitioned into a semi-retirement phase where he continued to influence.

Johnson’s career exemplifies the excesses of the 1980s corporate world. He operated without regret, recognizing that risk-taking and disregard for norms allowed him to thrive.

For Johnson and others like him, the 1980s were less about building lasting legacies for companies and more about enjoying personal luxuries and momentary triumphs.

Examples

• Johnson formed a consulting firm post-Nabisco to stay active.
• He settled into a comfortable semi-retirement in the 1980s.
• Johnson maintained his focus on wealth and luxury, despite public criticism.

Takeaways

1. Evaluate the long-term consequences before pursuing high-risk business strategies, as quick wins can have far-reaching impacts on employees and stakeholders.
2. Maintain transparency and ethics in business dealings to preserve reputation and avoid public discontent.
3. Consider aligning corporate strategies with industries and values to avoid cultural clashes during mergers or acquisitions.