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

Tools

Beta

Discussion Questions

Chapters 16-18Chapter Summaries & Analyses

Chapter 16 Summary

On Monday morning, the First Boston group was “pumped” (422). They had until the following Tuesday afternoon to submit their updated bid. Kim Fennebresque, Brian Finn, and Greg Malcolm focused on different aspects of the process. Malcolm oversaw the financial team and “had to convince a bank to lend First Boston up to $15 billion against the installment notes it would issue (423). Fennebresque needed to identify the hypothetical profits from selling Nabisco’s businesses. Finn advised all groups. RJ Reynolds’s former CEO Tylee Wilson was also working with First Boston and “was delighted to finally join the battle, although he had deep doubts about First Boston’s chances” (434). Wilson, too, did not have much of an “in” into the company having only two friends on the board: John Clendenin and John Medlin.

At this time, the First Boston group wondered whether Kravis would make a second bid at all because “his $94 bid was a joke” (423). Some at Shearson, like Peter Cohen, had the impression that Kravis would pull out. The special committee, too, wondered whether Kravis was “trying to lose” (426). The committee’s objective was “to keep alive two bidders” and aim for more (427). Felix Rohatyn, the dean of the committee’s banker group, decided that “Kravis had to be saved” (427). Thus, the “campaign to save Kravis began on Monday” (427).

Kravis interviewed key players from RJR Nabisco such as Edward Horrigan, Jr. Horrigan told him that he could do nothing to cut company costs and that the company people “run a tight ship” (429). Neither could they do better with their numbers because they were projections. Kravis was “disgusted with Horrigan’s performance” and told him that their initial offer was “too high” (430). After this, Kravis headed to lunch with First Boston’s group, including Mel Klein, Jerry Seslow, and Jay Pritzker. For Kravis, this lunch was a way to determine the seriousness of “Maher’s strange effort” (430). He rejected Klein’s offer of being fifty-fifty partners stating that he wants to be in control. With 24 hours to go, Kravis’s group “remained scattered” (442).

In the meantime, Ross Johnson gave an interview with well-known journalist Frederick Ungeheuer of Time. RJR Nabisco was one of the largest advertising buyers of this magazine, and now Time was about to publish its RJR Nabisco story called “Greed on Wall Street” with Johnson on the cover (431). The interview was meant to be a “bargaining chip” to avoid additional negative media publicity, but the effort failed (432). In addition to the cover, Johnson’s questionable answers to the interview questions led to self-inflicted damage. In the realm of bidding for RJR Nabisco, both management and Shearson heard the same message, “Kravis won’t be back” (438). By the deadline, Johnson’s management group settled for a bid of $101—a dollar over the initial bid. In reality, “Kravis was prepared to lead the final charge” (450). On the day of the deadline, KKR bid $106.

The day before the bid deadline, First Boston began unraveling. They needed $1.2 billion in equity. However, the investors’ informal commitment of approximately $600 million was “contingent on meeting with First Boston and reviewing RJR Nabisco’s financial data” (442). At the last moment, Chase Manhattan pulled out. Furthermore, the day before the bid was due, they “had no idea what form First Boston’s bid would take: a merger, a recapitalization, or something else entirely” (446). They were also short $250 million, and they “rejected any suggestion of delivering a bid without equity commitments” (448). In the end, Tom Pritzker called his father, Jay, and secured the missing money. Maher also had Citibank produce a monetization letter.

Chapter 17 Summary

Once the bid was in, Peter Atkins told Maher not to wait up for the results. Maher knew this meant that First Boston had lost the bidding war, “He had fallen one miracle short” (458). At the same time, despite the negative media attention, Shearson’s “Cohen and Hill were convinced they were on the verge of victory” (455). Yet they did not receive a call for hours after the bid submission. When Goldstone called Atkins, however, he was told that there was no need for the management team to wait up. “The words were a splash of ice water in Goldstone’s face” (459). The management group sent a letter to Atkins’s office outlining their grievances, signed by corporate advisor Jack Nusbaum, and insisted on continuing to bid. Johnson tried to find out by how much KKR had outbid them without breaching the auction process and concluded that the KKR bid was around $106. Linda Robinson called reporters to let them know that the bidding was over. Later, she had to retract her statements when the management group decided to proceed with another bid. After all, “[t]here were no rules governing the bidding process” (466). The body of law regarding bidding repeatedly changed. Usually, “most auctions closed when bidding tot too high for all but one party” (466).

Meanwhile, Kravis’s people were invited to Skadden by Peter Atkins. Everyone at KKR “felt a victory was within their grasp” (457). Rohatyn told Kravis that it was their bid that would be recommended to the special committee, contingent upon working out securities questions and getting “comfortable with regard to the financing” (458). As the night went on, the KKR people learned that the management group might make another bid. They suspected that a member of the special committee “was leaking details of their bid, no doubt in an effort to spur a higher bid from the management group” (470).

Chapter 18 Summary

On November 30, Peter Atkins gathered the RJR Nabisco directors at Skadden Arps, including Bill Anderson and Albert Butler, saying, “We must try to reach a decision in the best interests of shareholders” (474). He informed the directors that KKR had given them an ultimatum: “If their bid is not acted on by one o’clock, they will withdraw it” (474). That day, KKR talked to directors and summarized their strategy. For example, they would sell 20% of the RJR Nabisco assets, while “[s]hareholders would be able to share in their profits through a 25 percent equity stake to be distributed in the form of warrants” (477). Overall, the KKR presentation was solid and “tailored to soothe” (477).

Meanwhile, the management group decided on a higher bid “based on low cash, high PIK [payment in kind, see Index of Terms]” (475). Johnson accepted the circumstances, having “long since lost his capacity for disbelief” (475). He let Shearson drive the bid. After discussions led by Cohen, Shearson introduced a new bid of $108 totaling $25 billion. Jack Nusbaum, the corporate advisor, was nervous, saying, “This thing is beginning to smell like a cover-up” (479). Cohen’s solution was to release a public announcement that could not be ignored the way they felt they had been ignored at Skadden Arps.

Ten minutes before their 1 pm deadline, KKR learned that the management group had bid $108. For Kravis, “It was the realization of his worst fears,” while “[c]urses filled the room” (482). Kravis agreed to extend the deadline by an hour should their expenses to date be paid. Whereas their expenses were around $400 million, they asked for only $45 million. Kravis boosted their bid from $106 to $108 but forgot to ask for a deadline. As a result, the Lazard and Dillon people working with Atkins took several hours to evaluate the securities issue with the management group’s bid. Kravis wanted to keep Johnson out of the final board meeting even though it was illegal to do so. Johnson, however, had already departed and opted not to attend.

Cohen’s people did not know what the KKR bid was. They settled on increasing it to $112 per share or $25.76 million. Jack Nusbaum’s reaction was, “Ho-ly shit” (484). For Atkins, the Shearson bid “seriously complicated” things (485). After all, the KKR securities question has already been resolved, and “the advisors were comfortable the bid’s values were close to what Kravis said they were” (485). The Shearson bid, in contrast, “included no ‘reset’ mechanism that would guarantee they would trade where Shearson said they would” (485). By this time, “Johnson was in hysterics” (489). He was not the only one stressed out, “The pressure was intense, and it affected each director differently” (490).

Before the board made the final decision, KKR threw in another raise of 50 cents per share. The board took 30 minutes to make its final decision. Johnson’s management group’s bid was $112, while KKR's bid was $109. However, the lack of a reset mechanism in the management group’s bid had the board discount the final raise which made the two bids almost even in terms of the price per share. As a result, the board voted unanimously in favor of KKR’s bid, “Kravis went numb” because “[h]e had been fighting for this so long” (499). When the management group’s Goldstone learned that KKR got the deal, he too went numb. Some, like Ed Horrigan, took the defeat even harder. Johnson concluded that the situation was “painful,” but it was “the best thing for shareholders” (502).

Chapters 16-18 Analysis

In the final three chapters of this book, the “war” over the fate of RJR Nabisco reaches its climax and resolution. The reader learns about the second set of bids and the ultimate winner, Henry Kravis’s KKR. As part of this structure, the authors continue to highlight the suspenseful nature of the proceedings. For example, on the day of the second bid, Kravis gives Skadden Arps an ultimatum: If he does not get a definitive answer, he will pull out of the bidding process. Of course, for Kravis, this move is not a narrative device intended to build suspense but rather an example of a seasoned Wall Street professional playing hardball to attain his goal. In this way, the motives of the key players and those of the authors align. Another suspenseful moment is the participation of First Boston, which came in as an underdog. At first, the First Boston group was excited and expected a second miracle. The company even had to rely on nepotism as Pritzker called his father to contribute around $200 million to the bid. Yet, throughout the day, the bid unraveled. In the end, First Boston’s incomplete bid was not taken seriously. Thus, the story of the RJR Nabisco buyout does not give a feel-good ending with an underdog triumphing over the more experienced participants. Yet, in a way, Kravis, too, played an underdog, as the authors emphasize that the management group forgot about his participation altogether and worried more about First Boston. In this way, Kravis pulled an upset in the bidding contest.

As in the previous chapters, this section continues to focus on the relationship between the media and the RJR Nabisco buyout. In fact, this section features not only the climax of the whole narrative but also the climax of the sub-narrative about the media coverage of the bidding war. It is here that Ross Johnson gives his infamous interview to Time magazine in December 1988. The cover story focuses on greed in the corporate world and Wall Street. Indeed, the story is not simply a case of media bias, as Johnson largely sabotages himself with his insensitive and questionable answers, such as suggesting that the employees who were to be let go because of his company’s buyout had versatile professions and would not encounter problems finding a different job. His answers, and the lack of empathy they reveal, help to substantiate the Corporate Excess and Wall Street Greed in 1980s America theme.

Finally, the authors highlight the intense level of competition between the parties, concluding their exploration of the theme of The RJR Nabisco Buyout as War by noting how this intense environment led competitors to engage in high-risk, debt-financed business practices and drove company stock into the stratosphere. Burrough and Helyar make references to “Maher’s troops” and mention that “Kravis troops remained scattered” to draw another parallel between a battle scenario and the buyout bids (422, 442). On the last day of bidding, “the management group was on the warpath” (463). They also describe the emotional reactions the losing side had to their defeat akin to a defeat in combat. Finally, the overall sense of Kravis’s victory is not one of elation but exhaustion. This victory is Pyrrhic, since the price—and the resulting debt load—is unsustainably high. Indeed, by the mid-1990s, KKR had liquidated its RJR Nabisco ownership altogether. By the late 1990s, the company was split.