The RJR Nabisco Mega Deal: Buyout at the Corporate Corral
IN the fall of 1988, when Ross Johnson told the board of directors of RJR Nabisco that he and his investment bankers were willing to pay $17 billion for the food and cigarette giant, he set off a Wall Street bidding war that will probably be remembered as the zenith of merger-mania. At stake, aside from the nation's 19th largest industrial company with 140,000 employees, were hundreds of millions of dollars in fees for investment bankers, lawyers, and advisers. And, as ``Barbarians at the Gate'' reveals, there was a considerable amount of Wall Street arrogance involved as well.
Such investment banking giants as Salomon Brothers, First Boston, Merrill Lynch, Drexel Burnham Lambert (now defunct, having been forced by creditors into liquidation) and Shearson Lehman Hutton locked horns to establish bragging rights to the biggest deal the United States has ever seen.
Bryan Burrough and John Helyar wrote about the bidding war on the pages of the Wall Street Journal. But unlike many other reporters who simply repackage their columns and reporting, Helyar and Burrough have gone far more deeply into the deal.
First, they paint portraits of the protagonists. There was Ross Johnson, the president and chief executive officer of RJR Nabisco. Johnson, a Canadian, had hoisted himself through the ranks to become one of the privileged. He believed in perks, letting the shareholders pay for his pleasures. His maids were on the payroll. Corporate jets flew him to golf courses. RJR paid for two dozen memberships at country clubs around the country.
Then, there were the Wall Street big shots. The then-chairman of Shearson Lehman Hutton, Peter Cohen, desperately wanted to do the deal since it meant that Shearson would be on the junk-bond map - competing with Drexel Burnham Lambert. Cohen teamed up with Johnson to execute the buyout. The book's unflattering portrayal of Cohen was later cited as a reason why Cohen got fired.
There was Henry Kravis, who ultimately bid against Johnson and Cohen. Kravis, a partner in Kohlberg Kravis Roberts, had been among the pioneers of leveraged buyout (LBO) deals in which management and outsiders borrow huge sums of money to purchase a company. The LBOs have been good to Kravis: He has a Park Avenue apartment loaded with French antiques and Renoirs.
Around Kravis was a swarm of lawyers and advisers all salivating over the fees they hoped to earn. In one telling anecdote, the authors recount how Kravis's two chief advisers went to him after an early meeting to discuss their fees. They wanted $50 million each - just for advice. Kravis refused to discuss the money. ``But, this is important to us, Henry. We'll just have to trust you on it,'' said Eric Gleacher, head of mergers at Morgan Stanley.
Again this book has had an aftereffect. The authors recount how Kravis was convinced that Bruce Wasserstein - the other $50 million adviser - had leaked information to the press. This revelation plus the problems of real estate magnate Robert Campeau have tarnished Wasserstein's reputation.
Everyone was breathing hard because there was lots of money to spread around. The tobacco business alone brought in $1.2 billion a year in cash. ``You can't spend a billion dollars in a year,'' said Johnson.
But, he tried. RJR spent more than $12 million on a hangar at the Atlanta airport for its air force of 26 planes. The top 31 executives were paid $14.2 million. Buildings were redecorated and refitted simply because the money was available.
And, Johnson knew how to spread the wealth. Members of the board of directors got fat consulting contracts. To turn the head of Juanita Kreps, former commerce secretary under President Carter, Johnson had RJR endow two chairs - one in her name - at Duke University. Another $2 million to Duke resulted in a new building being named for the president of the tobacco subsidiary. Scores of athletes, from golf pro Ben Crenshaw to baseball player Don Mattingly, had half-million-dollar contracts so they would rub elbows with RJR Nabisco customers.
Johnson was no less kind to himself and his fellow executives. Early on he wrote a management contract ensuring himself and six other executives as much as $2 billion if the LBO took place. And, even though he wouldn't be putting up any equity, he would still run the company and control the board.
But, as Helyar and Burrough show, the RJR deal was not just about money. It was also about hubris. Salomon Brothers decided it had to become part of the biggest deal of the century. John Gutfreund, Salomon's autocratic chairman, became embroiled in the negotiations.
Kravis, who was negotiating with Cohen and Salomon Brothers, wanted Drexel to underwrite the junk bonds. He had a good reason: Drexel dominated the junk-bond market. Both Salomon and Shearson had stubbed their toes trying to float junk bonds. Gutfreund was adamant. Salomon must do the bonds. As a result, Kravis ended up bidding against Johnson, Shearson, and Salomon. Kravis won. Gutfreund, et al., lost.
A lot has been said about the pros and cons of such mega-deals. Fortunately, the authors don't add to the clutter. Instead, they have produced a book focused solely on the deal and the people around it.
By the end of the book, I was still fascinated by the story, even though it is more than a year since Kravis paid $25 billion for RJR Nabisco. I couldn't put the book down because it showed these men at their most vulnerable moment: when pride and money were at stake.
``Barbarians at the Gate'' is a modern-day fable of our corporate times.