In October, it was reported that KKR titans Henry Kravis and George Roberts had decided they were no longer going to lead the firm they founded 45 years ago.
Nowadays, KKR is itself a diversified giant. But it’s still best known as a buy-out house that’s bought more than 400 companies and which, according to the FT, first made millions of dollars “by striking deals that pulverised other people’s corporate empires”.
The $25bn hostile bid in 1988 to buy and break up ‘undervalued’ cigarettes-to-biscuits conglomerate RJR Nabisco first made many baby boomers and Gen Xs, including me, aware of leveraged buy-outs (LBOs). They began in the 1960s as a fix for the kind of retirement deals that still abound today in companies of all sizes. But within two decades, leveraged bids had grown to cover multinationals valued in the billions of dollars – with advisory fees reaching the tens of millions.
Barbarians at the Gate, a hefty book about the battle for RJR Nabisco, written by Wall Street Journal reporters Bryan Burrough and John Helyar, had a huge influence on a business generation. In fact, one Big Four firm used to dish it out as recommended reading to new joiners in corporate finance. It still reads well as a deep dive into hyper-capitalism in the late 1980s.
Power play
Kravis and his then-wife Carolyne Roehm, Manhattan monied royalty, first appear in the book at the beginning of chapter five, at the Met Gala. His cousin George Roberts appears a few pages later. Neither man was self-made. Both were extremely ambitious corporate financiers.
Star of the RJR Nabisco show was chief exec F Ross Johnson, a cigarillo-puffing former accountant who wanted to take the group private himself. “Some genius invented the Oreo. We’re just living off the inheritance,” was one of his famous takes. Johnson eventually lost a multi-sided bidding war, won by KKR and fuelled by ‘junk’ bonds – although he still made many millions. Rival financiers such as Ted Forstmann pitched themselves as the ‘real people’ against ‘barbarians’ Kravis and Roberts.
The glitzy lifestyles of the story’s principals, their bankers, lawyers and even their consulting psychologists, zig-zagging between North American cities in Gulfstream private jets, felt very exotic when I read it at the time. As the book says: “On one thing they all agreed: the executives who launched LBOs got filthy rich.”
A companion read in fiction about US high finance and (im)morality in the late 1980s would be Tom Wolfe’s The Bonfire of the Vanities, while on the big screen there was the unforgettable Gordon Gekko (Michael Douglas) in Wall Street. Was he a different species?
No smoking, please
For millennials and Gen Zs, the most incongruous aspect of the story now might be that it was about the takeover of a cigarette manufacturer. With no ESG (environmental, social and governance) in sight, the ethics of deal-doing in those days were, shall we say, interesting. About 2,000 workers lost their jobs following the takeover.
Today, it’s unlikely that many private equity firms would give journalists the access that Burrough and Helyar were accorded in the aftermath of the deal – they conducted more than 100 interviews with the main protagonists. Public relations in LBO houses has now become as much about keeping heads down as stepping into the limelight.
Barbarians is self-consciously written in the style of a suspense novel. It opens with a five-page cast list – by my count, 67 men, one woman. In a whirl of mixed metaphors, the authors conclude: “Hoisted onto the auction block, RJR Nabisco became a vast prism through which scores of Wall Streeters beheld their reflected glories.”
Author bio
Shaun Beaney works on communications, public policy and research for ICAEW’s Corporate Finance Faculty, including innovation investment, venture capital and private equity.
Barbarians at the Gate is published by HarperCollins