The Biggest Deal of All Time...

In late 1988, the corporate takeover frenzy reached its ultimate pinnacle: The $25 billion acquisition of RJR/Nabisco by the celebrated “leveraged buyout” firm Kohlberg Kravis Roberts & Co.

The acquisition followed a protracted, vicious bidding war, and the sheer size of the deal set it apart. The final price was twice as large as anything that had come before. It defied conventional Wall Street wisdom at the time that mega-companies the size of RJR were immune from such ownership battles. And well before it was over, the fight galvanized public criticism of debt-financed takeovers in a way that all of the previous deals hadn’t.

In retrospect, it’s clear that the RJR battle was a watershed event in the history of deal madness; it was the beginning of the end. The transaction was so large that for months it absorbed the energies of every Wall Street investment bank of consequence. The ensuing lull in takeover activity provided a pause during which reality finally caught up with some of the shakier deals that had gone before. Defaults and bankruptcies by debt-laden companies led to the collapse of the “junk bond” market and the current sustained drop-off in takeover activity.

Much has been made of the role of greed in the buyout phenomenon, and greed there was. A secret agreement between the RJR management group and its investment bankers, leaked in the middle of the fight, showed that if they had won, a handful of top RJR executives would have received close to $2 billion from a 20% stake in the post-buyout company, in exchange for virtually no investment of their own.

But what emerges most clearly in these two books about the mammoth battle for RJR was the role of individual egotism. Winning was essential; bankers and buyout specialists were out to establish themselves as the biggest carnivores on Wall Street. Jealousy and pride wrecked a compromise that would have been extremely beneficial to the two main opposing groups. In the end, the underlying value of the company and the price paid for it became all but irrelevant.

“Barbarians at the Gate” is a superlative book, a reconstruction of awesome proportions. Bryan Burrough and John Helyar covered the RJR fight for The Wall Street Journal. (Helyar now works for Southpoint Magazine.) In the ensuing months, the secretive investment-banking world was thrown open to them; they were given privileged access to nearly all of the major and minor figures in the bidding war. This included days of interviews with KKR partner Henry Kravis, and with F. Ross Johnson, the fallen former chief executive of RJR whose bid to take the company private touched the whole thing off.

They have put this wealth of raw material to good use. The writing is unflawed. Because they go out of their way to point out where recollections differed, the verbatim reconstruction of conversations and amazing level of detail--down to the color of the bathrobe someone wore on a particular morning, or the fact that a KKR partner at a Plaza Hotel dinner pushed his steak away because it was too peppery--all ring true. It is a tribute to the writers that even though the final outcome is well known, Burrough and Helyar weave their narrative in a way that steadily builds suspense until the very end. This, therefore, is the book for armchair investment bankers dying to vicariously relive the biggest deal of all time.

Johnson, the chronically restless chief executive of the tobacco and food conglomerate, triggered the bidding war in October, 1988, when he surprised his board of directors with an offer to buy in all of the company’s publicly held stock and take the company private for $75 a share. His official motive was that shareholders had been disadvantaged because the stock market had “unfairly” kept down the value of tobacco companies’ stock.

Even at that price, the deal would have been by far the largest ever; Johnson and his band of investment-banker advisers couldn’t conceive that anyone would attempt to top it. They failed to foresee, however, that Wall Street rivalries and the egos of men like Kravis, who had a reputation to preserve as the king of LBOs, wouldn’t allow them to sit by. Rival bids soon came from Kravis and others. By the time RJR’s board declared KKR the winner, stockholders were paid $109 a share, a price 53% higher than the company’s stock had ever traded before the bidding war began.

Members of Congress, prominent economists and the press were angrily questioning the wisdom of deals that were loading corporate America with debt and which seemed to have no economic purpose other than to generate huge fees for investment bankers and sudden enormous wealth for a handful of executives.

Helyar and Burrough don’t have many axes to grind. They make no overt moral judgment on the LBO phenomenon or the RJR/Nabisco takeover in particular. (An LBO, or leveraged buyout, occurs when borrowed money is used to take a company private by buying in all of the publicly held shares. The company’s own cash flow, and proceeds from selling off parts of the company, are then used to pay off the debt.)

In their introduction, the authors say their personal belief is simply that “some companies are well suited for the rigors of an LBO, while others are not.” The final verdict on the success of RJR/Nabisco buyout won’t come for several years, they say, once the company is reorganized, the debt paid down and investors given a chance to size up their return.

“Barbarians,” however, does have several clear-cut themes. One is the shark-like behavior of investment bankers. Because this was the biggest deal ever, every investment bank on Wall Street felt that as a matter of pride and reputation it had to be involved. In addition, the fees to the investment banks representing the winning side would be staggering, running into the hundreds of millions of dollars. Another sustained theme is the enigmatic character of Ross Johnson, and his unsuitability to lead a leveraged buyout.

The preachers of the LBO gospel --Michael Milken, Carl Icahn, Henry Kravis--portray the chief executives who have an ownership stake in their bought-out companies as the heroes who will return efficiency to industrial America. Driven by the motivation of steep rewards and the need to meet large debt payments, they will ruthlessly pare away fat and cut costs. But for Johnson, according to the book, a company was nothing if not the lavish perks it bestowed on its top executives.

Earlier in his career, when Johnson became chief executive at Standard Brands, the company paid for his membership in no fewer than 18 country clubs. By the time he became head of RJR/Nabisco, he established an air force of 36 corporate jets, mostly used to chauffeur himself, his top executives and corporate directors around the country, often on trips that seemed purely personal. He showered tens of millions of dollars of corporate money on golf tournaments, and kept sports celebrities on the payroll for little apparent reason except that he liked to hobnob with them.

As the book points out, by the time Johnson and his team got around to proposing their LBO, it wasn’t as if they were underpaid. The top 31 executives were then receiving an average salary package of $458,000 each. Johnson’s own annual compensation before the buyout was more than $1.7 million. Johnson’s fear of losing his corporate air force and other perks made him ambivalent about launching the LBO bid, and later, the authors suggest, made him unenthusiastic about the bidding war that, as the purchase price mounted, would have required ever deeper cuts in corporate spending. But Johnson was unable to control the feeding frenzy of the investment bankers he had unleashed.

In the end, one concludes from the book, KKR won because its managing partners were more sophisticated, maintained better control over their investment bankers, were willing to use more real money as opposed to securities of doubtful value, and were more willing to make provisions for employees and pensioners. Johnson’s own board of directors, stung by the public revelation of what sweet deal Johnson was to receive if his bid won, had lost confidence in him. At the end, they were searching for almost any excuse to give the company to someone else.

If there is criticism to be made of “Barbarians,” it is that, perhaps because of the privileged access they were given, the authors aren’t as hard as they might have been on several of the top executives who allowed them generous interviews. The picture that emerges of Kravis, the victor, is almost entirely favorable. The book doesn’t go into the mediocre record of some of KKR’s earlier deals, and doesn’t mention that in some cases the price paid for previous acquisitions was so high that there was virtually no margin of error if initial projections didn’t turn out right. This has led to bankruptcies and disappointing results for KKR’s investors.

In this one respect, “True Greed” enjoys an advantage over “Barbarians.” Hope Lampert, the author of “True Greed,” is more directly critical of their performance. She fully notes KKR’s spotty record. Her book covers much of the same ground as “Barbarians,” and for the reader in a hurry, it has the advantage, at 259 pages, of being only half the length of “Barbarians.” It is relatively complete and even contains a few anecdotes that aren’t in “Barbarians.”

Yet of the two, “Barbarians” is by far the more readable book. The “True Greed” narrative is somewhat disjointed, and the writing uninspired. It remains to be seen whether the fall-off in takeover activity is only temporary, or whether the deal fever of the 1980s has really run its course. In any event, these two books show the biggest deal ever for what it was: a mad scramble to be king of the hill by men who had huge amounts of money to throw around and little apparent concern for the fundamentals of business