Barbarians at the Gate

1. The CEO's Fatal Flaw: Hubris and Undervaluation

“It’s plain as the nose on your face that this company is wildly undervalued,” Johnson said.

Undervalued assets. F. Ross Johnson, CEO of RJR Nabisco, initiated the largest leveraged buyout in history primarily because he believed the market unfairly penalized the company's stock due to its tobacco operations. Despite strong performance in its food divisions like Nabisco and Del Monte, the stock languished, prompting Johnson to seek a drastic solution to "unlock shareholder value." This conviction, coupled with his restless nature, set the stage for the unprecedented corporate drama.

Personal ambition. Beyond shareholder value, Johnson harbored a deep-seated desire for action and personal enrichment. Having spent two decades climbing the corporate ladder, he was a "noncompany man" who thrived on constant change and big deals. The LBO offered a chance to cement his legacy, escape the perceived constraints of public ownership, and become "a billionaire," as one suitor promised.

Underestimated forces. Johnson's decision to take RJR Nabisco private was born from a mix of strategic frustration and personal ambition, but he profoundly underestimated the competitive forces and public scrutiny he would unleash. His initial confidence that the deal would be unopposed, or easily managed, proved to be a critical misjudgment that would define the ensuing battle.

2. The Peril of Perks: A Culture of Excess

“Spending money was always a joyful, joyous thing to Ross,” recalled William Blundell, a Canadian friend.

Lavish corporate lifestyle. Ross Johnson cultivated a corporate culture defined by extravagant perks and a "party animal" ethos, a stark contrast to the frugal traditions of RJ Reynolds. This included:

• A fleet of ten corporate jets (the "RJR Air Force"), including two $21 million G4s.
• Company-owned apartments and homes in Manhattan, Palm Beach, and Vail.
• Dozens of country club memberships and lavish golf tournaments.
• High salaries and generous expense accounts for favored executives.

Symbol of excess. While Johnson saw these perks as essential for morale and business networking, they became a potent symbol of corporate excess and detachment from the company's roots. The opulent spending, particularly on items like the "Taj Mahal of corporate hangars" and celebrity endorsements, fueled resentment among employees and the public, ultimately undermining Johnson's credibility.

Erosion of trust. This culture of indulgence, combined with Johnson's disdain for cost-cutting and detailed financial oversight, created an environment ripe for criticism. It suggested a CEO more interested in personal gratification than sound business management, a perception that would haunt him throughout the LBO battle and alienate key stakeholders.

3. The Management Buyout: A Double-Edged Sword

“The wolf is not at the door,” Johnson said. No corporate raider was forcing him to do this. “This is simply the option that I think is best for our shareholders."

Inherent conflict of interest. Johnson's decision to lead a management buyout (MBO) of RJR Nabisco, while framed as a benefit to shareholders, immediately created a profound conflict of interest. As CEO, he was obligated to maximize value for existing shareholders, yet as a bidder, his incentive was to acquire the company at the lowest possible price to maximize his own group's profits. This duality became a central ethical challenge for the board.

Unprecedented personal gain. The proposed management agreement, which promised Johnson's group an initial 8.5% equity stake (potentially rising to 20%) and significant control, was seen as extraordinarily lucrative. This potential for billions in personal wealth, without significant personal investment, drew intense criticism and fueled public perception of "greed."

Board's compromised position. The board's initial approval of Johnson's exploration of an LBO, and his role in selecting the "independent" special committee, placed them in a difficult position. They were tasked with evaluating an offer from the very CEO they oversaw, creating an appearance of impropriety that would be relentlessly exploited by competing bidders and the media.

4. The Barbarian's Discipline: KKR's Relentless Pursuit

“What Cohen didn’t know,” Kravis recalled months later, “was that we were charging right through the rice paddies, not stopping for anything and taking no prisoners.”

Strategic aggression. Henry Kravis and KKR, initially dismissed by Johnson, launched a surprise $90/share tender offer, seizing the initiative and forcing Johnson's hand. This aggressive move, made without management's cooperation, signaled KKR's determination to win, regardless of traditional LBO norms.

Financial prowess. KKR's strength lay in its unparalleled ability to raise massive amounts of capital and structure complex deals. With a $5.6 billion war chest and the backing of Drexel Burnham Lambert's junk bond network, KKR could deploy an unprecedented $45 billion in buying power, dwarfing most competitors.

Ruthless efficiency. Unlike Johnson, Kravis was a disciplined financial operator focused on maximizing investor returns through rigorous cost-cutting and asset sales. His team meticulously analyzed financial data, even when denied full access, to identify areas for efficiency and value creation, demonstrating a "charging through the rice paddies" mentality.

5. The Board's Burden: Navigating Greed and Scrutiny

“It is important,” Peter Atkins began, “that today be as clear and thoughtful as any day ever spent in a boardroom.”

Fiduciary duty vs. public image. The RJR Nabisco Special Committee, led by Charles Hugel, faced immense pressure to maximize shareholder value while navigating intense public and political scrutiny. They were caught between Johnson's self-serving bid and KKR's aggressive tactics, all under the glare of a media increasingly focused on "greed."

Legal and ethical tightrope. The board's advisers, particularly Peter Atkins of Skadden Arps, were acutely aware of the legal precedents set by previous LBOs and the risk of shareholder lawsuits. This compelled them to:

• Establish formal bidding guidelines and a "level playing field."
• Scrutinize management's compensation agreement.
• Consider alternative restructuring plans to ensure the best outcome for shareholders.

External pressures. The committee was bombarded with criticism from various stakeholders, including:

• Angry employees and retirees in Winston-Salem.
• Institutional investors concerned about LBO debt.
• Politicians threatening regulatory intervention.
  This external pressure significantly influenced the board's decisions, pushing them towards a more transparent and competitive auction process.

6. The Junk Bond's Power: Fueling the Takeover Frenzy

“Today’s financial age has become a period of unbridled excess with accepted risk soaring out of proportion to possible reward,” Forstmann wrote.

Transformative financing. Drexel Burnham Lambert's high-yield "junk" bonds revolutionized the LBO industry by providing unprecedented access to capital for audacious takeovers. This "funny money," as critics called it, allowed smaller, less established bidders to challenge corporate giants, fundamentally altering Wall Street's power dynamics.

Forstmann's moral crusade. Theodore J. Forstmann, head of Forstmann Little & Co., vehemently opposed junk bonds, viewing them as a dangerous drug that corrupted the financial system and enabled irresponsible deals. His moral stance, articulated in a Wall Street Journal op-ed, positioned him as a "white knight" against the "junk-bond cartel" led by Michael Milken and Henry Kravis.

Risk and reward. While junk bonds fueled massive profits for LBO firms and their investors, they also introduced significant risk. Forstmann warned that the immense debt assumed by LBO companies, if unchecked, could trigger widespread bankruptcies and even a national economic crisis, likening the situation to "a herd of drunk drivers."

7. The Auction's Chaos: Egos, Leaks, and Misinformation

“All these guys,” says the chairman of one of Wall Street’s largest firms, “have three balls. Loyalties one, two, and three are to themselves."

Intense personal rivalries. The RJR Nabisco auction was less a rational financial process and more a gladiatorial contest driven by the colossal egos and shifting allegiances of Wall Street's top players. Personal friendships and long-standing rivalries often overshadowed objective business decisions, leading to:

• Public spats between Peter Cohen and Henry Kravis.
• Ted Forstmann's moralistic denunciations of Kravis.
• Internal conflicts within bidding groups over strategy and fees.

Strategic leaks and bluffs. Information control was paramount, yet leaks were rampant, often strategically placed to gain an advantage or sow discord. Johnson's management agreement, Kravis's bid details, and Forstmann's intentions all found their way to the press, creating a volatile environment of misinformation and suspicion.

The "deal heat" phenomenon. Investment bankers, driven by the prospect of massive fees and the prestige of the "deal of the century," often succumbed to "deal heat," pushing for higher bids and more aggressive tactics. This collective frenzy, fueled by adrenaline and the desire to win, sometimes led to irrational decisions and a disregard for long-term consequences.

8. The Cost of Overconfidence: Johnson's Strategic Blunders

“This is stupid as hell! This is asinine! If all the negotiations have broken down, what the hell use is there in making an offer?"

Misjudging Kravis. Johnson's initial dismissal of Henry Kravis as a serious competitor, based on a year-old meeting and a belief that Kravis wouldn't touch tobacco, proved to be a fatal error. He failed to anticipate KKR's aggressive entry and its willingness to bid without management.

Poorly structured agreement. The management group's initial agreement, granting Johnson's team an outsized equity stake and significant control, was a public relations disaster. Despite warnings from Jim Robinson and Steve Goldstone, Johnson's reluctance to renegotiate it early on made his group appear greedy and undermined their standing with the board.

Delayed and flawed counter-bids. Johnson's detachment from the bidding process, coupled with Shearson's overconfidence, led to a series of strategic missteps:

• A delayed counter-bid to KKR's initial $90 offer.
• A subsequent $92 "fuck you" bid that merely infuriated Kravis without securing a merger agreement.
• A final $112 bid that relied on "soft" securities without reset mechanisms, making its true value questionable to the board.

9. The Unseen Hand: Information Asymmetry in Battle

“This is useless,” he muttered to Josh Gotbaum, a Lazard Freres banker monitoring the interviews. “These guys aren’t saying anything.”

Kravis's information disadvantage. KKR faced a significant challenge in conducting due diligence without the cooperation of RJR Nabisco's management. Johnson's executives, loyal to their CEO, provided minimal information, forcing Kravis's team to rely on:

• Public filings and external analyses.
• Strategic leaks from disgruntled insiders like John Greeniaus.
• Their own financial modeling and assumptions, which proved to have significant "gaping holes."

The "Other Uses of Cash" mystery. A critical example of this information asymmetry was the "Other Uses of Cash" line item in RJR's projections, a $300-500 million annual figure that KKR's analysts couldn't decipher. This single unknown represented a billion-dollar swing in valuation, highlighting the risks of bidding blind.

Greeniaus's pivotal role. John Greeniaus, Nabisco's president, became an invaluable, albeit secret, source of information for KKR. His detailed insights into Nabisco's operations and potential cost savings allowed KKR to significantly refine its valuation and boost its bid, providing the "first chink in their armor."

10. The Public's Verdict: Greed at the Gate

“This spectacle is not just unseemly—it is dangerous,” it held. “It is precisely this sort of behavior that plays into the hands of those who want to shackle the free market with unnecessary regulation."

Media's moral outrage. The RJR Nabisco LBO became a national sensation, with media outlets like Time magazine portraying Ross Johnson as a symbol of corporate greed. Headlines like "A Game of Greed" and "King Henry" fueled public indignation, transforming a business transaction into a moral debate about the soul of American capitalism.

Political backlash. The controversy quickly spilled into the political arena, prompting calls for regulatory reform from figures like Senator Bob Dole and Federal Reserve Chairman Alan Greenspan. The involvement of state pension funds in "hostile" bids sparked political squabbles, highlighting the broader societal implications of unchecked LBO activity.

Erosion of trust. The spectacle of executives enriching themselves while employees faced job losses, combined with the bitter public feuding among bidders, eroded public trust in Wall Street. The LBO became a lightning rod for criticism, symbolizing a financial system perceived as prioritizing short-term profits and personal gain over long-term stability and community welfare.

Last updated: August 29, 2025