Barbarians at the Gate: Quotes About the Greedy LBO

This article is an excerpt from the Shortform book guide to "Barbarians at the Gate" by Bryan Burrough and John Helyar. Shortform has the world's best summaries and analyses of books you should be reading.

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What are the best Barbarians at the Gate quotes? What do these quotes tell us about the unusual nature of the largest LBO in history?

Bryan Burrough and John Helyar’s book Barbarians at the Gate uncovers the story of the leveraged buyout of RJR Nabisco. The competitive nature of the bidding and the high price for the company made it one of the most talked-about LBOs in history.

Below we’ll look at a few quotes from Barbarians at the Gate quotes with context.

Quotes From Barbarians at the Gate

The leveraged buyout of RJR Nabisco in 1988 garnered the attention of the press, not only because at $25 billion it was the largest buyout in history up to that point, but the transaction was also surrounded by an unusual amount of drama and intrigue. In Barbarians at the Gate, Wall Street Journal reporters Bryan Burrough and John Helyar present a detailed history of the buyout proceedings, with inside information on many of the people and companies involved.

Let’s look at the best Barbarians at the Gate quotes that represent the authors’ main ideas.

“Recognize that ultimate success comes from opportunistic, bold moves which, by definition, cannot be planned.”

Burrough and Helyar describe how the financial company Kravis spread a rumor that they might not bid in the second round of RJR Nabisco’s LBO, or wouldn’t raise their bid much if they did. But during this time, Kravis also finally found an RJR Nabisco executive who was willing to discuss its operations, especially avoidable expenses that the company could eliminate to improve profitability. Based on this new information, Kravis ended up bidding $106 per share in the second round.

Meanwhile, Johnson’s team bid $101 per share, not expecting much competition: They didn’t think First Boston would be able to pull off what they had proposed, and they more or less believed the rumor that Kravis wouldn’t bid again. They were wrong about Kravis, but they were right about First Boston. Although First Boston finished much of their analysis, they were unable to secure enough financial backing to convince the board that their bid was a viable option.

Burrough and Helyar report that Ross Johnson accepted the loss of the bidding contest graciously and went into retirement. He asserted that both his actions in initiating the LBO and the ultimate outcome had been best for the company’s stockholders. Some of the stockholders, though, disagreed: RJR Nabisco stock had paid dividends, and the company was so profitable that stockholders were making money even when the stock price was low. So they were sorry to lose their stock even though they got a big payout when the company sold.

Kravis hired a new management team to run RJR Nabisco, restructured the company, and eventually sold it again. In the end, Kravis made only a small profit on the LBO, despite streamlining RJR Nabisco’s operations to increase the company’s profitability by almost 50%.

After the RJR Nabisco LBO, leveraged buyouts became much less popular. Burrough and Helyar believe this was due in large part to the negative publicity that LBOs and especially junk bonds received, which reached a peak during the RJR Nabisco buyout. Of the few LBOs that did happen after 1988, most were handled by Forstmann Little without using junk bonds.

“The minute you establish an organization, it starts to decay.”

The authors recount that from practically the beginning of his career, Johnson’s philosophy revolved around two principles. First, he believed anything that wasn’t changing was stagnating and decaying. He would frequently change the organizational structure of his company, making sure that the company was always adapting and not becoming stagnant.

(Shortform note: Johnson’s perspective on change is controversial among business theorists. Many experts assert that you (and your company) need to be capable of adapting because change in the business environment is inevitable, but few take it as far as Ross Johnson did. At the opposite end of the spectrum, in Built to Last, Jim Collins argues that the idea that successful companies are always changing is a myth. Rather, he asserts that successful visionary companies are built on core principles that never change. This contributes to their success by giving them continuity and stability, even as they adapt their non-core business activities to environmental changes.)

Second, Johnson believed in spending money liberally. He saw restrictive budgets as a cause of stagnation, which he went out of his way to avoid. Not only did he pay his executives higher wages than competing companies, but he also provided them (and himself) with extensive perks such as company cars and apartments, company-paid membership in exclusive social and recreational clubs, and personal use of corporate jets. Johnson was particularly adept at spending company money in ways that would build his network of social connections or endear him to board members or other important contacts.

(Shortform note: While many experts advise taking a more conservative approach to spending money than Johnson did, the way he spent money arguably exemplifies John C. Maxwell’s 5th law of leadership, namely that leaders should serve others. Like former Costco CEO Jim Sinegal, whom Maxwell cites as an example of servant leadership, Johnson paid his staff above-average wages. He also went out of his way to see that his board members and other business associates were well taken care of.)

“Of particular interest to [Ross] Johnson were the many uses the bidders had found for the strain of junk bonds known as pay-in-kind securities, or PIK. The management group’s decision to “pile on the PIK” in place of cash still boggled his mind.”

Burrough and Helyar go on to explain how finance companies that facilitate LBOs often raise large amounts of money by selling what the authors call “junk bonds,” or pay-in-kind (PIK) securities. These are high-interest bonds that pay the interest on the bonds in the form of more of the same kind of bonds, rather than in cash.

(Shortform note: In The Intelligent Investor, Benjamin Graham defines “junk” bonds more broadly as bonds that must pay high interest rates to attract buyers because there is a significant risk that the company issuing them might run out of money and default on its bonds. He doesn’t stipulate that junk bonds would be pay-in-kind.)

Barbarians at the Gate: Quotes About the Greedy LBO