Book SummaryBarbarians at the Gate, by Bryan Burrough and John Helyar

1-Page Summary1-Page Book Summary of Barbarians at the Gate

In 1988, the RJR Nabisco company was sold in a “leveraged buyout” (LBO) for $25 billion, making it the largest business transaction of the 20th century. The high value of the transaction, as well as the unusually competitive bidding in the LBO process, caught the attention of the press.

The buyout of RJR Nabisco represented a turning point in the use of LBOs. The press coverage revealed how LBOs can generate tremendous income for CEOs and finance companies, but they also can incur tremendous corporate debt that weakens the company. Increased public awareness of these issues caused LBOs to fall out of favor in the business community.

Wall Street Journal reporters Bryan Burrough and John Helyar...

Barbarians at the Gate Summary The Basics: Leveraged Buy-Outs

Burrough and Helyar focus more on the drama of the RJR Nabisco buyout than on the mechanics of it, but they do explain LBOs in passing. In a typical leveraged buyout, a team of executives takes the company private, usually in order to gain a greater share of company profits, as we’ll elaborate on shortly.

Shortform Background: Key Business Terms

There are some key business terms that are helpful to understand before we dive into the explanation of the LBO process:

• The Stockholders: Publicly traded companies are owned by stockholders, with shares of stock equating to shares of ownership. Sometimes stockholders have the opportunity to vote on key issues affecting the company, but usually they have no direct say in how the company is run, even though they own part of it.

• The Board of Directors: A company’s board of directors acts as representatives of the stockholders. They govern the company at the highest level but generally are not involved in its day-to-day operations.

• **[The Management...

Barbarians at the Gate Summary The Background: Ross Johnson and RJR Nabisco

Now that you understand how leveraged buyouts work, you’re in a position to understand the buyout of RJR Nabisco. But to help you see the whole picture and understand what made the RJR Nabisco buyout special, we’ll now discuss the background of the RJR Nabisco CEO who initiated the LBO, Ross Johnson.

Ross Johnson’s Philosophy

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...

Barbarians at the Gate Summary The Bidding Contest for RJR-Nabisco

Understanding Ross Johnson’s background and philosophy makes it easier to understand why he managed the RJR Nabisco LBO the way he did, since competitive bidding is unusual in LBOs.

As Burrough and Helyar explain, usually people doing an LBO will carefully determine what the company is worth, estimate how much debt it can pay down, and secure funding commitments from banks before proposing the LBO to the board of directors. This makes it almost impossible for anyone else who might be interested in buying the company to come up with a viable counteroffer before the board reaches a decision.

However, Ross Johnson’s team didn’t do that. Instead, Johnson pitched the idea of an LBO to the board very early in the process, presenting it as a solution to the problem of their low stock price, and asking for their approval to move forward. He did this because he wanted to maintain his good relationship with the board, whether they approved the LBO or not. Besides this, Shearson didn’t think anyone else would be interested in buying the company anyway, given the lagging stock price and the public sentiment against tobacco companies.

Loss Aversion Bias

In _[Thinking Fast and...

Shortform Exercise: Apply Lessons from Barbarians at the Gate

In this exercise you’ll have a chance to contemplate how you can apply lessons from Barbarians at the Gate to your own business situation.

Twice, prior to the RJR Nabisco LBO, Ross Johnson arranged for his company to be acquired by a larger company and then worked his way up to CEO of the company that bought him out. In hindsight, this strategy probably worked much better for him than trying to compete with those companies head-to-head would have. What’s hindering your own progress right now? For example, is there a rival you can’t seem to out-compete (as in Ross Johnson’s case), or some other obstacle that’s holding you back?