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Barbarians at the Gate: The Fall of RJR Nabisco.

Barbarians at the Gate: The Fall of RJR Nabisco.

Bryan Burrough, John Helyar. Harper & Row, $22.50. Is the spate of takeovers and LBOs really Adam Smith's invisible hand in action? Should management take as its primary goal the task of increasing the trading value of the company's stock? If so, is it worth the resulting financial convulsions involved in assuming billions of dollars in debt, slashing R&D expenditures, and often laying off hundreds or thousands of employees?

Answers to these and related questions will have to wait, at least as far as Bryan Burrough and John Helyar are concerned. Barbarians at the Gate, a fast-paced account of the intricate financial deal-making and breaking in the record-shattering $25 billion sale of RJR Nabisco, never really examines serious issues, although it succeeds admirably in depicting the Wall Street culture of investment bankers and lawyers who grow fat on the consulting fees generated by takeover deals. Larger-than-life figures - everyone from the flamboyant, frat-boyish CEO F. Ross Johnson to the tightly controlled and publicity-shy Henry Kravis - are painted in broad, often unflattering strokes against a background of extravagant corporate luxury.

As fiction, the basic storyline would be unsettling enough; presented as fact, it's downright ominous. Johnson and his management group, worried by the fact that their stock is undervalued at $55 a share, propose an LBO at $75 to the company's board of directors. Unswayed by Johnson's veiled bribe - an offer of post-LBO directorship seats and the opportunity to watch their own stock holdings grow as much as four-fold - members of an independent board appointed to evaluate the offer issue a press release instead of keeping the deal quiet until the last moment. Kravis, always on the lookout for a high-profile deal to hang his name on, preempts Johnson's bid with a $90 tender offer. Confusion reigns. Third parties come and go, unable to obtain credible financing. Johnson and Kravis strike a deal, only to see it unravel over seemingly minor disputes. A second management bid of $100 is derailed by a long shot from an outside group led by First Boston, which loses out in a subsequent bidding round. Finally, in protracted overnight negotiations, the board decides to sell to Kravis for $109, rejecting a $112 management bid because of concerns about its underlying financial assumptions.

Gripping stuff, right? Unfortunately, I don't know how much of it to believe. Burrough and Helyar have stiched together an impressive narrative, but except for the facts already in the public record, it's impossible to tell how much relationship their story bears to reality. Since the authors are reporters for The Wall Street Journal, I'm not that worried about their diligence in tracking down the facts. But, like all New Journalism, this book relies heavily on reconstructed dialogue and characters' inner thoughts reported as truth - even when, as on at least two occasions, encounters between two characters are described wholly from one perspective. (Dissenters' views get a hearing in footnotes.)

The novelistic style also prevents the authors from stepping outside the narrative to provide an objective assessment of the buyout. Questions about the company's ability to service its debt are raised, but only by characters anxious to learn how high they can push their bids without inheriting a bankrupted wreck. The closest thing to a critical look at how LBOs affect the economy comes from Ted Forstmann, a minor Wall Street player with a passionate hatred of junk bonds, who buttonholes anyone who'll stand still long enough for his tirades on the evils of "funny money" financing. (And the only real hint as to any opinion held by the authors themselves is the book's title, which is taken from one of Forstmann's spiels. The "barbarians" he envisioned were the junk bond hordes eager to tear down yet another company for the sake of the fees.)

The book's most interesting contribution is its description of how these billion-dollar Wall Street deals are really driven by the participants' egos. Ivan Boesky notwithstanding, greed is out; beating the opposition is in. In the case of RJR Nabisco, no one in the Street's insular community wanted to be left out of the greatest deal of the century; as a result, no one bothered to ask whether their competitive instincts were leading them over the precipice. Right after Kravis's tender offer, for instance, an agreement between Kravis and Johnson threatened to bring the proceedings to an early close; the two investor groups would split the purchase of stock and control of the company's board, with huge fees for all concerned. But according to Burrough and Helyar, the deal foundered when one of Johnson's partners, the investment bank of Salomon Brothers, refused to allow a hated rival - the junk bond house Drexel, Burnham, Lambert - to assume the leading role in the bond financing. What was initially a disagreement over a minor point quickly escalated until the deal was called off.

My favorite bit of investment banker folklore, however, concerns First Boston's spoiler bid of between $105 and $118. Because it exploited an almost-expired tax loophole that would allow its investors to defer nearly $3.5 billion in taxes, the bank was able to eclipse both Johnson and Kravis, forcing a second bidding round at the last minute. Competition was the only watchword - the plan's architect barely hesitated when he realized that a deferral of that magnitude would have increased the federal deficit by a full 2 percent. Next time you hear someone rhapsodizing about the virtues of the free market, remind him of this.
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Author:Hamilton, David P.
Publication:Washington Monthly
Article Type:Book Review
Date:Jan 1, 1990
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