BARBARIANS AT THE GATE

The book to read (re-read, in my case) after Liar's Poker is Barbarians at the Gate. The former is about the bond market during the 1980's; the latter is about mergers and acquisitions and leveraged buy-outs. In particular, it's about the scrap to win the late 1988 buy-out of the American food and tobacco company RJR Nabisco, a battle eventually won by LBO specialists Kohlberg, Kravis, Roberts.

BATG is not as funny as Liar's Poker, it is written more in the style of a thriller. But it's a good read nevertheless, since both books are, at the end of the day, about financial excess and terrible decision-making.

RJR was a sprawling conglomerate run by a cheerful Canadian called Ross Johnson. Johnson's mission in life was to have a good time, using the company's cashflow to pay for it. RJR had a fleet of eight corporate jets, and corporate apartments for most of the senior staff. When Johnson moved the company's headquarters from Winston-Salem to Atlanta, he had a new hangar built at Atlanta Airport; his only comment on the design plans was to make them bigger. He schmoozed his Board by putting them all on consultancy contracts, and not small ones either. In terms of business, Johnson was not very good; his big new idea, a smokeless cigarette called Premier, was a disaster.

A company like that cried out to be knocked into shape by cutting out the fat, and running it properly. Investment banks queued up to entice Johnson to go for a management-led LBO, which would be the biggest in history. Johnson liked the idea of being his own boss, but not the cutting the fat bit. He squared the circle by opting to team up with Shearson, Lehmann, a bank that had not really ever done an LBO before. Shearson's boss was so desperate to become a player in the market, that he agreed to let the management team of 7 people have (for free) a slice of the deal that could have netted them US$1.9 billion (and you think that Fred Goodwin was greedy!). One of the recurring themes of the book is a succession of top Wall Street financiers saying to themselves or other top Wall Street financiers "we've got to do something about Ross' management agreement", but never actually getting around to doing anything about it.

In the end, after many twists and turns, the Shearson/management bid was topped by KKR. Johnson resigned before he was fired, and had to console himself with a US$53 million golden parachute. Nabisco profits rose by 40% the following year; though they needed to in order to service all the debt taken on to fund the US$25 billion deal. 

What goes around, comes around. And the only thing you learn from history is that you don't learn anything.

Walter Blotscher