Push the barbarians back from the city gates. Book#76
A friend of mine recommended this book Barbarians at the gate a while ago by Bryan Burrough and John Helyar. I got to it last year without knowing what to expect. What a gem! So over the top that I found myself laughing constantly. It tells the fascinating inside story of the largest corporate takeover in American history at the end of the 80s: the leveraged buyout of the RJR Nabisco Corporation for $25 billion. Why did I enjoy it? Because this is not a story about economics and finance, it is a book about human avarice, greed, ambition, ego and lust for power on an epic scale.
The critics on Amazon are pretty good too: New York Times wrote “One of the finest, most compelling accounts of what happened to corporate America and Wall Street in the 1980’s.” The Chicago Tribune raved “It’s hard to imagine a better story, and it’s hard to imagine a better account. And in an era of spectacular business crashes and federal bailouts, it still stands as a valuable cautionary tale that must be heeded.” Also business reporter Andrew Ross Sorkin wrote in his book Too Big to Fail that this is his favorite business book of all time.
The restless, flamboyant personality of Ross Johnson, CEO of RJR Nabisco, is at the center of the story. The tale begins with the calculated maneuverings that lead Ross Johnson’s, from Winnipeg Manitoba Canada, to rise to RJR Nabisco’s chief executive office. Ross is addicted to action and dynamism. He spends the free cash flow of the company lavishly in gifts and high compensations to attract support and rise to the top. I loved the comment someone made about it on Amazon “it brings you back to the time of the Rock Star CEO with a jet at the door and the 12 different country club subscriptions and Bloody Marry on Monday at 10 AM to get rid of the hangover of the previous corporate sponsored golf tournament.” Lol.
The 80s at its peak, with lavish spending and partying. I laughed out loud at the part when Ross Johnson is flying his dog in a private jet alone at the expense of the company, just so that he can get it back to his house in Florida while he attends business in NY. Who cares, the company pays for it all! I also laughed at the time when they describe two private planes flying next to each other so that the two millionaires can talk on their cell phones and exercise while smoking cigars. Or this other one when several limousines are stuck in traffic, carrying one person each. The executives in each car start calling each other on their huge expensive cells phone until they soon realize that they are actually not far from each other in separate cars in the same street! Hilarious.
This book is an excellent reminder of the dangers of hubris. Corporate deals happen a lot more for interpersonal reasons than for the pure rationality of numbers. We also see how Wall Street heavyweights leverage partisanship, manipulate medias and threaten their peers. Everyone wants to come out as the biggest deal maker.
I realized later that Warren Buffett himself recommended the book in his 2014 annual letter to shareholders (page 31). When commenting about the dangers of leverage used by private equity houses he used this book as an illustration.
For some years, these purchasers accurately called themselves “leveraged buyout firms.” When that term got a bad name in the early 1990s — remember RJR and Barbarians at the Gate? — these buyers hastily relabelled themselves “private-equity.” The name may have changed, but that was all: Equity is dramatically reduced, and debt is piled on in virtually all private-equity purchases. Indeed, the amount that a private-equity purchaser offers to the seller is in part determined by the buyer assessing the maximum amount of debt that can be placed on the acquired company. Later, if things go well and equity begins to build, leveraged buy-out shops will often seek to re-leverage with new borrowings. They then typically use part of the proceeds to pay a huge dividend that drives equity sharply downward, sometimes even to a negative figure. In truth, “equity” is a dirty word for many private-equity buyers; what they love is debt. And, because debt is currently so inexpensive, these buyers can frequently pay top dollar. Later, the business will be resold, often to another leveraged buyer. In effect, the business becomes a piece of merchandise.
The climax of Barbarians at the Gate reveals its irony. Competition and greed to win the deal drives bids to the roof. Therefore the winner, Henry Kravis, ends up getting “modest returns”, probably below those of the S&P500 in the same period.
You have to see the movie adaptation of the book. The complete absurdity of the whole thing is just fun to watch.
My purpose in life is independence, fulfilment and a better understanding of how the world works. Like Charlie Munger, I believe in the discipline of mastering the best that other people have ever figured out. And like Sir Isaac Newton, I believe in our ability to see further than any others before us by acknowledging that we are standing on the shoulders of giants. With this blog I hope to keep track of my learning about investing, business, decision making, entrepreneurship and self development, while inspiring others to do the same. For the moment the format of this blog will be one post for each book that has influenced me, but I expect it to evolve over time. This post is for book number 76 of the journey. Join me now. John.
