Barbarians at the Gate

By Bryan Burrough and John Helyar (1990) 

Barbarians at the Gate is arguably the most famous book about investment banking ever written. It is the true story of the $25 billion battle for control of the American biscuit and tobacco company - RJR Nabsico – manufacturer of the Oreo cookie and RJ Reynolds cigarettes.

It is a tale of incredible greed of behalf of investment bankers, corporate managers, private equity investors, shareholders, lawyers, PR advisers and an assortment of players; the kind of people who give ‘City-types’ a bad name.

Although the book was written at the end of the 20th century, it is still relevant at the beginning of the 21st. Until 2005, the takeover of RJR was the largest leveraged buy-out (LBO) of all time. (An LBO is the acquisition of a company using a significant amount of borrowed money.)

At the centre of Barbarians is the-then CEO of RJR Nabisco – F. Ross Johnson, who the book paints as a highly colourful character: "Ross was the only man who could be given an unlimited budget and exceed it". As his tenure as CEO progressed, he became frustrated that RJR’s share price – and so its valuation – was stagnating. He sought ways to obtain greater value for his stock holders and was eventually persuaded by his investment banking advisers (Lehman Brothers) that a leveraged buy-out, where he would lead a takeover of the company financed with debt lent by banks, was the answer.

RJR was certainly ripe for a takeover. Its products – biscuits and cigarettes – were recession-proof staples. RJR enjoyed stable and plentiful cashflows. It was also undervalued by the stock exchange. Its valuation was less than the sum of its part and suffered from the effect that investment bankers label "the conglomerate discount".

As soon as his bid was announced, other bidders for the company emerged. The chief protagonist was KKR – the private equity firm who recently bought Alliance Boots and thereby gave it the dubious honour of becoming the first FTSE 100 company to fall prey to a LBO. KKR was founded by Henry Kravis, Jerome Kohlberg and George Roberts and the book gives an insight into the minds of men who are still, arguably, the most important players on the world financial stage today.

Almost all the major investment banks became involved, on one side or another, as advisers to the deal. A number of characters who remain important in the financial world make appearances. Bruce Wasserstein, who today is the CEO of Lazard, was involved. At the time of the RJR takeover he had just left Credit Suisse to form his own investment banking boutique, Wasserstein Perella, with Joseph Perella, who has recently formed another front-line boutique – Perella Weinberg. Eric Gleacher and Bob Greenhill – who have since founded their own eponymous investment banks, play their part as advisers at Morgan Stanley.

The book makes a slow start, spending 300 pages (that’s half the total number) setting the scene, providing background to all the major characters and describes the history of the RJR Nabisco company. The pace then picks up quickly, and soon has the drama and page-turning compulsion of a thriller. Read it or watch the film version. It will either turn you into an investment banker or turn your stomach.