Book Review #12
"Never play by the rules. Never pay in cash. And never tell the truth" said Ross Johnson, then the CEO of RJR Nabisco, the poster boy of corporate excesses who instigated the takeover of his company through a Leveraged Buy Out (LBO) with his management team.
Greed was his underlying motivation even as he thrived on lavish expense accounts and constant celebrity hobnobbing. The book "Barbarians at the Gate" by Bryan Burrough & John Heylar is a business thriller that I had wanted to read ever since doing the RJR Nabisco case during my b-school days. The fat volume (600+ pages) made me take several weeks to read and draft my takeaways from this book
1> Valuations: Public market (or stock market) trading of company stock does not always lead to right price discovery. There are always companies with significant value that are undervalued due to several factors ranging from history of the company, industry segment, investor relations and the inability of markets to really understand the complexity of a business with several assets. It is here that corporate executives and Private market investors (or) Private Equity come in to play to take such companies private, break them apart, streamline the operations and eventually list them back or sell them to new owners.
2> Greed: Understanding that a business is under valued can lead to a top-executive or a savvy investor to fancy the prospect of taking over and reaping huge profits. In this case Johnson and his management team try to take over RJR Nabisco with a raft of investment bankers led by Shearson at a low price and with a management agreement that confers $2 billion to Ross and his team. But such levels of greed can't go without competition. Eventually there were several bidders and after a thrilling and suspenseful bidding process the eventual takeover happens at a much higher price with much less to eventually profit from after take over.
3> Ego / Reputation: Much of the activity in Wall street is driven by the egos and reputation of investment banking firms and the associated fees that big deals bring with them. The one-upmanship of these firms leads to huge personality fights, overbidding and risky financial engineering that can even put economies at risk
4> The People factor: The authors show how even in such secretive, complex and highly intense bidding situations people across different teams stay connected and how information flows at times even to the detriment of their own factions. At the same time there are good Samaritans who can sense the greed equations and despite all their limitations do everything they can to help the shareholders get the best overall outcome.
While one may think Henry Kravis (of KKR frame) is the protagonist of this book, in my view even though his group eventually won the bid and ousted Johnson there was really no protagonist. Overall, an outstanding business thriller and a must read in my opinion.
#bookreview #privateequity #lbo #takeover
