Wednesday, April 10, 2013

Barbarians at the Gate

The LBO craze of the 1980s culminated in the massive buyout of RJR Nabisco in 1989. Barbarians at the Gate takes the reader through the twists and turns that finally led to the consummation of this deal.

The first one-hundred and fifty pages or so had me snoozing, and wondering what the hype around this book is all about. These early pages tell the story of how Nabisco and RJR came to be, including their respective cultures (including a dual-culture at Nabsico, thanks to a recent merger with Standard Brands, and the small-town, conservative culture at tobacco company RJ Reynolds).

But the next few hundred pages were highly entertaining. The authors do a masterful job at keeping the reader in suspense with respect to how it all plays out. The dramatic turns make the book read like fiction. But the story is 100% real, as chronicled by these Wall Street Journal writers turned author.

One of the striking lessons for an amateur investor will be the lack of shareholder consideration exhibited by all parties, including bankers, managers and directors, in dealing with this buyout. All stakeholders were clearly in it for themselves, and paid only lip-service to "shareholder value". Bankers wanted prestige, power and money; managers wanted to keep their jobs or vault into jobs of higher importance; directors sought to avoid liability while hanging onto their lucrative gigs. Investors should keep these incentives in mind when attempting to determine how various stakeholder groups will respond to future events.


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