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Ross Johnson’s story is the embodiment of corporate America in the 1980s: a time of larger-than-life personalities, high-stakes deals, and unapologetic extravagance. Despite his Canadian roots—he was born in Winnipeg in 1931—Johnson personified the archetype of the all-American executive with his infectious charm, sharp humor, and love of the high life. The book Barbarians at the Gate aptly describes him as a new breed of corporate leader, one who thrived on deals and lived for the chase.
Early Career: A Natural Leader with a Flair for Connection
Though academics weren’t his strong suit, Johnson’s charisma and knack for leadership ensured his place in the upper ranks of his class. His career began at Canadian General Electric, where he honed his talent for relationship-building. Whether on the golf course or over late-night drinks, Johnson could entertain and persuade, always ready to show up for work as if he hadn’t been up all night.
Johnson’s ascent through the corporate world was steady, shaped by his unconventional philosophy of “creative chaos.” He firmly believed that organizations were in a constant state of decline from the moment they were created and that only constant evolution could sustain success. This belief set the stage for his future as the driving force behind the legendary RJR Nabisco leveraged buyout (LBO).
Transforming Standard Brands
By age 40, Johnson was President of the Canadian division of Standard Brands, a U.S.-based food company. Despite its outdated and staid reputation, Standard Brands became Johnson’s proving ground. He overhauled the company’s leadership, replacing 21 of 23 top executives with dynamic, like-minded individuals who shared his vision—and his zest for life.
His bold leadership caught the board’s attention, and by 42, Johnson was running the company’s international operations. Just three years later, he was promoted to CEO. Johnson wasted no time making his mark, raising executive salaries, including his own, and indulging in lavish perks like private apartments, a Madison Square Garden box, and club memberships. One memorable moment from the book captures his extravagance: on the cusp of the holiday tipping season, he reportedly instructed his secretary, “Get me an inch thick of fifties, will you.”
While Standard Brands performed adequately under his leadership, Johnson’s penchant for constant reorganization and experimentation kept the company energized. He introduced a slew of new products, with mixed results, but his restless ambition soon led him to seek a bigger challenge.
The Merger with Nabisco
In 1981, after four years as Standard Brands’ CEO, Johnson orchestrated a $1.9 billion merger with Nabisco, the powerhouse behind Oreo cookies and Ritz crackers. Johnson became President and COO of the combined entity. The book offers a fascinating history of Nabisco—its origins, evolution, and cultural significance—which is another reason it’s such a compelling read.
As COO, Johnson began consolidating his power. He formed close ties with Nabisco’s CEO and systematically replaced key executives with trusted allies from his Standard Brands days, a group that came to be known as “Johnson’s Merry Men.” With his team in place, Johnson began selling off underperforming brands, often securing surprisingly high prices. He charmed potential buyers while highlighting how poorly Nabisco’s previous management had handled the assets.
Cookie Wars and Corporate Conquests
One of Johnson’s standout victories was a battle against Procter & Gamble in the so-called “cookie wars,” a saga that Barbarians at the Gate recounts in gripping detail. This triumph cemented his rise to the CEO role at Nabisco, where he now presided over one of America’s most iconic food companies.
As CEO, Johnson moved in elite circles, mingling with world leaders, celebrities, and sports icons, often bankrolled by Nabisco. True to his nature, Johnson had little patience for long-term planning. Instead, he championed bold, opportunistic moves, famously declaring that “ultimate success comes from opportunistic bold moves which by definition cannot be planned.”
This philosophy—combined with his charisma and relentless drive—defined his tenure and set the stage for the extraordinary events chronicled in the book.
In 1985, Ross Johnson encountered the kind of opportunity he thrived on when Tylee Wilson, CEO of RJ Reynolds, approached him with a proposition. RJ Reynolds, the North Carolina-based tobacco giant, was feeling the pressure of increasing public awareness about smoking’s health risks and the looming specter of litigation. The solution? Diversify the company’s portfolio with a transformative acquisition.
The $4.9 Billion Deal: RJ Reynolds Acquires Nabisco
Johnson saw the potential and negotiated hard, ensuring he retained all his perks while securing the role of President and COO, second only to the CEO. The $4.9 billion deal merged Reynolds’ cash flow with Nabisco’s household brands, positioning Johnson to exert significant influence.
As he had done at Standard Brands, Johnson cultivated strong relationships with the Reynolds board, a weakness of Wilson’s leadership. This strategy would prove decisive when a corporate bombshell dropped: Reynolds had been secretly developing a smokeless cigarette called Premier. Fearing leaks, Wilson had kept the project hidden even from the board.
When this came to light, the board was outraged. What followed was a marathon of contentious meetings, with members airing grievances against Wilson. Sensing the moment, Johnson took a calculated risk. He hinted to key board members that he was ready to leave and had a tempting offer from British food company Beecham. It was a bluff, but an effective one. Within weeks, Wilson was ousted, and Johnson was named CEO.
Extravagance and Excess at RJ Reynolds
As CEO of the newly formed RJR Nabisco, Johnson controlled a corporate behemoth with annual cash sales exceeding $1.2 billion. With these resources at his disposal, he spared no expense indulging his whims.
Sports Sponsorships: Johnson lavished cash on his favorite athletes, paying golfers like Fuzzy Zoeller $300,000 per year, Ben Crenshaw $400,000, and Jack Nicklaus an eye-popping $1 million annually for appearances. Even O.J. Simpson was on the payroll, earning $250,000 a year.
Corporate Jets: Despite Reynolds already owning six jets, Johnson ordered two $21 million Gulfstream models and built a $12 million state-of-the-art hangar to house the fleet.
Board Perks: Johnson showered board members with financial perks, including donations to their alma maters and consulting fees. Although he reduced the number of board meetings, he increased their annual fees to $50,000 and granted unrestricted access to company jets for personal use.
Headquarters Relocation: Displeased with the small-town feel of Winston-Salem, Johnson persuaded the board to move RJR Nabisco’s headquarters to Atlanta, a decision that drew ire from locals but reinforced his vision for the company’s future.
Wall Street Enters the Scene: The Era of Leveraged Buyouts
By the mid-1980s, Wall Street was booming, fueled by cheap capital in the form of junk bonds. This surge enabled a wave of corporate takeovers, including the rise of leveraged buyouts (LBOs)—the financial mechanism that would soon dominate RJR Nabisco’s story.
An LBO works by borrowing vast sums of money to acquire a company. The appeal lies in the promise of trimming excess and boosting profitability. In theory, the new owners could make the company “leaner and meaner.” But in practice, LBOs often left companies saddled with enormous debt. This burden forced drastic cuts in areas like research and development, product innovation, and long-term growth initiatives.
In many cases, LBOs also fueled aggressive acquisition sprees, with the acquired company taking on even more debt to buy complementary businesses. While this strategy created the illusion of growth, it often bypassed genuine innovation or expansion, leaving companies with bloated debt loads and stagnating progress.
The real winners in most LBOs were the investors. They reaped enormous profits when cashing out, often at the expense of the company’s long-term health. As we’ll see, this would become a central theme in the epic battle for control of RJR Nabisco.
By the mid-1980s, RJ Reynolds’ impressive cash reserves and Nabisco’s household brands had made the company a tantalizing prospect for Wall Street. The authors of Barbarians at the Gate paint a vivid picture of the frenzy: Ross Johnson was fielding over 40 phone messages daily, with more than half coming from investment bankers eager to pitch leveraged buyout (LBO) opportunities.
Johnson’s Reluctance to Embrace an LBO
At first, Johnson balked at the idea of an LBO. He understood the trade-offs all too well: the crushing debt, the inevitable cost-cutting, and—perhaps most troubling for him—the likely loss of his enviable perks. A fleet of corporate jets, lavish company-owned apartments, and golf tournaments featuring celebrity athletes were hallmarks of his high-flying lifestyle. These were not easily surrendered.
Still, Wall Street’s relentless pursuit continued. Johnson couldn’t ignore the examples around him, particularly the success of Don Kelly, CEO of Beatrice Foods. Beatrice had gone private in a landmark LBO orchestrated by KKR (Kohlberg Kravis Roberts), earning Kelly hundreds of millions of dollars while KKR pocketed $1.7 billion. If Wall Street could position Beatrice as a record-setting deal, they saw RJR Nabisco as a potential windfall on an entirely new scale. A $20 billion LBO for RJR Nabisco would dwarf Beatrice’s $6 billion deal and generate astronomical fees for banks and advisors.
Johnson Meets Henry Kravis
Eventually, Johnson agreed to meet Henry Kravis, co-founder of KKR and one of the most influential figures in the LBO world. The meeting took place in Kravis’ opulent Park Avenue apartment, a setting described in the book as dripping with wealth—priceless Renoirs and Monets adorned the walls. Kravis himself was a striking figure: diminutive but commanding, with silver hair and an intense presence.
The book delves deeply into Kravis’ career path, which began at Bear Stearns. Alongside his cousin George Roberts, Kravis worked under the mentorship of Jerry Kohlberg, a pivotal figure in the evolution of leveraged buyouts. Kohlberg’s innovation, the bootstrap deal, laid the foundation for modern LBOs.
The Birth of LBOs: Kohlberg’s Bootstrap Model
Kohlberg’s bootstrap model emerged to solve a specific problem faced by family-owned businesses. Aging owners of these firms were often reluctant to sell outright due to estate taxes, loss of control, or the volatility of public markets. The bootstrap deal offered a middle ground:
A shell company was formed and backed by investors who contributed partial funding.
The majority of the purchase price was borrowed, and the family retained a minority stake while continuing to operate the business.
As the debt was paid down and acquisitions added value, investors reaped substantial returns upon exiting.
This model, which minimized upfront costs and maximized returns, became the bedrock of the LBO industry. Kohlberg, Kravis, and Roberts refined the concept at Bear Stearns. However, when the firm denied their request to establish a dedicated LBO group, the trio left to form KKR in 1976.
KKR’s Meteoric Rise
By the time Johnson met Kravis, Jerry Kohlberg had left KKR, leaving Kravis and Roberts as the faces of the firm. The two cousins were inseparable, jointly deciding every major buyout and systematically growing their business. Starting with a modest $30 million fund, they raised progressively larger sums, reaching $1 billion by 1983. Wall Street took notice as KKR completed a series of high-profile deals, sparking a surge in LBO activity.
Between 1979 and 1983, the number of LBOs increased tenfold. By 1985, there were 185 LBOs, 18 of which exceeded $1 billion in value. KKR’s dominance culminated in their 1987 fundraising milestone—a $5.7 billion fund that provided them with a staggering $45 billion in purchasing power.
It was within this context that KKR set its sights on RJR Nabisco, positioning the company as the ultimate prize in the era’s LBO frenzy. With Kravis leading the charge and Johnson grappling with the mounting pressure, the stage was set for the epic takeover battle that would redefine corporate America.
Henry Kravis holds a pivotal role in this saga, not only for his financial acumen but because he became the face of KKR. Living in New York, Kravis naturally positioned himself at the center of Wall Street’s action. His cousin and partner, George Roberts, maintained a lower profile from San Francisco. Roberts’ measured and analytical demeanor contrasted with Kravis’ charisma and public prominence, which was bolstered by his marriage to socialite and fashion designer Carolyne Roehm. Together, Kravis and Roehm were fixtures on New York’s elite social circuit, further elevating his visibility.
The Kravis-Johnson Dinner: A Missed Opportunity?
When Johnson dined with Kravis, he was impressed. Kravis came across as serious, strategic, and entirely capable of engineering an LBO of RJR Nabisco. Yet, Johnson wasn’t ready to commit. As much as the meeting laid the groundwork for future events, Johnson remained wary of disrupting the lavish lifestyle his corporate perks afforded him.
But as British Prime Minister Harold Macmillan famously noted, "Events, dear boy, events," often dictate the course of history. For Ross Johnson, the defining event that forced a shift in perspective was the stock market crash of October 1987.
The 1987 Crash: A Catalyst for Change
The crash sent RJR Nabisco’s stock tumbling from the mid-sixties to the low forties. Despite the company posting a 25% profit increase in December 1987 and deriving 60% of its revenue from non-tobacco products, Wall Street showed little enthusiasm. The stock price stagnated, and for Johnson, this felt like a personal slight. As many CEOs do, he equated the company’s stock price with his own performance.
Determined to reverse the trend, Johnson tried several strategies:
Stock Buyback: RJR Nabisco spent over $1.1 billion to repurchase 20 million shares. However, the move failed to significantly lift the stock price.
Proposed Merger with General Mills: Johnson approached Philip Morris, whose portfolio included both Marlboro cigarettes and General Mills. He pitched a merger between Nabisco and General Mills that would create an $18 billion food giant, with RJ Reynolds and Philip Morris each owning 37.5% and the remaining 25% publicly traded. Philip Morris rejected the idea outright.
Meanwhile, Wall Street was hungry for takeover activity in the wake of the crash. With trading volumes low, bankers sought revenue through mergers, acquisitions, and leveraged buyouts. These deals offered a lucrative combination of advisory fees, lending profits, and revenue from selling off acquired companies’ non-core assets.
Wall Street’s relentless lobbying for an LBO, combined with Johnson’s inherent restlessness and flair for chaos, set the stage for bold action. Still, Johnson had one last gambit to rescue the stock price: Premier, RJR’s smokeless cigarette.
The Premier Experiment: A Fiasco in the Making
Premier had been a controversial project from the start, its development a secret so closely guarded that it led to the ousting of Johnson’s predecessor. The product was groundbreaking in concept—it contained only a small amount of tobacco, used a carbon tip to heat flavor beads inside, and produced negligible smoke and no tar. Johnson believed that Premier could potentially revolutionize smoking and provide the stock price with a much-needed boost.
However, reality didn’t match expectations. Taste tests and market research revealed catastrophic flaws:
Premier was hard to draw on.
Its smell when lit with a match was described as akin to burning lettuce.
Most critically, smokers found the taste unappealing.
Johnson quickly realized that Premier was more likely to sink the share price further than salvage it. With Premier a non-starter and the stock languishing, Johnson was out of options. An LBO began to look less like a disruption and more like an inevitability.
The stage was now set for the extraordinary events that would make RJR Nabisco’s buyout the largest and most dramatic deal of its time.
As Ross Johnson’s options dwindled, the idea of a leveraged buyout began to seem less like a disruption and more like a necessary solution. What had once been an abstract consideration now became a serious possibility. Earlier, Johnson had asked his executives to explore the mechanics of an LBO, leading to preliminary proposals from the Wall Street firm Shearson Lehman & Hutton. Now, with his company’s share price stagnating and pressure mounting, Johnson reached out to Shearson’s CEO, Peter Cohen, with a newfound determination.
Why Not KKR?
Despite having met Henry Kravis and recognizing his expertise, Johnson intentionally avoided involving KKR. Johnson knew that Kravis’s model meant relinquishing control. In a typical KKR deal, the firm took over the board and exerted significant influence over management, often leaving executives in place but firmly under KKR’s direction. Johnson had no intention of surrendering his authority.
In contrast, Shearson, which lacked experience in LBOs, was eager to lead what would be the largest deal of its kind. To secure the opportunity, they offered Johnson terms that KKR never would have entertained. These terms included allowing Johnson to retain control of the company and maintain his autonomy over major business decisions. This was a deal tailor-made for Johnson’s ego and ambitions.
The Management Windfall
The Shearson proposal included a controversial incentive: a management agreement that promised Johnson and his team up to $2.5 billion if they hit post-LBO performance targets. This staggering figure gave Johnson significant leverage to reward himself and his allies. Such a structure reflected Shearson’s desperation to break into the LBO market and its willingness to bend standard practices for a shot at a historic deal.
Shearson’s urgency was understandable. A successful RJR Nabisco buyout could catapult the firm into the upper echelons of Wall Street’s LBO players, securing massive fees and enhancing its reputation. Cohen’s aggressive negotiating style fit this high-stakes moment, and the backing of Shearson’s parent company, American Express, added an extra layer of security. Johnson’s friendship with AMEX’s CEO, Jim Robinson, likely sweetened the partnership further.
The Misstep: Declining the "Gun to the Head" Approach
A critical component of most LBO strategies is the “gun to the head” tactic, where management and their Wall Street partner prepare a fully financed offer and present it to the board as a fait accompli. The element of surprise typically prevents other bidders from entering the fray. Shearson assumed Johnson would take this route, but Johnson flatly refused.
Having seen the backlash to the former CEO’s secrecy over the Premier cigarette project, Johnson preferred transparency. He had cultivated strong relationships with the board and wanted their buy-in. However, this decision meant the offer would become public knowledge, inviting potential competitors to bid.
The $75 Per Share Offer
Johnson and Shearson believed that the sheer scale of the deal would deter other suitors. At $75 per share, the offer valued RJR Nabisco at $17.6 billion—the largest deal in corporate history at the time. Johnson was confident that the size and complexity of the deal would give him and Shearson an unchallenged path to success.
This assumption, however, overlooked the massive financial stakes at play. For Wall Street firms, the fees and profits generated by such a deal were too tempting to ignore. Even though Kravis had previously shown little interest in tobacco, he was now incensed. Johnson’s decision to go with an inexperienced player like Shearson, coupled with the relatively low offer, reignited Kravis’s interest. He viewed $75 per share as an opening bid, and the fact that he hadn’t been consulted as an affront.
Setting the Stage for a Battle
The announcement of the LBO bid marked the beginning of one of the most dramatic corporate takeover battles in history. As the news spread, it triggered a flurry of activity on Wall Street. Henry Kravis, now determined to enter the fray, began assembling his resources to challenge Johnson’s bid.
This is where Barbarians at the Gate shines. The book masterfully captures the tension, ambition, and egos of the players involved, weaving together their histories, motivations, and strategies. While we can only scratch the surface in this podcast, the book’s narrative thrust is unparalleled, immersing readers in the fast-paced and cutthroat world of 1980s Wall Street. It’s a story of power, greed, and ambition, all centered around one of the most monumental deals ever conceived.
The brilliance of Barbarians at the Gate lies in its nuanced portrayal of the players behind the scenes of the largest corporate deal in history. Despite their immense wealth and power, the authors reveal the humanity of these multimillionaires. For all their financial prowess, their decisions were frequently influenced by ego, rivalry, and emotional missteps. Testosterone-driven bravado, gossip, and perceived slights often clouded their judgment, adding layers of drama to the already high-stakes narrative.
The Shearson Bid Shakes Wall Street
The announcement of the Shearson-backed management bid for RJR Nabisco sent shockwaves through Wall Street. The company’s stock surged by 21 points, closing at $77.25—a clear signal that the $75 per share offer was insufficient. The excitement also caught the attention of Henry Kravis, who, despite having been left out of the deal, was now determined not to let it proceed without KKR’s involvement.
Peter Cohen, Shearson’s CEO, quickly learned of Kravis’s displeasure. For KKR, the deal represented more than just profit—it was about maintaining dominance in the LBO world. Losing the largest leveraged buyout in history to a competitor would tarnish KKR’s reputation as the industry leader. Cohen understood that if he couldn’t find common ground with Kravis, KKR would likely launch its own bid.
A Friday Meeting with Three Options
Cohen and Kravis met that Friday to discuss the situation. Kravis presented three potential paths forward:
A Bidding War: Both sides would escalate offers in a potentially ruinous competition. While this might secure the company, the resulting debt load could make it nearly impossible for either party to deliver strong returns for their investors.
A Partnership: Kravis and Cohen could combine forces to avoid infighting and share the spoils. However, neither man found this palatable. Kravis, proud of KKR’s stature, saw himself as the rightful leader of the deal, while Cohen, emboldened by the support of Johnson and RJR Nabisco’s management, felt he didn’t need KKR’s help.
Sell RJR’s Food Business to KKR: Shearson could execute the deal and later offload Nabisco’s food brands to KKR. This seemed logical, given KKR’s recent acquisition of Beatrice, but it was briefly discussed and ultimately set aside.
Kravis doubted Cohen would seriously consider any of the options. Recognizing the impasse, he returned to KKR and began preparing for a rival bid.
KKR’s Weekend Strategy Session
Kravis convened his partners and advisors over the weekend. Fueled by whispers, rumors, and a healthy dose of paranoia, KKR became convinced that Shearson intended to secure the RJR board’s approval for their bid on Monday, effectively shutting KKR out.
By Sunday evening, the team had reached a tentative conclusion: they would counter with a $90 per share bid, elevating the deal to a staggering $20 billion. However, Kravis and George Roberts decided to sleep on it before making their final decision.
The $90 Per Share Bombshell
In a dramatic twist, someone within KKR’s advisory team leaked the $90 bid to the press late Sunday night. Whether it was one or two advisors, their motive was clear: by forcing KKR’s hand, they ensured their involvement in the deal—and the accompanying massive fees. On Monday morning, The Wall Street Journal and The New York Times ran front-page stories about KKR’s $90 bid.
Kravis was livid. The leak not only forced him to proceed with the bid but also exposed a breach of trust within his own team. He strongly suspected Bruce Wasserstein, the flamboyant co-founder of Wasserstein Perella, a boutique investment bank advising KKR. Nicknamed "Bid-'Em Bruce" for his aggressive deal-making style, Wasserstein was known for his ambition. While Kravis could never prove it, the suspicion lingered.
A New Level of Competition
The news of KKR’s bid sent shockwaves through Shearson and Johnson. Their $75 offer was now dwarfed, and at $90 per share, the deal reached an unprecedented $20 billion valuation. What had begun as an ambitious management buyout had escalated into a battle that would define Wall Street in the 1980s.
This was a critical turning point, marking the start of an intense bidding war that would pit some of the era’s most powerful financiers against one another. The stakes were astronomical, the rivalries fierce, and the consequences for all involved would be monumental. Barbarians at the Gate captures this moment with vivid detail, immersing readers in the personalities, strategies, and machinations driving the deal forward.
As the battle for RJR Nabisco intensified, Ross Johnson and Peter Cohen realized that unless they could broker a deal with Henry Kravis, the situation would devolve into a ruinously expensive bidding war. While such a war might delight shareholders, it would almost certainly leave the company drowning in debt.
The Breakdown of Talks
Cohen met with Kravis for a second time to propose a 50/50 partnership, believing that uniting their forces would create a mutually beneficial outcome. Kravis, however, dismissed the idea outright. He had little respect for Cohen and felt Shearson brought minimal value beyond their alignment with RJR Nabisco’s management. Despite the meeting ending in a stalemate, Kravis later returned with a counteroffer: KKR would acquire RJR Nabisco and pay Shearson a one-time fee of $125 million along with a 10% ownership stake in the company.
Cohen was insulted by the proposal, viewing it as a dismissal of Shearson’s importance and a slap in the face.
Johnson Steps In
Next, Johnson stepped into the fray, meeting directly with Kravis and George Roberts. Unlike Cohen, Johnson held no animosity toward Kravis. In fact, he respected Kravis for his sharp mind and financial acumen. While Johnson had concerns about how KKR might run the company post-acquisition, he was willing to find common ground. He even managed to persuade Kravis to meet with Cohen again for a third attempt at resolution.
Chaotic Negotiations
The third meeting took place late at night, reflecting the high-pressure, non-stop nature of the deal. The smoke-filled room was packed with lawyers, advisors, and representatives from both sides. The sheer number of participants often hindered progress, with egos, personal agendas, and endless back-and-forth complicating the already fraught negotiations.
The absence of Johnson during these critical discussions was a misstep. Johnson trusted Cohen to secure a deal, but Cohen, as the head of Shearson, had his own priorities. His ultimate goal wasn’t to serve Johnson’s interests but to position Shearson as the dominant player in the deal. This divergence in agendas, combined with the involvement of too many stakeholders, prevented meaningful progress. By 3:00 AM, the meeting ended without resolution, leaving Johnson frustrated and bewildered by the lack of compromise.
Media Spotlight Intensifies
Compounding the chaos was the intense media coverage surrounding the deal. This wasn’t confined to the business pages—mainstream outlets were eating it up.
Businessweek ran scathing articles on how the rise of leveraged buyouts was eroding the foundations of corporate America.
Newsweek offered salacious details about Kravis’s personal life, dragging his socialite wife, Carolyne Roehm, into the spotlight.
Time Magazine put Johnson on its cover under the headline “The Game of Greed.” The accompanying article exposed the details of the management deal, including the staggering sums Johnson and his team stood to make if the bid succeeded.
This relentless coverage painted the deal in a negative light, casting its players as greedy opportunists and intensifying public scrutiny.
KKR’s Limited Access to RJR Nabisco
As Shearson and Johnson continued refining their bid, Kravis faced a significant disadvantage: limited access to RJR Nabisco’s inner workings. The book vividly compares the LBO process to buying a used car—you don’t just buy it based on the ad. You meet the seller, inspect the operation, and, most importantly, kick the tires. Ideally, you bring along an expert to ensure everything checks out.
But for Kravis, the “kicking the tires” phase was impossible. Without the management team’s cooperation, KKR was effectively flying blind. While they could interview some executives as part of the bidding process, these executives were mostly aligned with Johnson and Shearson, making them reluctant to share critical details. This lack of insight made it difficult for Kravis to accurately value the company.
Flying Blind into the Largest Deal Ever
The stakes couldn’t have been higher, yet KKR was operating with limited information. For Kravis, this was both a tactical and emotional battle. The lack of transparency from RJR Nabisco’s management frustrated him, but it also fueled his determination to win. The result was a tense, volatile environment where personal and professional motivations collided, setting the stage for the next round in one of Wall Street’s most dramatic takeover battles.
As the battle for RJR Nabisco approached a breaking point, Kravis and Roberts decided to make one last attempt to strike a deal with Cohen and Shearson. Linda Robinson, a well-connected PR executive and the wife of AMEX CEO Jim Robinson, organized a high-stakes meeting that brought together Ross Johnson, Jim Robinson, Peter Cohen, Kravis, and George Roberts.
A Deal on Paper
In just an hour, the group hashed out the framework of a potential agreement. The deal involved:
Shared Control: A 50/50 split of control over the RJR Nabisco board.
Stock Division: An equal split of stock, with Johnson’s portion coming from Shearson’s share.
Management Fees: KKR would receive their customary 1% management fee, equaling $200 million in a $20 billion deal. However, Kravis, sensitive to public perception, agreed to revisit this figure to mitigate backlash.
Several smaller issues were also addressed, and the group left the meeting optimistic that a deal was finally within reach. They summoned their advisors to finalize the agreement. That’s when everything unraveled.
The Tombstone Dispute
Shearson had partnered with Salomon Brothers to raise funds for their bid and underwrite the bond offering. A critical sticking point arose over the tombstone—the symbolic ad published in major financial publications to announce the deal. In these ads, the lead bank is listed first, on the coveted left side of the tombstone.
KKR’s financing was being handled by Drexel Burnham Lambert, a direct competitor and bitter rival of Salomon Brothers. KKR insisted that Drexel be recognized as the lead bank and listed on the left. Cohen had initially agreed to this during negotiations. However, Salomon Brothers vehemently objected, refusing to concede the position to Drexel.
Neither Kravis nor Salomon would back down, and what seemed like a minor detail turned into a major impasse. The deal fell apart once again, derailed by Wall Street’s ego-driven rivalries.
Chaos Erupts
That same night, while Johnson and Kravis believed negotiations were still ongoing, Shearson unilaterally released a new bid of $92 per share—without consulting Johnson. The sudden move added to the growing sense of chaos.
At the same time, the RJR Nabisco board was reeling under mounting public and media pressure. Negative coverage of Johnson, Kravis, and the LBO process had tarnished the board’s image. Time magazine’s exposé on Johnson’s potential earnings had particularly soured the board’s perception of him, undermining the trust he had previously enjoyed. As a result, the once unthinkable—a deal with KKR—became a real possibility.
Order Amid Chaos: The Final Bidding Process
With the bidding process spiraling out of control, the RJR board intervened to restore order. They announced an open competition: all interested parties would have 11 days to submit their final bids, with a deadline of 5:00 PM on November 18th. The compressed timeline set off a frenzy of activity as the competing groups scrambled to:
Analyze RJR Nabisco’s financials.
Consult with advisors and legal teams.
Strategize ways to outmaneuver their rivals.
A New Challenger Emerges
Just as the competition seemed like a two-horse race, a third bidder entered the scene: First Boston. This group had been quietly assembling a proposal financed by wealthy investors. Their plan relied on exploiting a complex tax loophole, which, if deemed viable, could allow them to make a highly competitive offer.
The entrance of First Boston added yet another layer of complexity to an already chaotic process, setting the stage for an intense final showdown. As the clock ticked down, the players were running out of time—and options—in what was rapidly becoming the most dramatic corporate takeover battle in history.
On November 18th, after weeks of intense negotiations and media scrutiny, the final bids for RJR Nabisco were submitted:
KKR: $94 per share.
Shearson/Management Team: $100 per share.
First Boston: An unconventional proposal claiming their bid could reach $118 per share if the board accepted a complex tax loophole.
First Boston's Wild Card
First Boston’s bid, though speculative, disrupted the process. It introduced enough uncertainty that the board felt compelled to investigate its validity. Concerned about potential litigation from shareholders for ignoring the highest bid, the board consulted experts, who concluded that while the First Boston proposal had potential, it lacked sufficient clarity. This ambiguity prompted the board to scrap all bids and initiate a second round of bidding with an 8-day deadline.
A Drained Field
By now, all parties were exhausted. Henry Kravis, especially, was feeling the strain. With KKR’s bid of $94 significantly trailing Shearson’s $100, rumors spread that KKR might withdraw entirely. George Roberts, ever the strategist, suggested they subtly feed this narrative, allowing speculation about their exit to grow.
Kravis took his family skiing for Thanksgiving, and Roberts returned to San Francisco. Their departure seemed to confirm the rumors. Shearson and the management team assumed they were in a commanding position and raised their bid by a mere $1 to $101.
Shearson’s Miscalculation
While Shearson correctly predicted that First Boston’s bid wouldn’t progress—it remained too vague, with unresolved questions about funding and the tax loophole—they misjudged KKR’s intentions. Though Kravis and Roberts had taken a holiday break, they tacitly agreed to regroup afterward and reassess. Reinvigorated, they returned to New York and raised KKR’s bid to $106.
The board, weighing all factors, accepted KKR’s offer. But in the true spirit of this deal’s unrelenting drama, the story wasn’t over.
Shearson's Last Stand
Refusing to concede, Shearson made another bid of $108, breaking the committee’s deadline and publicly announcing their offer. This move forced the board’s hand. If they considered Shearson’s new bid, fairness dictated they also give KKR the opportunity to counter.
The board imposed a final ultimatum: both sides had 15 minutes to submit their absolute best bid, after which no further offers would be considered.
The Final Showdown
KKR: Believing Shearson’s highest bid was $108, they matched it. Confident in their proposal’s stronger terms and reputation, they assumed the tie would work in their favor.
Shearson: Unbeknownst to KKR, Shearson actually raised their bid to $112.
However, Shearson’s proposal had critical flaws. KKR’s bid included a reset mechanism for its securities, protecting against market fluctuations, while Shearson’s did not. This left their junk bonds more vulnerable and had already been flagged as a concern by Lazard Frères, the board’s financial advisor. Additionally, the KKR proposal left 25% of the company’s stock with shareholders compared to Shearson’s 15%, a factor Lazard had explicitly stated would be preferred.
KKR also provided better terms for RJR Nabisco employees, a notable contrast to the contentious management payouts tied to Shearson’s bid.
The Final Twist
Despite Shearson’s higher bid, Lazard determined the price gap was effectively neutralized due to Shearson’s lack of a reset mechanism. This allowed the board to focus on the other strengths of KKR’s proposal. The board also requested KKR’s final “best and highest” bid. In response, KKR raised their offer by $1 to $109, valuing the deal at a record-breaking $25 billion.
The Verdict
The board unanimously chose KKR’s bid, ending the most dramatic, public, and expensive corporate takeover in history.
The Aftermath of the RJR Nabisco Saga
Following the dramatic conclusion of the RJR Nabisco deal, the main players saw wildly divergent fates, while the deal itself became emblematic of both the excesses and pitfalls of the 1980s leveraged buyout (LBO) craze.
The Payouts and Fallout
Ross Johnson resigned with a golden parachute valued at $53 million, an exit as grandiose as his tenure. Henry Kravis, now in control of RJR Nabisco, brought in Louis Gerstner as CEO. Gerstner, who would later earn acclaim for turning around IBM, faced the unenviable task of managing a company burdened with unprecedented debt.
While the deal generated massive fees for those involved, the long-term financial outcome was less rosy:
The Banks: Lenders earned $325 million in loan fees.
Drexel Burnham Lambert: Received $227 million for its role.
Morgan Stanley & Wasserstein Perella: Each pocketed $25 million.
Merrill Lynch: Earned $109 million for its financing role.
KKR: Took home $75–$100 million in fees from its investors.
Despite these staggering payouts, the deal was a financial disaster. According to a New York Times article, KKR ultimately incurred a $730 million loss on its investment, taking nearly 15 years to unwind their position.
Carl Icahn's Big Payday
One surprising victor in the RJR Nabisco story emerged years later: Carl Icahn. As discussed in our episode on Sumner Redstone, Icahn has a knack for capitalizing on high-profile deals. In 1996, when RJR Nabisco spun off its food business, Icahn seized the opportunity. By the time he sold his stock in late 2000, he had pocketed a staggering $884 million. Icahn’s involvement is a tale worth exploring in a future episode, as his influence spans numerous deals and corporate battles.
The Decline of the LBO Market
The RJR Nabisco buyout marked the high point of the LBO boom but also heralded its decline. The aftermath coincided with the collapse of the junk bond market, which had fueled much of the LBO activity. This downturn brought about the downfall of key figures, most notably Michael Milken, the so-called “Junk Bond King.” Milken’s exploits and eventual imprisonment are brilliantly chronicled in James B. Stewart’s Den of Thieves, a must-read for understanding how junk bonds reshaped—and destabilized—corporate America.
Wall Street’s Next Move
True to form, Wall Street quickly pivoted to profit from the chaos it had created. As LBOs and junk bonds fell out of favor, banks and institutions began earning substantial fees from “fixing” the very companies they had burdened with debt during the takeover boom. This cyclical opportunism only deepened public disillusionment with financial markets and the banking elite.
The Main Players: Where Are They Now?
Ross Johnson: After resigning, Johnson started a small consultancy but never regained prominence. He passed away in 2016 at the age of 85.
Peter Cohen: Ousted from Shearson in 1990 with a $10 million payout, Cohen went on to establish an asset management firm that achieved moderate success.
Henry Kravis & George Roberts: KKR survived the LBO crash and remains a powerhouse in private equity. The firm went public in 2009 and boasts a market cap of $53 billion. Kravis and Roberts, each worth $8–$9 billion, stepped down as co-CEOs in 2021 but remain influential figures.
Legacy of the RJR Nabisco Deal
The RJR Nabisco saga is remembered as the pinnacle of 1980s excess, exposing both the ambition and the recklessness of the era’s financial elite. Barbarians at the Gate immortalized the deal, offering a window into the cutthroat world of high finance, where billion-dollar decisions hinge on ego, ambition, and cutthroat competition.
This story isn’t just about one company—it’s about a transformative period in corporate America, the reverberations of which are still felt today.
What stands out most in Barbarians at the Gate is how avoidable this entire saga could have been.
It all began with Ross Johnson’s bruised ego. Feeling undervalued by the stock market was a personal blow that he couldn’t let go. Combined with his restless nature and penchant for shaking things up, Johnson set the wheels in motion for the chaos that followed.
Once the LBO process began, it might have concluded relatively quickly—and with far less drama—had Peter Cohen and Henry Kravis found a way to collaborate early on. Instead, the deal devolved into a contest of egos, fueled by testosterone, gossip, and petty rivalries.
What’s remarkable is how these so-called “masters of the universe,” as Tom Wolfe famously described them, fell prey to the same flaws as anyone else. For all their intelligence, wealth, and power, they allowed personal grudges, perceived slights, and the relentless need to come out on top to cloud their judgment.
Ultimately, what may have been a failure in business terms became a gift to readers. The missteps, rivalries, and sheer spectacle turned this ill-fated deal into one of the most compelling business stories of all time. Sometimes, the best tales come not from flawless execution, but from glorious, ego-fueled chaos.
Disclaimer
Each article is grounded in extensive research from a range of reputable sources, which can include written articles, books, videos, and podcasts. The specific types of sources may vary depending on the topic. I compile this information into a detailed document, typically around 6,000-9,000 words, to serve as a rehearsal script for my podcast episodes. My goal is not to produce a polished article but to create a working script that structures my thoughts for the episode.
To refine this script, I use ChatGPT with carefully crafted prompts, ensuring all facts and figures are accurate while preserving my opinions and voice. This process helps transform my research into a script mainly, but also an article, that reflects the depth of my preparation while staying true to my perspective.
Sources
Barbarians at the Gate: The fall of RJR Nabisco By Bryan Burrough & John Helyar
https://www.youtube.com/watch?v=OtKizreanP0
https://www.youtube.com/watch?v=e6jdCSX3DY4&list=PLlm_ndk9SoTHgAvMUkIOJI_o4du3Cy2HF&index=3