Barbarians at the Gate: Is This The Best Business Story Ever Told?

Welcome to Great Business Stories, and today's episode is called Barbarians at the Gate.

Is this the best business story ever told?

Well, it's definitely my favorite business storybook.

It's a riveting account of a leverage buyout of the tobacco and food joint, RJR Nabisco, in the late 1980s.

The story gives a great insight into exactly what leverage buyouts are.

We learn how Henry Kraivis and his cousin, George Roberts, formed the legendary LBO firm, KKR.

We see how banks and LBO firms manage to profit handsomely, even when deals go bad.

And we see how industry titans end up playing second fiddle when they open their doors to the sharks on Wall Street.

It's full of drama, rivalries, big egos, and lots and lots of money.

And we hope you enjoy us.

Morning, Caemin, how are you?

Morning, Keith, how's it going?

I'm very good, thanks, very good.

Really excited to talk about this particular story.

It's a story that you and I have talked about and read about for very many years.

Revisiting again was exciting and entertaining.

What sort of made you suggest this particular one yourself?

I recently read a great article by Brian Burrow.

That just got me thinking, oh man, I remember him, he did a book called Barbarians at the Gate, which was my first, I think, business book that really grabbed me.

I'd say after reading it for a second time, it's still my favorite business book.

Now, he co-wrote it with a guy called John Helliar.

It's just a rip-roaring page-turner.

I love this.

I love it.

It's an exciting story.

You really become invested in the characters.

They feel very human.

For me, it felt a bit like reading historical fiction in a way, in so far as the real events, but they felt very human.

So I think it could as to the writing in the book, we'll be getting into the events in a minute or two, but the book itself is fantastic.

Great.

It's the pace they put into us as well, because for our listeners who aren't aware of it, it's about a leverage buyout that happens back in 1980s, where a leverage buyout firm called KKR, Colbert Kraivis Roberts take over our bid for this tobacco and food company called RJR Nabisco.

But what the writers do is they inject it with so much pace, you really get a feel for all the late night deals, the panic, the drama, the rivalries, they paint such a good picture and they really do suck you in.

So for the people who are listening to this podcast, we're going to go through the story and give you an idea of what the story is about.

But even after listening to the podcast, I would definitely say to anybody who's interested in a business story, go buy the book.

It's a fantastic route.

Yeah.

And I was speaking to somebody during the week about it and they're saying, oh, I think that's required reading on a certain course.

So it's made its way into academia as well as a fantastic case study or example of, you know, leverage buyouts and case study, a lot of things, but we can get into that there.

Yeah.

I read that your man, that Ross, Too Big To Fail, Andrew Ross Sorkin, he's got that down as his favorite business book as well.

I'd say with a lot of people who are into this show and are into business stories, it is the book.

Yeah, it is.

So maybe we should start at the beginning and who RJR Nabisco are then.

So maybe that's probably hard to kick off.

And then as the story builds up, we can delve into the big personalities.

Yeah, RJR.

And again, the book goes into way more detail than we go in here.

It's a tobacco firm in North Carolina.

They were the company behind the Winston Cigarettes and Bay.

The book really paints a great picture of the foundation of the company, the guy who founded this, how he built the community around the company.

And after reading the RJR story, I'm tempted to go, we got to do an episode on RJR.

It in itself is such a big story.

And I suppose taking it back to the main characters, because there are some big characters in the story.

And the big characters aren't really the RJR guys.

The big characters start with the guy, F.

Ross Johnson.

Yes.

He's the guy who takes over RJR.

But I'll just jump back a little bit to tell you a bit about who Fred Ross Johnson.

Ross Johnson is what he was called.

He was a guy who was born in Canada.

But for me, he definitely comes across as this all American kind of guy.

Backslap, Joe, what is the make of him?

I certainly felt I didn't like him as much on the second read.

I thought he'd be a great guy to have a point with or a cigar, which he seemed very fond of as well.

But I think the hubris, it's impressive his journey, right?

So he came from I wouldn't say backwatering Canada necessarily, but he had a huge career, standard brands, I think it was he was in right just before joining RJR Nabisco.

So he's a food guy, a marketing guy, he's super smart, he's charismatic, he's a loyal team of kind of people behind him.

Yes, the Merry Men they call them.

The Merry Men.

But at the same time, you're thinking, oh, God, this is one blingy guy.

Blingy is definitely one thing that describes him.

As you said, he started off in Canada, moved up the ranks in these food companies, a company called Standard Brands, even the name, I suppose that went back to the 60s or 70s, calling your company Standard Brands.

Yeah, throw it back to Standard Oil, maybe.

Yes, I suppose so.

And you're saying the blingy thing, when he got to move up the rungs and he was a bit of a late bloomer.

He was about 42 when he got to the top of Standard Brands, but as soon as he got into the top role, like he doubled his salary from 200,000 to 480,000, he started joining country clubs.

They got company apartments.

He doubled the salary of all the executives that he brought in.

He got rid of all the executives and brought in his own guys and gave them huge salaries.

And the book describes it as him and his merry men having these kind of just frat parties every night where they drink late into the night, drinking scotch and just bouncing ideas around the place.

It sounds fantastic if you're a merry man, but if you were a shareholder with some sort of huge responsibility, and when did he join then?

He had this sort of theory of creative chaos.

He believed that you had to keep things moving around all the time.

Basically I got the impression that he just got bored very quickly.

So he was with Standard Brands, he got bored, and he decided to do a merger with Nabisco, and that happened in 1981.

1981, and Nabisco was the company behind Oreo and Ritz.

So they did a 1.9 billion stock swap, and he became president but wasn't the CEO, because Standard Brands were very much the smaller company at that stage.

But he did what he was always good at doing.

He schmoozed with the board.

He always got the board on his side.

He got on very well with the CEO of Nabisco as well.

The guy in Nabisco was very impressed with him.

He was a good businessman.

One thing he did do with Nabisco was, he realized that if their brands weren't number one or two in the sector, he was going to sell them off.

Apparently, he was very good at selling.

He didn't really like buying stuff.

No, but he loved selling them because he used his charm, they were saying, and also they said a mixture of charm and also talking down previous management, saying, yeah, these guys who were running it did a crap job of running this brand, but you'll do a much better job.

And he managed to get really good prices for the companies he sold.

And also then there was a big, they describe it very well, a cookie war between Procter and Gamble.

That was fascinating.

Yeah, soft cookie war.

Exactly.

And he won that cookie war and that eventually got him to the top of Nabisco.

And again, after a few years in Nabisco, he just got bored and out of nowhere, he got a call from RJR, tobacco companies at that time, you can imagine, were coming under big pressure because of litigation coming down the road and they need to diversify big time.

And Philip Morris had diversified by buying General Mills.

So RJR thought, okay, we got to buy a food company.

They looked around, they saw Nabisco and the CEO of RJR at the time, a guy called Tylee Wilson rang up, got together with Johnson, and Johnson, always looking for change, drugged in, they did a 4.9 billion deal for RJR bought Nabisco.

So that's how he got in.

And that's him in.

He's almost immediately restless then.

So he starts filling that company with loyal people who were part of his previous business or promoting his own team from the merger, but restless.

Just I think you're right.

I think he just, he has to be a constant side of trucks.

He does.

He's either selling or it just would get bored super easy.

He does.

He's out in the golf course an awful lot with all his celebrity buddies.

He does an awful lot of that.

He is very much a good time guy.

I suppose back then you would have, they would have called him very much a man's man, but you're right.

I would say to deal with, he would have been very hard because he shuffled people around like the new time.

Like you'd be in a role, happy in the role.

And next minute he would just move you off to a different town, to a different city and say, go off.

That's right.

He moved to headquarters as well.

Actually, he moved everyone to a new town, right?

He did.

But that's, he wasn't CEO at this stage again.

It was his sort of ability to schmooze with the board.

What happened was the CEO of RJR at that time didn't get on with the board as well as Johnson did.

Johnson was CEO and president and managed in his deal with RJR Nabisco to negotiate that he kept all his perks, schmooze with the board.

And then all of a sudden, at a board meeting, the board found out that the CEO was hiding the fact that they were developing a smokeless cigarette called Premier.

He was hiding the fact from them because he was afraid of leaks, of course, and the board found out that he was hiding this fact from them.

They went nuts.

Johnson used this opportunity to put the cat among the pigeons.

He rang up a few board members and told them that he was going to leave.

That's right, that he had gotten an offer from the UK food company, Beecham.

He knew exactly what he was doing.

He knew that his CEO, Tidy Wilson, was in big trouble.

He announced he was leaving, then they thought, hold on a second, we don't like this CEO.

The guy who's second in charge is talking about leaving.

Let's get him in.

Within a matter of weeks, they got rid of the CEO and they put Ross Johnson.

The king is dead, long live the king.

Exactly.

And now you have Ross Johnson in charge of this huge tobacco company who had just thrown off, I think they were saying something like 1.2 billion in cash every year.

Yeah.

And the premier is this sort of innovative smoke a cigarette, right?

Yeah.

So it's interesting.

I remember reading about it originally when I read the book and I thought, this is interesting.

It's a smoke a cigarette, it heats the tobacco, but doesn't burn it.

And there are some sort of stories in the book where people go, this thing stinks, and it looks like a pedigree.

But actually, when you think about the rise today of vaping, okay, it's not traditional tobacco or whatever, but it's way ahead of its time as a pioneering idea.

I think the other interesting thing is, okay, that was an opportunity for Johnson to essentially ascend the throne, all right.

So, Premier was the making of him in a way, but it wasn't as if he did give a care in the world about Premier.

He was a big driver of it and a proponent of it even going forward.

He was.

This is one thing, even back in his standard Brands days, he was always, and those late night parties with his merry men, he was very much, I think it was partly because he was so restless.

He was always looking for new ideas and they said it would standard Brands in his career there.

They brought out loads of products.

Some of them were total crap and some of them were good.

He was very much an ideas man.

And I think you're right.

He did see Premier as this could be the big product.

And he was right.

He was way ahead of his time.

Yeah.

But the Premier Cigarettes, as we'll probably talk about later, it was too early in development.

It just, they didn't have it right.

It wasn't a good product.

And what they did, they couldn't make it a good product.

And I suppose in some respects, there could be an argument that he had underestimated the links, the depths of the emotional connection with the core tobacco product itself.

So there was a lot of, you'd see references in the book that he was a tobacco man.

He was born in the town.

He grew up in the town.

He was passionately connected and understood tobacco.

Yeah.

So you can imagine the shock of people producing this completely innovative product that potentially threatened the core product.

There must have been a huge amount of resistance as well.

Oh, I would say so too.

There was even the story that in RJR was based in Winston Salem and there were signs around the town that you say, thank you for smoking.

So smoking was integral to the whole community and business and town around Winston Salem.

So yeah, you're right.

A disruptor like the Premier was fully anathema to what we were all about.

Yeah.

Wasn't there a weird idea that they were going to market a particular brand of cigarettes to black people?

So they were developing a brand, an ethnically targeted brand.

And when I read that, I thought, this is just bizarre.

Yeah.

I forget that part now.

I don't remember that part at all.

Yeah.

So they had all of these sort of hair-rained sort of schemes.

And maybe this is some sort of flight of fancy as well.

And one of these late nights that the guys are kicking around new ideas.

But there is certainly a theme of mad creatives product innovation.

Yeah.

Some of it lands, some of it doesn't.

But the premier one is interesting in and of itself because it hung around for quite a while, like a proverb in a bad spell, which is probably an attribute of a two.

Yeah.

Apparently it smelt like burnt laces when it was small.

Yeah, not a sunny point, really.

You have Johnson in to this emerge company.

He's king of ale.

How soon did it take him to get restless again?

First of all, he started spending like crazy.

They have some of the figures I have here is that he now has loads of money, more money than he ever had.

To give you an idea of the kind of money he was spending on just frivolous stuff, he used to have these golf pro-ams and he had these golfers on his roster.

He was paying Fuzzy Zeller, the golfer, 300,000 a year.

He was paying Ben Crenshaw 400,000 a year.

He was paying Jack Nicklaus 1 million a year.

He even had, he was a big football fan.

He had OJ Simpson and he was paying him 250,000 a year.

Now, this was just so that they would turn up as one or two pro-ams a year.

And some of them even do that.

Jack Nicklaus, they said, was particularly difficult.

And they, it was nearly a job just to convince them to turn up at one.

And they were paying him a million a year.

So that's the kind of money he was thrown out.

He, they, RJR, when he became CEO had six corporate jets and yet Johnson bought two more Gulf streams that cost $21 million each.

And then had a $12 million hanger built to house all their jets.

So he was just throwing money around.

He again, schmoozing the board.

He raised their, the boards, I suppose it's not a salary, but what their compensation to 50,000 a year allow them to use jets.

And as you said, also managed to convince the boards to move the headquarters.

Now manufacturing stayed in Salem, Winston, but they moved the corporate headquarters to Atlanta, which caused uproar in the community.

But he just didn't like small town life in Salem, Winston.

There was too glamorous for that.

Yeah.

Yeah.

So that's the stage we've said you've got Ross Johnson, King of the Hill, RJR.

And now we get to the Wall Street element because we're talking now about, this is around the mid eighties and throughout the late seventies, early eighties, LBOs are leveraged by us had grown massively fueled in part by cheap money in the form of junk bonds.

And for any of our listeners out there who want to read more about junk bonds, James B.

Stewart has a fantastic book out called Den of Thieves, which talks about Michael Milken, the junk bond market and how that sort of fueled this huge merger and acquisition and LBO markets in the seventies, early eighties.

So a leveraged buyout for people who don't know is really where it's the precursor to private equity.

It's where one party borrows significant funds to acquire a company.

And the thesis behind the LBO is that many of these companies, they say are too fast and that new owners would come in and make the company leaner and more profitable.

And while this might have happened on a few occasions, more often than not, the new entity is grappling with a huge amount of debt that was used to buy this company.

And the debt often necessitated asset sales, budgetary cuts in areas like product innovation, research and development, which causes once innovative and expanding companies to channel profits into debt repayment.

Now an awful lot of the time in instances, the debt was also used to make acquisitions so that the company that was initially bought would acquire complimentary businesses.

And so while the company grew, it didn't grow through research and development or product innovation, but it did grow.

And this allowed the investors who put up the money initially, and they'd only put up a fraction of the money because an awful lot of the money was actually borrowed.

But after three to five years, they would cash out and make a lot of money, but the company would still be left with an awful lot of debt.

And it was all funded, as I said, by cheap money in the form of junk bonds.

And Johnson, because RJR would look like a prime deal, it would look like a big target and in the book, they do say that Johnson would get about 40 messages every day and about 20 of those messages were from these Wall Street bankers pestering him to do an LBO or to do a merger and acquisition with other companies.

And the share price was low at this point as well.

So this seems to be an obsession, he took it quite personally and felt fundamentally the success that they were having was not being appreciated by the wider world.

That's it exactly.

In the book, they say that an awful lot of CEOs see the share price as nearly like a report card.

And it's a reflection on how well or badly they're doing.

And you see what happens here is in 1987, their share price, I think, was up around the mid sixties, which was okay, but wasn't great.

But then you had the 1987 crash in October and their share price went way down to the low forties.

And no matter what Johnson could do, he tried to do a buyback.

He put about 1.1 billion into a buyback to buy 20 million shares.

Didn't budge the price.

They brought out results the December after the October crash, which showed a 25% increase in profits and also showed that 60% of their business was coming from the food side, not the tobacco side, but it still didn't budge their share price because they were the tobacco side of it.

They felt was just dragging down the share price.

And you're right, Johnson, this was driving Johnson nuts.

So it seemed to be an obsession with them.

And that with the opportunity and the fashion for LBOs brought him into an exercise of investigating it internally, investigating the options for the culprit.

Yeah.

Yeah.

He had his own sort of financial wizards and they do describe it in the book.

One or two of these guys that worked for him that seemed to be these guys who go into back office for like months at a time and come out with big beards and crazy hair with all these figures.

And he had them do these exercises for a year or two, looking at all options.

He even went as far as to go to meet with Philip Morris, who owns General Mills and Nabisco, and proposed a merger between General Mills and Nabisco to form an $18 billion company where they'd have equal shareholding, I think 37.5% each, and they'd put 25% of the stock on the markets.

But Philip Morris turned that down.

So yeah, he was grappling with everything.

And he was also hopeful that maybe the premier cigarettes would be the savior of their company.

But the book has a really good passage where he's getting all this market research, but he's still starting to think, no, this will be okay.

But then he brings all his golf buddy friends away for a weekend and he introduces them to the premier cigarettes.

And there's a very funny few pages where all his golf buddies and all these celebrities are dragging on these premiers and they can't even get a drag out of them.

And when they do get a drag out of them, they say, this tastes like shit, Ross.

It's only then that he realizes, okay, not only is this not going to bring up the share price, it's more than likely going to harm the share price.

So then he goes, all right, I got to look at this LBO thing.

Now before this, before he actually jumps in and does the LBO, he had met a year previously with Henry Kraivis and a friend of his who had done an LBO, a guy called Don Kelly, who had done it in LBO, his company Beatrice.

Oh yeah, the foods company.

They did the biggest LBO at that time worth something like 6.7 billion.

And he had told Ross Johnson that he did it with Henry Kraivis of KKR and to meet Henry, Henry's a great guy.

And Johnson went to Henry Kraivis' Park Avenue apartment.

And they talk about in the book about Kraivis' Renoirs and bodies and the opulence of this place.

And Johnson was impressed with Kraivis.

He knew that Kraivis was a serious player, but he didn't want to do the deal because as he said at the time, he had a good life.

He knew that an LBO would mean seeding control and would mean all those perks and all these golf programs and all these jets might go by the wayside.

So he didn't want to do it.

Yeah, that's interesting.

I thought about that somewhere in his, I wasn't trying to overanalyze the guy, but I wonder was that sort of reluctance to compromise his lifestyle, a contributor to the events that unfolded later on, maybe subconsciously.

Yeah.

I definitely think, and we'll get into this, but I definitely think the way that he extracted himself from negotiations at key times and the negotiations kept on falling true.

And we will go into that.

You're going, why was he doing that?

And he was surrendered.

Yeah.

And I wonder, maybe he didn't really want this.

I know.

I really, when you put it like that, because it was part of my notes when I was going through this, I kept on asking, why does he keep letting other people negotiate on his behalf and nearly allowing the deals to fall true?

But anyway, look, we will get to that.

So Kraivis himself then is an interesting character.

Kraivis is a very, you could write a book about him almost.

Well, the great thing when we do these episodes, Keith, is nearly in every episode we come across three or four characters within an episode that I go, we're going to have to do an episode on this guy.

This company and Kraivis, you have to do one.

So Kraivis, a small diminutive guy, very intense guy, 43 years old at this time.

And he had started off in Bear Stearns with his cousin, George Roberts.

And they had come under the tutelage of a guy called Jerome or Jerry Kohlberg.

And the three of them were working in Bear Stearns.

And one of their sort of side projects was what was called bootstrap deals.

And this was the precursor to LBOs.

And we described what an LBO was.

And they did this for family companies that didn't want to get into the bother of inheritance taxes.

So they would put together a deal whereby they would get investors to put in a small amount of money.

Then they would borrow a big amount of money.

They would go to the family company and they would buy them out, but let them have still a control or a share in the company.

The family could continue running the company.

The founder would be left with a nice nest egg to compensate.

Exactly.

And Kohlberg and Kraus would then acquire complimentary companies, grow the company and then the investors could cash out later on and make money.

And they called them bootstrap deals and they were the precursor to LBOs, which is the precursor to private equity.

And they were doing quite well on this little side thing within Bear Stearns.

So they went to Bear Stearns and said, we'd like to set up a group within Bear Stearns to LBOs and Bear Stearns said no.

So I think it got quite frosty and they eventually left and they set up KKR, Kohlberg, Kraivis and Roberts.

And by the time Johnson enters the fray, Kohlberg was gone.

He was much older.

And much more conservative as well, I think.

Much more conservative.

Yeah.

The two guys were the young Turks, the kind of hotheads.

Although I think one thing you can safely say is that George Roberts wasn't a hothead.

He comes across as very calculating, very able to extract himself emotionally from any deal.

Whereas Kraivis definitely seems like the more driving force, most definitely, but also much more emotionally involved in this deal anyway.

I had a slightly different impression, Roberts, that it was more of a simmering sort of heat.

So when he felt he was been messed around or taken advantage of, or maybe to a certain extent, there was a bit of breedmanship going on.

He seemed to be simmering with temper in the book, where Kraivis was a more volatile sort of character.

Roberts seemed to be on a more steady boil, really.

That's true.

All right.

They do detail a passage there where Roberts meets with Ross Johnson and Ross Johnson is smoking his premier cigarette.

If you say Robert, you could see that he almost wants to throw Johnson out of the window.

Getting back to KKR, so they set up in about 1977, started off, they raised 30 million and they grew the LBO business and within the space of I think six or seven years, LBOs had increased tenfold.

By the time or even just a few years before they met Ross Johnson in 1985, they had raised 5.7 billion in that year alone, which gave them firepower to make to about 45 billion.

So they had grown the LBO business, they were the number one guys when it came to LBOs.

And Kraivis had met Ross Johnson, he was looking at RJR, Ross Johnson had said no.

But then a year later, after the stock market crash, after the share price was dwindling, when Ross Johnson said, yes, I want to do an LBO, he didn't go back to Henry Kraivis, which was a fatal mistake.

He went instead with Peter Cohn, who's the CEO of Shearman, Lehman, Hutton.

They had an American Express relationship.

This is one of the reasons.

The CEO and chairman of American Express was a guy called Jim Robinson, and him and Ross Johnson were best pals.

The book describes them spending weekends together, their wives spending weekends together.

They were tight.

And so he was CEO of American Express, Owen Shearson, Lehman, Hutton.

I'm guessing that's why Peter Cohn got the game.

There are other reasons as well, though.

Shearson were not in the LBO business and they really wanted to get in there.

So because they were desperate to get in, they gave Johnson terms that KKR would not have.

They gave Johnson and management a veto.

So in other words, after the LBO was done, they're saying to Johnson, okay, you have still a 100% veto.

You still call the shots.

Whereas any deal that KKR did, because they were the new owner, of course, they call the shots.

Now they'd leave management in place and if management were doing their job well, they'd leave them do their job, but KKR still called the shots.

Shearson gave Johnson all the sorts of control, which you'd never hear.

Shearson also agreed a management deal with Johnson that it was crazy.

I saw figures in the book, like some like 18.5% that they'd get some like 2.5 billion payouts split between the management and Johnson would have oversight over who got what.

It did vary.

I never got conclusively exactly how much money, but it was a crazy man.

The details, there was revisions to it as the story goes on as well, which makes it a little bit hard to keep a grip on it, but it seemed, face value, crazily generous to the management team who were very small in number originally.

So there was a very small number of people who are going to benefit from this.

But just to talk a little bit about the LBOs before this, traditionally, they would have been, the KKR ones, at least the management team would be a crucial part of the go forward.

So they would try to structure something containing or with the management team as part of it.

Was Johnson trying to be the management team led as opposed to a KKR situation where it will be KKR led with the involvement of the management?

I'm guessing they would.

The management being involved is crucial though.

And that's why Shearson felt that they were very much in the driving seat because they did have the management on board.

But yeah, it very much seemed to be, whereas an LBO is usually done, as you said, with the likes of KKR taking the driving seat.

This seemed very much to be the management in control.

But as we see later, Shearson did take over negotiations in a certain way.

But the authors like in the LBO compared it is like buying a second-hand car.

And when you're buying a second-hand car, you need to go down, meet the guy who's selling it, get a feel for him.

You got to be able to kick the tires, you got to be able to look under the hood, maybe bring a friend with you so that they can look under the hood for you.

And you got to be able to get all that information together so that before you buy the car.

Yes.

And within LBO, when you have the management on board, you're able to do all that.

You're able to look under the hood and see all the figures.

You're able to see what their plans are.

You get a real good idea of exactly how much you can.

Yeah, you're buying it from yourself almost in a way.

Exactly.

Exactly.

And KKR, without the management on board, are really flying blind.

Yes.

So Johnson decides, this is the moment we're going to lodge a bid and declares this publicly and that essentially results in a slurry of competitive bids emerging who want the same company and same assets that he does.

Yeah.

He meets with the board, tells the board that they're thinking of this.

The board kind of forces hand and say, what price you're looking at?

And yeah, the price is 75.

As soon as he does that, the board makes a public, we've been offered 75 per share for the company.

And, when Kraivis hears this, he had three emotions.

He had anger that he wasn't asked yet to come on board.

He was surprised that Shearson was the lead banker on this because as he said, they had no experience and he was astonished at the price of $75.

He knew it was way too low.

So as soon as he felt that he was entitled to that idea.

Did you get that impression?

I did.

I think he felt this was my idea, even though it was very common, that he fully expected to be in the driving seat of this deal, not second fiddle to Johnson certainly.

He didn't seem to have much regard for Peter Cohen or for Shearson.

It was very much the impression, we're the LBO guys here.

This is the biggest LBO ever and we should be the guys doing this.

So straight away he made it known that he was not going to sit on the sidelines.

Cohen hastily set up a meeting with them with Henry Kraivis.

The book describes it as very tense and Kraivis puts three options to him.

It's A, we can get into a bidding war, which neither of them really wanted because it could end up in a peric victory whereby the price goes so far up that the company said it was so much debt that none of their investors will make any money from it.

Two, they could join forces, which neither of them really wanted to do either because Kraivis thought we're the top dog here.

I'm not going into partnership with anybody.

Cohn thought we've got the management on board.

We don't need you guys.

So that was the second option.

And then the third option, Keith, I could never, third option was Shearson, you do this deal, but then you sell us Nabisco.

And that was like, yeah, that makes sense.

You don't have to fight over this, but it was thrown aside and it was brought up later on in one of the negotiations.

Again, I think George Roberts said we could always just buy Nabisco after a deal is done.

And it was never really followed true.

No, and it did make a lot of sense, actually, for everyone, because tobacco business seemed to be a weak point for KKR in terms of their understanding of how that business worked.

The other impression I got from them is when they got involved in a company or an industry that were very operational, that were right in there and the sick of things in the weeds with an expert team working outside the management team.

It seemed to me that they knew the food business, obviously, tobacco was a bit of a mystery in terms of the relationship with retailers and having loads, orders in a year, etc.

We can maybe talk it.

There's a couple of characters in there as well.

There is, but it made so much sense.

Like they already had just bought Beatrice, a huge food company, so it was a perfect fit.

And I just don't understand why that part of the deal, like it was put out there and you're going, okay, this is the perfect fit.

But anyway, it didn't happen.

Yeah.

I suppose the tobacco business has thrown off so much cash.

There was that.

That they want to use that sort of as an engine of growth.

But this is where the book really excels because now we're coming into the stage where now the frantic late nights are starting to happen, where all the bidders are starting to get all their advisors together and my God, was there a lot of advisors?

It really, it was crazy.

So after Kraivis meets Cohen, this on a Friday, he decides, I don't trust this guy.

I don't think we're going to do a deal with this guy.

I don't rate this guy.

So I'm going to get my own guys together.

So he gets all the KKR partners together.

He gets all these outside advisors together over the weekends, burning the midnight oil and over the course of the weekend, through a mixture of mixed signals, perceived slights and good old paranoia, Kraivis gets the impression that Shearson and the board are going to try and seal this deal by Monday.

So him and his advisors say, okay, we're going to put in a bid on Monday morning.

They don't say for definite, they say, let us sleep on it.

Roberts and Kraivis, who as part of the way they run their company, if both of them agree to a deal, they don't go ahead with it.

So Kraivis and Roberts, with their advisor, talk about it and they break it up on a Sunday night and say, we're 75% certain we're going to go ahead and put in a $90 deal on Monday, but let's just sleep on it.

What happens is while Kraivis is in bed that night, one or maybe two of the outside advisors who was in those meetings with him over the weekend leaked to the press that Kraivis are making a bid for $90.

So what that advisor, whoever leaked it, has done is they forced Kraivis' hand.

So when Kraivis wakes up on Monday morning, he is probably going to launch a bid, but he reads in the newspapers that he already has launched a bid for $90.

So he's propelled into action then.

Not only is his hand forced, but he also has to deal with the fact that he's got a leaker on his deal.

And in the book, one of the prime suspect is a guy called, and this is a guy we're definitely going to cover, is a guy called Bruce Wasserstein.

Or as he was known back then, a guy who's called Biddimup Bruce, because he was known for bidding up the price as high as he could, because if he took a percentage of the fees, then the higher the fee, the higher the...

Yeah, there's a lot of people at the trough in any of these deals.

So people are compensated based, but there's almost a perverse disincentive in the way the bigger the deal gets.

So the higher the price they pay, the more slice of that they get.

Yeah.

So, Bidemort Bruce was the main suspect, but Kraivis would never...

He denied it.

He denied it very strenuously.

And he is an intriguing character that we will cover at some stage.

And that bid then caused panic in the Johnson Cup.

Caught him totally off guard, didn't it?

Yeah.

Yeah.

So that's the...

They were speculating and trying to figure out what was going on.

This bid came in and the reaction was interesting.

But actually at that point, it was make it earlier.

Was there that sort of sense within Johnson that he was starting to lose his appetite for the police at 90?

It shows Johnson going through highs and lows.

I think at times he reveled in the fights and reveled in the drama.

And then at other times, he just went, fuck it, clear.

And he really did seem like a very...

I don't know.

I don't know if the guy had ADHD or if he was just so laid back that he just didn't care because I don't know, it's hard to pin him down.

But at $90, he did say to Cohen, this is going to get crazy.

You have to meet with Kraivis again.

So they met again.

And this is, I think, the second of four meetings.

So they met again, a very frosty meeting, and they can come to terms on this meeting.

They leave the meeting, and then Kraivis later that day gets in contact with Cohen and gives him an offer of, we're going to do the deal, KKR, but you know, we'll give you $125 million and you can have the chance to buy 10% to the company.

And this is just like a red rag to Cohen, it's like an insult to him.

So this just drives him nuts.

Now in fairness, in the book, we might be painting it like Kraivis has been very insulting to Cohen, but Cohen does seem to go into these meetings sometimes very aggressively.

Yes.

And you're going, man, tone it down a little bit here.

But then again, I get the impression maybe Cohen didn't necessarily want KKR on board.

That's interesting.

Yeah.

And the other thing, I guess, when the dust settles and years afterwards, all of these people end up in bed in further deals.

Yes.

One way or the other anyway, and it's a tiny community.

It's a tiny community.

Cohen and Kraivis, like you read in the book, they met each other on a skiing trip the year before.

They weren't best friends, but they knew each other pretty well.

And an awful lot of these people know each other.

And it's like they just, they're nearly like professional sports stars.

They're just, hey, we're Pali, but now we're on this team.

So we got to play against you.

But now next year we might be on your team and we play with you.

It was very much like that.

But at the same time, they did get really annoyed with each other and there were egos clashing and testosterone bouncing all over the place.

And I got the impression that Cohen, he really needed this deal for Shearson.

One of the problems with Johnson was that Johnson let Cohen go into these meetings on his own, thinking that Cohen was doing the bidding for Johnson, not realizing that Cohen's real aim here was to make sure that Shearson was the top dog in this deal.

That was his.

Aim.

Yeah, and he wasn't thinking about the good of necessarily the management deal.

That Johnson is starting to have some concerns around Cole.

Yeah.

And why can't everybody just get along?

I know, which is reasonably naive and such a cutthroat sort of world, but maybe he was right.

Maybe there was a way to satisfy everybody.

Every time you got to the stage in the book where all the advisors got together and they tried to hammer out a deal, you're just going, there are too many people in the room here.

There are too many people who want their voices to be heard, too many egos, too many people who had history with each other, and there are 20, 30 people in these smoke-filled rooms fighting and arguing.

And you're going, why can't the top guys just sit down and hammer this out?

Which is what happens then eventually.

And then other potential deals and shapes of deals and shapes of bids starting to firm up as well?

Well, you did.

Okay, there was another bidder, but they come into the deal later.

Kraivis put out this deal.

Cohen just said, no bloody way.

I'm not taking back seat in this and taking 125 million payouts.

He decided we're not doing this deal.

We're going to do this deal on our own.

We don't need Henry Kraivis.

And he goes off and they decide, you know what, we're going to put in our own bid.

And they bounced this around for a long time.

But while they're doing all this, Henry Kraivis comes to the conclusion that if this is going to be a bidding war, he really doesn't have a good idea of how much the companies work.

So Kraivis comes around to the idea eventually that, you know what, we need management on board.

True, Linda Robinson, who is one of the characters who comes out very well in the book, she's the wife of Jim Robinson, the head of American Express.

She's a sort of a PR person, isn't she?

Yeah, very powerful PR person, has her own company.

She bangs all their heads together and she gets Cohen, Kraivis, Roberts, Johnson and her husband Jim Robinson, who's Cohen's boss.

She manages to get them into a room together.

And within an hour, they have the bones of an agreement sorted.

They come to an agreement whereby both of them will do the deal together in a 50-50 deal.

They'll have a 50-50 split of the boards, Shearson and KKR.

They'll take 50-50% of the stock with Johnson's share coming out of Shearson's share.

So they iron out.

Sounds like a pretty good deal.

They have all the details sorted out and they decide, okay, now let's just get your guys together in a room to iron out the finer details.

And again, this is where I don't understand.

Johnson removes himself from the deal and allows Cohn and his guys to go back in and negotiate.

And it all falls apart again, because it comes down to some stupid little intricacies whereby the lead bank gets their name on this thing called a tombstone.

Yes.

The tombstone is this part that announces the deal and is put in all the sort of major business publications.

And it's very important that your name is on the tombstone.

But Shearson is doing the deal with Solomon.

They're the bankers who are helping them finance this deal.

And KKR, their financiers are Drexel, who are the guys who have all the junk bonds.

And Cohen had agreed with KKR that Drexel would get their name on the tombstone.

But when it comes down to the nitty gritty, Solomon refused point blank that this is going to happen.

The deal falls apart.

Johnson and Kraivis aren't aware that the deal is falling apart.

And Shearson, without any say-so from Johnson, puts out a bid for $92.

Blind sides everyone.

Johnson and Kraivis hear that the deal is out in the public for $92.

And they knew nothing about it.

They thought the negotiations were still ongoing and that everything was fine.

So the whole thing just gets torpedoed.

They did Shearson by putting out this bid, just saying, no, we're going on our own and we're not doing it with KKR.

And it's $92.

The whole deal blows up.

And so while all this is going on, the boards, of course, are coming under increasing pressure because all this is playing out on the public.

This is the biggest deal in corporate America.

And because of Henry Kraivis, he's got a very opulent and very visible lifestyle because his second wife is a fashion designer called Caroline Roam.

And they're very visible on the New York socialite scene.

So this is making all the press.

Time magazine had Johnson on the cover with the headline, A Game of Greed.

That's right.

Something like that.

I think it was a personification.

And it was effectively details of the management deal.

That was it.

And when the board read this, they're coming under increasing pressure.

So they're starting to turn against Johnson.

And also the fact that Johnson's initial bid of $75, Johnson and Shearson have now increased to $92.

It looks like he was just trying to steal the company on the cheap.

So eventually the board says, okay, enough of this.

We're putting a days on this.

They put a days, I think they gave all bidders, they said two weeks to put in your best bid.

And so you got KKR on one side, you got Shearson in the management on the other side.

And then as you said, out of nowhere, a bank called First Boston put together a deal as well.

And their deal involves some wealthy investors and also this company tracks, which means that effectively the total cost will be less.

Yeah.

So the company will be less indebted.

Exactly.

They give them a days and they say we want all bids by 5pm on this days.

And when the day comes now, what was this?

It was around, yeah.

So it was November the 18th.

The bills were as follows.

KKR put in a bid for $94.

Shearson put in a bid for $100.

And First Boston's bid was a bid, it wasn't a firm offer.

They suggested that if the board accepted their complex tax loophole proposal, then their bid could be $118.

So while the First Boston bid was unconventional, the board fearing litigation from shareholders had to consider it.

So they brought in an expert and the expert said that in theory, it could work, the First Boston bid could work, but it needed more clarity and details around funding.

So as a result, all bids were thrown out, and the board said, you all got to come back to us with new bids within eight days.

So that's where it was left.

And as I said, the book builds this up into a fantastic drama.

So what happens then is that everybody has dreamed, especially Henry Kraivis, and Kraivis has disheartened with the low bid, that they were so far below the Shearson bid.

Nobody really gives the first Boston bid anything, it's out of credence.

And so there's speculation that KKR won't make another bid.

And George Roberts, ever calculating, he says, maybe we should just play into the speculation.

Put that out there.

Yeah.

And they really play into it.

It's coming up to Thanksgiving.

Kraivis goes off on holidays with his family.

That's right.

Roberts goes back to San Francisco where he actually lives.

Yeah, he hates New York.

He hates New York.

And he hates Wall Street.

So Shearson are pretty confident that the first Boston bid won't amount to anything.

They're thinking KKR arrives.

So they increase their bid from 100 to $101.

That's how confident they are.

Pure arrogance.

Pure arrogance.

They think there's nobody left in this race.

Let's just put a dollar extra on to it and off they go.

And they were right about the first Boston bid.

It didn't really factor anymore.

They weren't able to get it together.

And there was too many political implications for this tax loophole.

But unbeknownst to Shearson, KKR, Henry Kraivis and George Roberts, they did forget about the bid.

They did decide, you know what, we will go away on holidays.

But in the back of their minds, they always thought, when we get back from holidays, we're going to have one more look at this.

And they did have one more look at this and they put in a bid for $106 and it was accepted.

The board accepted the bid for $106.

So you think, okay, game over.

But it wasn't.

Shearson refused to accept that they had lost and said, no, we're going to put in a second bid and you got to accept this.

And to force the board's hand, they put a bid for $108 and made it public.

And this is all a bit of a legal gray area because there wasn't anything legal to say that.

They couldn't put in another bid because they made it public.

They forced the board's hand.

So then the board are going, okay, we're going to give both the KKR and Shearson, you got 15 minutes to give us your best bid.

Okay.

So come back in 15 minutes with your best bid.

Now KKR thinking that Shearson's best bid was $108 said, okay, we'll match that.

Because they were pretty sure that the management with all the bad publicity around Ross Johnson, that they didn't want the management to come on board and that they liked KKR, the KKR were the good guys in this.

So they said, we'll match that.

So they put in a bid for $108.

Unknown to them though that in those 15 minutes, Shearson up their bid to $112.

But the management, there were still issues with the Shearson bid and it's a big complex here.

Yeah, it is quite complex.

Yeah, but I just tried to narrow it down in three very salient points.

First of all, KKR's bid had what was called a reset mechanism for their securities while Shearson's did not.

This meant that the Shearson's junk bonds were subject to market fluctuations.

So that was one thing.

And Lazard actually, the company, the bank that was advising the board had told the bidders that this will be taken into account, but Shearson ignored that.

Lazard had also told the bidders that the board would favor a deal that had left more stock with shareholders.

The KKR proposal had left 25% of stock with shareholders.

Shearson bid had only left 15%.

That was another thing.

And also the KKR proposal contained better terms and conditions for the RJR Nabisco employees.

So it was a stronger bid.

The Shearson bid was more lucrative, but there was issues with it.

So the board came back to only KKR, they didn't get back to management.

They said to KKR, can you do any better?

KKR said, $9.

The bankers, Lazard looked at both bids and said, given the thing with the securities with Shearson, we would say that the $109 is pretty much equal to the $112.

So all things being equal, the board said, okay, the KKR bid is the one we want to go for and KKR, they won.

Yeah, to be fair, I suppose in the interest of fairness as well, during this time, Johnson's been watered down.

So the management deal, so that deal that Time Magazine or whatever are putting out there and it's corporate group personified, he's taking a hit on that a little bit.

He's compromising on that.

It becomes less and less favorable to him over time to sweeten the pot overall.

He did.

And you got the impression that Johnson by the end just really did chill out.

He really was just throwing his hands up in the air and kind of going, whatever, guys.

And he was just joking around.

He really just, he's a difficult character to pin down because.

Yeah.

And the fight seemed to go out from that.

Yeah.

Almost as soon as, you know, the smoke clears, KKR emerges the winners.

It's like handshakes and I'm all.

Yeah.

Off with a $53 million payout.

Yes.

Happy out.

He set up a small consultancy after that, but didn't do a whole lot else.

Peter Cohn was a few years later, sacked from Shearson, got a $10 million payout and set up an asset management company that had some success.

But the deal itself, when you talk about, was the deal good?

This idea of they won the bid, but they didn't win anything because it turned out to be a bad deal because they did overpay.

I looked at how the deal worked out overall.

And those very good article in the New York Times, it showed that it took over 15 years for KKR to unwind the deal in full.

It got very complex.

But overall, this article suggested that KKR and their investors ended up losing about $770 million from the deal.

And they effectively broke up the company as is common enough as well.

It's a sum of chunks of it.

Yeah.

Yeah.

And actually who did make money from the actual deal, not out of the fees, Carl Icahn.

And we mentioned Carl Icahn before.

Yeah.

We got to do something on him.

He didn't know that.

Yeah.

He eventually made about $800 million from the RJR Nabisco deal.

But in the end, this was like a good few years later.

So he made some money out of this.

But in terms of the fees, in terms of the deal itself, didn't work out well for the investors or for the companies involved, but for the people who were involved in the getting the deal together, the banks that provided the loans for the deals earned $325 million.

Drexel who were behind KKR got $227 million.

Morgan Stanley and the advisors like Wasserstein Pirella, they got $25 million each.

Merlinch got $109 million for their financing and Kohlberg and Kraivis pocketed for their fee somewhere between $75 million and $100 million.

So a lot of money got splashed around considering it turned out to be such a crappy deal.

Yeah.

It's a bit like that analogy of, you know, in the gold rush, people who made a lot of money were the guys selling the shovels and picks.

It's the bank guys who were selling the tools of finance that end up making a lot of the money.

And KKR, though, as a company, still going strong.

It floated in 2009 with a market cap of $53 billion.

Kraivis and Roberts, I read, worked about $8 or $9 billion and they resigned as co-CEOs in 2021, but the company is still going strong.

Fascinating story.

And Johnson died a couple of years ago.

Oh, did he?

Yeah, I think so.

Yeah.

Yeah.

So I don't know if he ever replicated in later lives the adventures.

I wonder, did the lifestyle continue?

Did it continue?

I would say the lifestyle continued.

I saw a video of him, just a short clip.

It was a video of the deal and they interviewed him on it and he was laughing about it.

It all just seemed like a big joke to him.

An adventure.

An adventure.

But I just thought it was a really good story.

I thought like, when you look at this, all the drama, all the intrigue around us, it all could have been avoided.

Johnson didn't have to do the LBO, but he decided he did because his egos hurt and he wanted to change, as he always wanted to create a bit of chaos.

And once the LBO started, all the drama could have been avoided if Cohn and Kraivis had reached a deal at the start.

So it really shows when you got testosterone, gossip, little things that play into these deals and inflate them and cause all this drama, just like anything in life, I guess.

Yeah.

But the crazy thing is, I'd love to understand at some point how many of these people who are bitter enemies ended up in partnership or in the deals years later.

I bet you they did.

I bet you they did.

Fascinating story.

Great selection.

Yeah.

Yeah.

Really enjoyed it.

All righty.

Look, I think you've got something lined up for the next episode.

I won't say anything right now.

I'm doing my research as we speak.

Yeah.

I'm looking forward to that one as well.

All righty.

Perfect.

Talk to you.