Barbarians at the Gate: The High-Stakes Battle for RJR Nabisco
In 1988, the corporate world witnessed one of the most aggressive and expensive takeover battles in history. At the center of the storm was RJR Nabisco, a massive conglomerate specializing in tobacco and food. What began as a strategic move by a CEO to protect his interests spiraled into a bidding war that redefined the concept of the leveraged buyout (LBO)—a transaction where a company is acquired using a significant amount of borrowed money.
The Catalyst for the Takeover
The conflict was ignited by F. Ross Johnson, the self-made multimillionaire CEO of RJR Nabisco. Johnson had pinned the company's stock price growth on a new product called Premier, a smokeless cigarette. However, upon receiving advanced news that Premier was likely to be a commercial failure, Johnson decided to take the company private to avoid the fallout and secure his own financial future.
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A Clash of Titans
Johnson initially approached Henry Kravis, a pioneer of the LBO, to discuss the deal. However, the relationship soured when Johnson bypassed Kravis and took the potentially enormous transaction to the Shearson Lehman Hutton division of American Express. Feeling betrayed, Kravis entered the fray as an opponent, determined to win the company.
The Entry of Other Bidders
As the tension between Johnson and Kravis grew, other players entered the competition. Ted Forstmann and his firm, Forstmann Little, emerged as bidders after it became clear that Kravis and Johnson could not reconcile their differences. This influx of interest pushed the bidding to unprecedented heights, turning the acquisition into a symbol of corporate excess.
Greed and the "Barbarians"
The battle for RJR Nabisco became a public spectacle of greed. Executive Charles Hugel highlighted the ethical void of the transaction, noting that while Johnson stood to profit immensely, thousands of Nabisco employees faced potential job losses. Hugel famously quipped, "Now I know what the 'F' in F. Ross Johnson stands for."
The phrase "Barbarians at the Gate" originated from a statement by Ted Forstmann. He criticized the financial instruments used by Kravis, labeling them "phoney junk bond crap" and contrasting them with the "real money" used by himself and his brother. Forstmann argued that to stop corporate raiders like Kravis, the industry needed to "push the barbarians back from the city gates."
Key Facts
- Target Company: RJR Nabisco, a tobacco and food conglomerate.
- Primary Catalyst: The predicted commercial failure of the Premier smokeless cigarette.
- Key Figures: F. Ross Johnson (CEO), Henry Kravis (LBO pioneer), and Ted Forstmann (Forstmann Little).
- Financial Strategy: The use of leveraged buyouts (LBOs) and junk bonds.
- Outcome: Henry Kravis's bid was declared the winner, despite Johnson offering a higher price.
| Entity/Person | Role | Key Motivation/Perspective |
|---|---|---|
| F. Ross Johnson | CEO of RJR Nabisco | Take company private following Premier's failure. |
| Henry Kravis | LBO Pioneer | Acquire the company after feeling betrayed by Johnson. |
| Ted Forstmann | Forstmann Little | Oppose "junk bond" raiders with "real money." |
| Shearson Lehman Hutton | Financial Division | Partnered with Johnson for the initial LBO bid. |
Frequently Asked Questions
Why did F. Ross Johnson want to take RJR Nabisco private?
Johnson wanted to take the company private after learning that the Premier smokeless cigarette, which was intended to boost the company's stock price, was likely to fail commercially.
What is a leveraged buyout (LBO)?
An LBO is a corporate acquisition strategy where a significant amount of borrowed money (leverage) is used to meet the cost of acquisition, often using the assets of the company being acquired as collateral.
Who won the bidding war for RJR Nabisco?
Henry Kravis's bid was declared the winner, even though F. Ross Johnson had submitted a higher bid.
Where does the term "Barbarians at the Gate" come from?
The term comes from a statement by Ted Forstmann, who compared corporate raiders like Henry Kravis to barbarians and claimed the need to "push the barbarians back from the city gates."
What were "junk bonds" in the context of this deal?
Junk bonds are high-yield, high-risk bonds. Ted Forstmann referred to them as "phoney junk bond crap" to contrast them with the traditional equity or "real money" he used for his bids.