Saturday, September 15, 2007

Book Review: Barbarians at the Gate

This is not a new book. I remember reading it more than a decade back, and then suddenly I caught sight of the book in my office library, and it brought back memories. The book is an incredible piece of writing, and one can expect a great deal of detail, since the authors, Bryan Burrough and John Helyar are investigative reporters and had covered the takeover deal for RJR Nabisco in great detail. The book may seem a bit dated, since it was written in 1990 covering the Leveraged Buyout (LBO) of RJR Nabisco in 2 frantic months of 1988. However, I would argue that anybody who reads this book and is even moderately interested in the working of businesses, takeovers, and most importantly, the CEO's and boards of companies should read this book.

Barbarians at the Gate

The book is gripping reading, especially because it desists from going into details into arcane financial details and boring readers (except the ones who get their kicks from too many financial details). Let me re-phrase; the book does not desist from providing financial details and certainly does not try to dumb down how things work, but the way in which the story line is crafted would make this seem like a thriller based on company mergers (and if you did not know this actually happened, you could believe this to be a work of fiction).
For a lot of readers, the stock-market boom of the internet era and the crash-and-doom of 2001 was a major thing, and they would have expected a period in history to be similar. But the fact remains that the 1980's was also an extra-ordinary period of financial turmoil with 2 great (and very controversial) terms coming to life; the junk-bonds most popularized by the junk-bond king Michael Miliken of the Drexel Burnham Lambert, and the Leveraged Buyout kind of takeover made most popular by a small firm called KKR (Kohlberg Kravis & Roberts).
These came together in a burst of what seemed like a great financial innovation - the Leveraged Buyout. What does LBO mean ? Loosely put, a LBO is used when the executives of a company believe that the company is being under-valued, or they want to make a pitch for the company when it is under hostile attack; and they go in for buying the company outright. They need to raise a bid high enough that shareholders (including the institutions - typically pension funds and others) sell of their shares. However, this requires a massive amount of money, and the net result of this is high debt levels (indeed, in many cases, crippling debt levels where interest payments demand massive cost-cutting). Some companies manage, becoming lean and mean, and in other cases, the whole stack of cards crumble.
Barbarians At The Gate is the story of the LBO launched by the CEO of RJR Nabisco, Ross Johnson, and his battle with the takeover firm, KKR (Kohlberg Kravis and Roberts - the important partners being Henry Kravis and George Roberts). Now KKR was a firm with extremely efficient partners, and the battle between Ross JOhnson and KKR was an epic battle with many rounds of discussion, debate and escalating payoff's, all being weighed by the board of RJR Nabisco, former friends and partners of Ross JOhnson, and now being the principle representatives of shareholders.
The interesting part of the book is a telling of the history of the companies, main people involved, their ambitions, their motivations and how they plan and scheme to get ahead. The book has what is called the 'people' perspective, and you will get a fair idea of what the personal ambitions of a person as ambitious (and ruthless) as Ross Johnson will cost many of the other people involved. However, it also details the variability involved in decision-making, particularly when Ross Johnson did not anticipate anybody else getting involved.
Also, you get to see something evolving in this book that continues to this day, namely the notion of how executive perks have kept on increasing. It is a fair understanding that many shareholders do not know the full level of executive perks, otherwise you would see far more resentment especially when the company is barely plodding along with not much dividend or increase in stock value.
This book is a great read, and I was absolutely hooked after reading it.

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