Barbarians at the Gate: The Fall of RJR Nabisco, by the Wall Street Journal reporters Bryan Burrough and John Helyar, is the story of the six weeks in late 1988 in which the chief executive of one of America’s largest consumer companies tried to buy it from its own shareholders, lost a bidding war to the buyout firm Kohlberg Kravis Roberts, and left behind a company carrying about $25 billion of acquisition debt. It was the largest leveraged buyout in history for nearly twenty years, and the book, published in 1990, became the standard account of the deal era: the junk bonds, the fees, the corporate jets, the boardroom manoeuvres and the question that still matters to anyone who audits a transaction, which is who the people running the process are actually working for. This guide summarises the book without reproducing it, sets out the deal and its mechanics, draws out the governance lessons, maps them to audit practice, and ends with a worked example of a bank’s audit function reviewing a management-led transaction.
In this guide
- The book in one page
- Who Burrough and Helyar are, and how the book came about
- The timeline: October to November 1988
- The deal: how a leveraged buyout works, and how this one did
- The people, and what each represents
- The governance questions the book raises
- The nine ideas worth keeping
- The vocabulary: fourteen terms defined for practitioners
- What it means for internal audit: transactions, conflicts and advisers
- The aftermath: what happened to RJR Nabisco and to the buyout industry
- The criticisms, and what the book leaves out
- Editions, reading time and how to read it
- A one-hour discussion guide for an audit team
- Worked example: Lakeshore Bancorp reviews a management-led sale
- Frequently asked questions
- Related guides
The book in one page
| Question | The answer, in our words |
|---|---|
| What is it about? | The 1988 contest for RJR Nabisco, the tobacco and food conglomerate, which began when its chief executive, F. Ross Johnson, proposed a management buyout at $75 a share with the investment bank Shearson Lehman Hutton, and ended when KKR won the company at $109 a share, about $25 billion in total. |
| Why did it happen? | Johnson believed the shares were undervalued because of the tobacco business and wanted to capture the difference for himself and his team; the banks and buyout firms saw the largest fee opportunity of the decade; and the junk-bond market made it possible to borrow sums that had not been borrowable before. |
| What was wrong with it? | The man proposing to buy the company was the man running it, with access to its information and influence over its board; his proposed deal would have given management a large share of the equity for little money; and the process that followed was shaped by advisers whose fees depended on a deal happening. |
| Who won? | KKR, with a bid the board’s special committee judged superior; Johnson received a severance package of more than $50 million and became the public face of executive excess. |
| What happened to the company? | It survived under the debt, but only just; the brands were sold piecemeal over the following years, KKR’s investors fared poorly, and the deal became the cautionary tale of the era. |
| Why read it as an auditor? | Because it is the clearest account in print of a conflicted transaction, of how boards and advisers behave under pressure, and of the controls that a special committee, an independent adviser and an audit function should bring to any deal in which insiders are on the other side. |
| Reading time | About twenty hours for the 500-page paperback; it is long, gossipy and absorbing, and the deal mechanics can be read in a third of the time. |
Who Burrough and Helyar are, and how the book came about
Burrough and Helyar covered the deal for the Wall Street Journal as it happened, and the book grew from their reporting and from interviews with nearly every participant, conducted while the memories and the resentments were fresh. Harper and Row published it in 1990; it was a bestseller, was filmed for television in 1993, and was reissued for its twentieth anniversary in 2008 with an afterword tracing what became of the people and the company. Burrough went on to write on the 1930s crime wave and on American radicalism; Helyar on baseball and on the sports business. The book is written as narrative, with reconstructed dialogue and scenes, and the authors note that the participants’ accounts often differed; its reliability on the sequence of events and the terms of the bids is high, and on who said what in which room it is journalism of the period.
The timeline: October to November 1988
| Date | Event | Why it matters |
|---|---|---|
| Early 1988 | RJR Nabisco’s shares trade in the $40s and $50s; Johnson, chief executive since January 1987, two years after the 1985 merger of R.J. Reynolds and Nabisco, is frustrated that the tobacco discount depresses the price | The motive: a gap between market value and what the parts might fetch |
| 19 October | Johnson tells the board he is considering a management buyout; the next day a group led by Johnson and Shearson proposes $75 a share, about $17 billion | The chief executive becomes a bidder for the company he runs |
| Late October | KKR, whose Henry Kravis had pitched Johnson a buyout in September 1987, announces a competing bid at $90; the board forms a special committee of outside directors chaired by Charles Hugel | The contest begins; the board’s structure for a conflicted deal is created under pressure |
| Early November | The management agreement with Shearson becomes public: Johnson’s group of executives would receive a large share of the equity on favourable terms; the press turns on Johnson | The terms of the insiders’ deal become the story |
| Mid November | First Boston enters with a tax-driven structure; Forstmann Little considers and withdraws; the special committee sets a bidding deadline | The auction |
| 18 November | Bids are due: management at $100, KKR at $94, First Boston with a complex proposal; the committee extends the process | The committee uses its control of the process |
| 29 to 30 November | Final round: management bids $112, $84 of it in cash, and KKR $109, about $81 in cash; the committee’s advisers judge the two substantially equivalent, and the committee chooses KKR, whose securities carry a reset and whose terms give shareholders more upside | Value is judged on certainty and structure, not headline price |
| Early 1989 | The deal closes; the company carries about $25 billion of debt; Johnson leaves with a severance package of more than $50 million | The largest buyout to that date, and the beginning of a long unwinding |
The deal: how a leveraged buyout works, and how this one did
A leveraged buyout is the purchase of a company mostly with borrowed money, secured on the company’s own assets and cash flows, so that a small amount of equity controls a large enterprise and the debt is repaid from the business or from selling its parts. The buyer’s return comes from the leverage: if the company is bought for ten times its cash flow with eight parts debt and two parts equity, and the debt is paid down or the business sold for more, the equity multiplies. The risk is symmetrical. If cash flows fall, the debt cannot be serviced and the equity is wiped out, which is what nearly happened to RJR Nabisco. In 1988 the junk-bond market built by Drexel Burnham Lambert allowed debt on a scale that had never been raised, including securities that paid interest in more securities rather than cash, and the fees to banks, advisers and buyout firms ran into hundreds of millions of dollars whatever happened to the company afterwards.
| Element | In a typical buyout | In the RJR Nabisco deal |
|---|---|---|
| The target | A company with stable cash flows and undervalued assets | Tobacco cash flows that the market discounted and food brands that could be sold |
| The buyer | A buyout firm with equity from institutional investors | Management with Shearson; KKR with its fund; First Boston with a structure |
| The leverage | Bank debt, subordinated debt, equity | About $25 billion, most of it borrowed, including pay-in-kind securities whose value later fell sharply |
| The returns | Debt paydown and resale | Asset sales under pressure; KKR’s fund fared poorly on the deal |
| The fees | Advisory, financing, monitoring | Several hundred million dollars to banks, lawyers and advisers on both sides |
| The governance | A board decides whether to sell and to whom | A special committee of outside directors with its own advisers, formed because the chief executive was a bidder |
The book’s deal chapters are the best plain-language explanation of buyout mechanics an auditor is likely to read, and the credit risk guide and the liquidity risk guide describe what the debt did to the company afterwards in the vocabulary of today’s lenders.
The people, and what each represents
| Person | Role | What the book shows |
|---|---|---|
| F. Ross Johnson | Chief executive of RJR Nabisco | Charming, generous with the company’s money, and convinced the business was his to sell; the corporate jets, the celebrity golfers on the payroll and the management agreement made him the symbol of the era |
| Henry Kravis and George Roberts | Co-founders of KKR | Disciplined, patient, and prepared to pay for certainty; the book shows them managing a process as much as a price |
| Peter Cohen | Chief executive of Shearson Lehman Hutton | The bank that backed management and wanted the fees; the deal’s loss damaged the firm |
| Charles Hugel | Chairman of the board’s special committee | The outside director who ran the auction, insisted on process, and chose the bid the committee judged more certain over the higher headline number |
| Ted Forstmann | Co-founder of Forstmann Little | The rival buyout investor whose contempt for junk bonds gave the book its title; he withdrew rather than use them |
| Bruce Wasserstein and the advisers | Bankers on various sides | Advice shaped by fees; the book is a catalogue of advisers whose interests were not their clients’ |
| The outside directors | The board | Caught between loyalty to Johnson and duty to shareholders; the special committee was their answer |
The governance questions the book raises
The book is not a work of governance analysis, but it raises, in narrative form, the questions that governance codes have been trying to answer since. Each is a question an audit committee or an audit function can put to any transaction.
- Can a chief executive bid for the company? He can, and the conflict is total: he controls the information, the forecasts and the relationships with the board, and his interest is to buy cheaply. The response the board found, a special committee of outside directors with independent advisers and control of the process, is now standard, and the book shows why.
- Who are the advisers working for? Fees contingent on completion, on both sides, meant that every adviser wanted a deal; the question of which deal was secondary. Independent advice is advice from someone paid regardless of outcome.
- What do the insiders get? The management agreement, which the board had not known existed until the press exposed it, would have given a handful of executives a large share of the equity for a small investment. The terms of insiders’ participation should be known, in full, before a process begins.
- How is value judged? The committee chose a lower headline bid that its advisers judged substantially equal in value and whose securities carried a reset; headline price is not value when part of the consideration is paper of uncertain worth.
- What does the leverage do to the company? Nobody in the book asks what $25 billion of debt would do to the employees, the brands and the pension plan, and the answer arrived over the following decade. A transaction review that does not model the downside is a valuation, not a review.
- What was the company spending before any of this? The perks, the jets and the sponsorships were visible for years; the book treats them as colour, and an auditor should treat them as evidence of a board that had stopped asking.
The nine ideas worth keeping
- A conflicted process needs its own structure. A special committee with independent advisers and authority over the process is the only defence when management is on the other side of a transaction; the book shows one being assembled under fire and working.
- Contingent fees shape advice. Advisers paid on completion advise completion. The audit function should know how every adviser on a transaction is paid.
- Headline price is not value. Certainty of financing, the quality of the paper and the time to close are part of the price; the committee’s choice of $109 over $112 is the lesson.
- Insider terms must be disclosed before, not discovered during. The management agreement’s exposure turned the public against Johnson and changed the auction; a board that had read it first would have shaped it.
- Leverage is a decision about the company’s future, not only its price. The debt determined what RJR Nabisco could be for a decade; the review of a leveraged transaction should model the business under stress.
- Perks are governance evidence. Discretionary spending by the chief executive that the board tolerates is a measure of the board’s independence.
- Information asymmetry is the insider’s advantage. Management knew the forecasts and the assets; the committee had to build its own view. Any transaction review should ask what the counterparty knows that the board does not.
- Process beats brilliance. The committee won not by out-thinking the bidders but by controlling deadlines, information and criteria; the auditor’s respect for process is the same instinct.
- Booms produce deals that busts explain. The junk-bond market made the bid possible and the junk-bond collapse of 1990 made it a burden; the strategic risk guide treats market conditions as a driver of transaction risk for that reason.
The vocabulary: fourteen terms defined for practitioners
| Term | What it means in the book | What it looks like in an audit |
|---|---|---|
| Leveraged buyout (LBO) | Acquisition financed mostly by debt secured on the target | The post-deal capital structure is the audit subject |
| Management buyout (MBO) | A buyout led by the company’s own executives | The conflicted transaction par excellence |
| Special committee | Outside directors appointed to run a process from which insiders are excluded | The control for conflicted deals; test its independence, advisers and authority |
| Junk bond | High-yield debt below investment grade | The financing that made the scale possible |
| Pay-in-kind (PIK) security | Debt that pays interest in more debt | Paper whose value depends on the issuer’s survival; the reason headline bids were discounted |
| Fairness opinion | An adviser’s opinion that a price is fair to shareholders | Read who paid for it and how |
| Contingent fee | Payment conditional on completion | The incentive to be disclosed and managed |
| Golden parachute | Severance triggered by a change of control | Johnson’s package; a governance test of pay |
| Management agreement | The terms on which executives participate in a buyout | Disclosure to the board before the process |
| Tobacco discount | The market’s reduction of value for litigation and regulatory risk | A strategic risk the deal tried to arbitrage |
| Break-up value | What the parts would fetch separately | The analysis a committee needs independently of management |
| Highly confident letter | A bank’s statement that it could raise financing | Certainty of financing as a component of value |
| Bust-up | Selling assets to pay acquisition debt | What happened afterwards; the model the review should run |
| Perquisites | Executive benefits beyond pay | Board independence evidence; see the corporate governance audit guide |
What it means for internal audit: transactions, conflicts and advisers
An internal audit function is rarely in the room when a company is sold, and the book explains why it should be closer than it usually is. The table maps the book’s questions to the controls over transactions that the function can test, before and after a deal. The corporate governance audit guide, the audit committee playbook and the strategic risk guide carry the frameworks.
| Question from the book | Control the audit function should expect | Test that produces evidence |
|---|---|---|
| Is management on the other side? | A policy that any transaction in which executives or directors have an interest is run by a committee of independent directors with its own advisers | Read the policy; for the last conflicted transaction, confirm the committee’s composition, advisers and authority over the process |
| How are the advisers paid? | Fee arrangements for every adviser disclosed to the committee; at least one adviser paid regardless of outcome | Obtain the engagement letters; identify the non-contingent adviser |
| What do the insiders get? | Full terms of management participation, severance and retention disclosed to the board before the process starts | Compare the disclosure date with the process start; read the terms |
| How was value judged? | A valuation framework that discounts non-cash consideration and financing uncertainty; a record of the committee’s reasoning | Read the committee minutes for the valuation criteria and their application to each bid |
| What does the leverage do? | A downside model of the business under the proposed debt, including covenant headroom and refinancing | Reperform the stress case; compare with the liquidity risk guide‘s survival-horizon method |
| What was the company spending? | Board oversight of executive discretionary spending, with reporting and limits | Analytics on executive expenses, aircraft use and sponsorships for the last two years |
| What did the counterparty know? | Information controls in a sale process: a data room with access logs, equal access for bidders, management forecasts reviewed independently | Review the data-room log for asymmetry; confirm the forecasts were reviewed by someone outside management |
| What happened afterwards? | Post-transaction review against the business case and the downside model | The root cause guide‘s method applied to the deal a year on |
The aftermath: what happened to RJR Nabisco and to the buyout industry
RJR Nabisco under KKR sold assets, cut costs and struggled with the debt, particularly after the junk-bond market collapsed in 1990 and the value of the pay-in-kind securities issued in the deal fell, forcing KKR to put in more equity. The company was taken public again in 1991, split into its tobacco and food businesses in 1999, and the food business was sold in 2000 to Philip Morris, which merged it with Kraft; KKR’s investors did poorly on the deal, and the lesson the firm drew was not to commit so much of one fund to a single investment. Johnson never again ran a major company. The buyout industry retreated for a decade after 1990 and returned in the 2000s with larger funds, more conservative leverage and, after a second wave of large deals in 2006 and 2007, a second lesson of the same kind. The governance protections the book describes, special committees, independent advisers, disclosure of management terms, became standard practice and in several jurisdictions became law, and the corporate governance audit guide reflects them.
The criticisms, and what the book leaves out
The book is journalism of its moment, and its limits are those of its method. The reconstructed scenes and dialogue are vivid but rest on participants’ memories, which did not always agree. The focus on personalities, particularly Johnson’s excess, makes the story about one man’s hubris when the mechanism, cheap debt and contingent fees, would have produced a similar deal with a modest chief executive. The book has little on the company’s employees, pensioners and communities, who bore the cost of the debt, and little on the litigation risk that was the reason for the tobacco discount in the first place. And it ends at the closing, so the reader has to go to the 2008 afterword and elsewhere for the decade of consequences, which is where the governance lesson is completed. None of this diminishes it as the record of the deal; it means an auditor should read it for the process and supply the economics.
Editions, reading time and how to read it
| What | Details | Best for |
|---|---|---|
| First edition | Harper and Row, 1990 | Historical |
| Twentieth-anniversary edition | HarperBusiness, 2008, with a new afterword | The edition to read |
| Audiobook | Unabridged | Long; the cast is large |
| Film | The 1993 television film with James Garner as Johnson | Entertainment; the book is the record |
| Reading plan | The opening chapters on Johnson and the company, the chapter on the management agreement, the final-round chapters, and the afterword | An auditor who wants the governance lesson in two evenings |
| Companion reading | The When Genius Failed summary for leverage in a different setting; the Smartest Guys in the Room summary for a board that approved what it did not understand | Placing the case |
A one-hour discussion guide for an audit team
- Ten minutes: the last conflicted decision. Identify the most recent transaction or decision in which an executive or director had a personal interest, and reconstruct who ran the process.
- Fifteen minutes: the advisers. For the organisation’s last significant transaction, list every adviser and how each was paid. Mark the ones paid regardless of outcome.
- Ten minutes: value. Discuss how the organisation judges competing offers or proposals: headline price, certainty, structure, time. Compare with the committee’s choice of $109 over $112.
- Fifteen minutes: the downside. Take the organisation’s largest recent commitment of capital or debt and ask whether a downside model was built and who built it.
- Ten minutes: the perks. Ask what the board sees of executive discretionary spending and whether the function has ever tested it; decide whether it belongs in the plan.
Worked example: Lakeshore Bancorp reviews a management-led sale
Lakeshore Bancorp is a fictional $9 billion community bank holding company with an internal audit function of twenty-two. In 2027 the head of its wealth-management subsidiary proposed to buy the subsidiary from the holding company with backing from a private equity sponsor, and the audit committee, before the board responded, asked the function to review the process the board intended to follow against the book’s questions.
| Question | What the function found | Result |
|---|---|---|
| Is management on the other side? | The subsidiary head and two of his lieutenants were in the bidding group and had prepared the forecasts the board was using | The board formed a committee of three independent directors, excluded the bidding executives from all information after the proposal date, and commissioned an independent forecast |
| How are the advisers paid? | The investment bank’s fee was wholly contingent on a sale to anyone | A second adviser, a valuation firm, engaged on a fixed fee to opine on the subsidiary’s value and on alternatives, including keeping it |
| What do the insiders get? | The management group’s equity terms with the sponsor had not been disclosed to the board | The committee required full disclosure of the management arrangements before it would consider the bid; the terms, once seen, were revised |
| How will value be judged? | No criteria had been set | The committee adopted written criteria: cash consideration, certainty of financing, regulatory approval risk, employee terms, and the value of retaining the business |
| What does the leverage do to the subsidiary? | The sponsor’s structure put debt on the subsidiary that the bank’s own credit function would not have approved for a client | The function modelled the subsidiary under the proposed debt with a 20 percent revenue decline; the committee used the result in negotiation and in deciding whether the bank would retain any exposure |
| What was the subsidiary spending? | The subsidiary head’s discretionary spending, including client entertainment and travel, had not been reviewed in three years | Expense analytics performed; two items referred to the committee; the policy tightened for all subsidiaries |
| What did the counterparty know? | The bidding group had access to the subsidiary’s systems and client data throughout | Information controls imposed: a data room with logged access and equal information for a second bidder the committee invited |
The committee ran a process with two bidders and a retention case, and the subsidiary was ultimately sold, to the sponsor-backed management group, at a price 22 percent above the opening proposal and with the management terms revised. The committee chair’s report to the full board recorded that the process would have been different, and worse, without the structure the function had recommended from a book about a tobacco company in 1988. That is the use of the case: it is not about junk bonds or corporate jets, but about what a board must do when the people who know the business best are the ones trying to buy it.
Frequently asked questions
Is Barbarians at the Gate accurate?
On the sequence of events, the bids and the terms, yes; the authors had access to almost every participant and the deal documents. The reconstructed dialogue is journalism, and the participants disputed some of it. The 2008 afterword updates the story.
What is the governance lesson in one sentence?
When insiders are on the other side of a transaction, the board must take the process away from them: a committee of independent directors, independent advisers paid regardless of outcome, full disclosure of the insiders’ terms, and written criteria for judging value.
Why did the committee choose a lower bid?
Because its advisers judged the two bids substantially equivalent once the securities were valued, and KKR’s terms were better for shareholders: its securities carried a reset to protect their value and it lengthened the conversion period on its debentures, while some directors were troubled by Johnson’s golden parachute. Certainty and structure are part of value, which is the lesson for any committee comparing offers.
Does the book explain how leveraged buyouts work?
Better than most textbooks, in narrative form. The credit risk guide and the liquidity risk guide cover the lender’s side of what the debt does afterwards.
Is it relevant outside mergers and acquisitions?
Yes, wherever insiders have an interest in a decision: executive compensation, related-party contracts, asset sales to management, spin-outs. The corporate governance audit guide covers each.
Where does the book sit in the reading list?
In the governance and financial history group of the internal audit reading list, beside Too Big to Fail and The Smartest Guys in the Room.
Related guides
- How to Audit Corporate Governance — conflicts, committees and executive spending
- The Audit Committee Playbook — the independent committee under pressure
- Strategic Risk: A Comprehensive Guide — transactions and market conditions as risk drivers
- Liquidity Risk: Types, Metrics, Warning Signs and Controls — what acquisition debt does to a company
- The Smartest Guys in the Room: Enron, Summarised for Internal Auditors — another board that approved what it did not understand
- When Genius Failed: Summary and Lessons for Internal Auditors — leverage in a different setting
- The Best Books for Internal Auditors — where this book sits among the others
- All book summaries — the full set of summaries for auditors
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