The Night They Carved Up RJR Nabisco

In a windowless conference room high above midtown Manhattan, a group of men in rolled-up shirtsleeves were about to trigger the most audacious leveraged buyout in history. It began, as many catastrophes do, with a phone call.

In October 1988, Ross Johnson, the silver-haired, backslapping CEO of RJR Nabisco, approached his bankers with a proposition: take the company private. The price he had in mind valued the company at $17 billion. The board would hear about it within days.

What Johnson did not anticipate was that the moment word leaked, and on Wall Street in 1988, word always leaked, every ambitious dealmaker in Manhattan would smell blood.

The bidding begins

Within a week, Henry Kravis and George Roberts at Kohlberg Kravis Roberts had entered their own bid. The war was on.

KKR’s opening offer ran past $20 billion. Johnson’s management group countered. KKR raised. The numbers climbed to places that made even hardened Wall Street veterans uncomfortable. Investment bankers from a dozen firms descended on midtown hotels, running valuation models through the night, sustained by room service and the intoxicating possibility of fees measured in nine figures.

The arrogance, the appetite, the absolute conviction that price was no object when the prize was large enough.

The board’s problem

Johnson’s bid created a structural conflict the board could not ignore. A management-led buyout asks the people running the company, the people with the best information about it, to buy it from the shareholders they answer to. Every dollar they save on the purchase price is a dollar taken from the owners.

To its credit, the special committee ran a genuine auction rather than rubber-stamping the insiders. That decision is what turned RJR from a quiet management deal into the defining contest of the decade.

The verdict

By the end of November 1988, KKR had won, at $109 per share, a total acquisition price of $31.4 billion. It was the largest leveraged buyout in history, and it would hold that record for seventeen years.

Ross Johnson walked away with a golden parachute reported in the tens of millions. KKR loaded RJR with debt, sold off divisions, and spent the next decade trying to service a burden that nearly broke the company. The deal made KKR permanently famous and only modestly profitable.

Bryan Burrough and John Helyar chronicled the auction in Barbarians at the Gate. It remains the definitive account of a deal that captured the spirit of an era, and a standing warning about the winner’s curse.