The Lowdown: This Summary of Barbarians at the Gate is based on the book written by Bryan Burrough & Jon Helyar, and delves into the Leveraged Buyout of RJR Nabisco back in the 1980’s.
Burrough and Helyar are investigative journalists for the Wall Street Journal, and they tell the true story of reach for power by F. Ross Johnson within RJR Nabisco. Johnson made a bid to take controlling interest in the company, which includes shunning those with the Nabisco family. This caused there to be numerous bids on the company, which is what caused it be a Leveraged Buyout.
A Leveraged Buyout is not a normal type of takeover, as it tends to lead to more debt for the winning party. This book goes into the tactics used by everyone involved in order to take controlling interest of a major company while explaining the financial components in a very easy and understandable way.
Three of the Main Lessons you’ll learn from Barbarians at the Gate include:
- How this Leveraged Buyout changed the strategies of a Takeover
- How CEO’s now prefer to be paid
- How Payment in Kind loans were born thru this Takeover
Lesson One: How this Leveraged Buyout changed the Strategies of a Takeover
Throughout modern history, there were not too many instances of Leveraged Buyouts, and this was by far the largest ever. This type of Buyout tends to leave the winning party with a lot of debt, as they have to overpay for a company. They still need to the company to pay for itself and to be successful, which doesn’t always happen in a hostile takeover.
Typically, an insurance company would have to finance the money for any kind of buyout, but with this particular takeover came the introduction of Junk Bonds. These types of bonds allowed different types of financial backers to become involved with takeovers, which change the landscape forever. These bonds are high-risk, high-yield bonds which are issued by a company who is looking to raise capital quickly.
These kinds of bonds are what led to the financial crisis in the late 2000’s.
Lesson Two: How CEO’s now prefer to be Paid
The CEO of a company is typically paid a large amount in the forms of a salary and a bonus. Although these have come under scrutiny over the last few years, the CEO wears a lot of different hats within the company in order to help it be successful. They are the driving force behind the culture and the innovation of a company, as well as ensuring the people working within the company are bought into the vision of what the company stands for.
During a Takeover process, often times the CEO is has no leverage and normally cannot stop the takeover from taking place. This has led to CEO’s now changing their financial portfolio, where they take less cash in a salary and bonus, and instead want more equity shares in the company. By having some more equity, they have more power to hold onto their company and help prevent some Leveraged Buyouts from even taking place.
Lesson Three: How Payment in Kind loans were born thru this Takeover
During this Leveraged Buyout, F. Ross Johnson, who was the current CEO of RJR Nabisco and was attempting the full takeover, discovered Payment in Kind loans. This kind of loan became very prevalent on Wall Street, as it is allows the person who takes the loan to not pay interest on loan for a majority of the life.
This allows you to not only spend the money freely, but you yourself can then loan out this money and make interest off it, which means it is extra income for you. However, these types of loans are another version of a junk bond, and are very risky. PIK loans allow other interested parties to secure capital quickly and easily, without having to deal with the ramifications of interest payments until much later in time.
My Personal Takeaway
When it comes to Leveraged Buyouts, there are not many positives which come from this process. Often times, it is a bitter war between at least two different parties, and whoever the winner ends up being typically is stuck with an avalanche of debt. This causes the company which is remaining to have an unsecure future.
Not only this, but the way they are typically financed, thru Junk Bonds or PIK Loans, make this very risky and undermines the true sense of a capitalistic society.
Put into Action
Anytime I hear of a buyout occurring, or a merger of two different companies, I will be on the lookout for how they are financing the takeover or merger. This will allow me to have a better understanding of how secure the companies are moving forward.
You should consider buying this book if…
You want to increase your financial acumen, and find a way to learn complex financial terms and strategies in an easy and fundamental way.
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