The Most Famous Leveraged Buyout: The RJR Nabisco Deal

A leveraged buyout (LBO) is a strategy used to acquire a business or asset using borrowed funds, primarily in the form of loans and bonds. An iconic example of a leveraged buyout in history is the acquisition of RJR Nabisco by KKR in 1988. This transaction, detailed in the book Barbarians at the Gate, remains one of the most renowned and controversial leveraged buyouts.

Key Details of the RJR Nabisco Leveraged Buyout

Price

The final purchase price for RJR Nabisco was approximately $25 billion, a record at that time. The immense size of this deal made it one of the largest LBO transactions ever completed. The financial complexity and extensive use of debt to finance this acquisition paved the way for future LBO strategies.

Bidders

The bidding process for RJR Nabisco was particularly intense and involved two key bidders:

Kohlberg Kravis Roberts Co. (KKR): One of the world's leading private equity firms; this group put forward a significant and comprehensive proposal for the acquisition. Management-Lead Group: Fueled by the leadership of RJR Nabisco's CEO Ross Johnson, this group presented a compelling alternative bid. The competition between these two parties drove the price of the acquisition and attracted global attention.

Outcome

KKR ultimately emerged as the successful bidder and entered into an agreement with RJR Nabisco. A groundbreaking feature of this deal was its financing strategy, which combined both debt and equity, typical of modern LBOs.

Cultural Impact and Legacy

The RJR Nabisco buyout had a profound cultural impact, resonating with the broader themes of corporate restructuring and the explosive growth of private equity in the late 20th century. These themes were so significant that the transaction was documented extensively in Bryan Burrough and John Helyar's book Barbarians at the Gate: The Takeover of RJR Nabisco. This book, known for its graphic depictions of the excesses of the era, contributed to a pervasive cultural narrative surrounding the LBO and its impacts on corporate America.

Contemporary Relevance and Insights

Despite the notoriety and historical significance of the RJR Nabisco deal, determining the most successful leveraged buyout proves challenging. Return on investment (ROI) varies widely, and measuring success requires careful consideration of multiple factors:

Measuring Success in LBOs

Return on Investment: While some LBOs might achieve triple-digit internal rates of return (IRR), this can often be attributed to short holding periods. Conversely, a focus on cash multiples might not account for the time value of money. Industry Context: Success can only be evaluated within the context of the current market and industry trends, which can significantly influence outcomes. Investor Perspective: From an investor's standpoint, the most successful LBO would be one that optimizes returns while minimizing risk, often through more modest leverage and significant managerial equity ownership.

The Notion of Big vs. Better

Investors and industry professionals often grapple with the concept of size versus effectiveness in LBOs. While large deals attract attention and may initially seem more impressive, smaller deals that deliver steady, long-term returns can be equally valuable. This is exemplified by Waterland Private Equity, a prominent Dutch private equity firm that consistently outperforms in LBO transactions, thanks to its strategic approach and focus on smaller, more manageable investments.

Ultimately, the RJR Nabisco leveraged buyout remains a seminal event in the history of private equity, serving as a benchmark and a cautionary tale that continues to shape the current landscape of corporate finance and investment.