Barbarians. II.

As discussed in Barbarians, Henry Kravis single-handedly created the modern private equity industry alongside his partners Jerome Kohlberg and George Roberts.

What started out as a focus on improving operations for mid-sized businesses eventually transformed to the pursuit of mega-deals financed by massive amounts of debt.

The most notable deal was so extraordinary that it became a notorious business school case study, bestselling book, and Emmy-winning film: RJR Nabisco.

The $25 billion leveraged buyout of RJR Nabisco by KKR wasn’t just the biggest deal of its time—it was the defining drama of the era.

RJR Nabisco was a behemoth. Its brands—Oreos, Ritz Crackers, Camel and Winston cigarettes—were household staples. Although the company’s revenue was impressive, the company’s stock price was stagnant, dragged down by bloated management and inefficiencies. Wall Street was frustrated and so was the CEO Ross Johnson.

Johnson was the typical 1980s executive: charming, ego-driven, and flamboyantly lavish. He relished his perks—private jets, company-owned art, and $15,000 monthly flower bills at his home. He also believed that Wall Street fundamentally misunderstood his company. The tobacco division was a cash cow, but investors were lumping it in with slower-growth food assets.

So, in October 1988, Johnson decided he’d had enough. Public markets didn’t get it.

Private markets might.

Johnson met secretly with Peter Cohen, head of investment bank Shearson Lehman Hutton. His pitch: take RJR Nabisco private in a management-led buyout at $75 per share—a deal worth roughly $17 billion.

The plan was kept on lockdown. Only a tight inner circle of Johnson’s lieutenants and Shearson bankers knew.

The structure? Heavily debt-financed, fueled by junk bonds.

The outcome? Johnson would remain CEO, steering the ship with borrowed money and minimal personal risk.

The secrecy didn’t last. Within days, the news leaked—most likely from a disgruntled insider or ambitious advisor. The moment it hit the tape, RJR’s stock soared. Wall Street knew something was up.

Among the most furious was Henry Kravis. Johnson had previously approached Kravis with vague LBO ideas, only to later cut him out and partner with Shearson.

He mobilized KKR instantly. Within days, they were ready with a $90/share counteroffer, backed by their deep experience in buyouts and a powerful network of lenders. For Kravis, this was about more than a deal—his entire reputation was on the line.

Johnson wasn’t backing down. He and Shearson scrambled to raise their bid. What followed was a no-holds-barred bidding war that would stretch for weeks.

The boardroom saga that unfolded was pure theater.

Advisors flooding RJR’s headquarters.

Rival teams building competing models.

Bids continually escalating.

At one point, Ted Forstmann of Forstmann Little jumped into the fray, proposing a “white knight” bid funded with less debt. He derided junk bonds as “phony money” and declared Kravis and Johnson the true “barbarians at the gate.” But it didn’t matter. At the end of the day, capital is capital.

That left KKR and Johnson’s camp in a financial arms race. By Thanksgiving, the bids were approaching $110/share. But while Johnson’s offers were consistently higher, they also included huge personal payouts and more aggressive debt assumptions.

Behind the scenes, Johnson was unraveling. He grew increasingly erratic—flying on jets to court board members, demanding a $100 million payout, and proposing bizarre corporate restructures like dual headquarters to justify his travel habits.

The board, alarmed by Johnson’s antics and eager to preserve shareholder value, set up a special committee, bringing in independent advisors to vet the bids objectively.

It all came down to Thanksgiving weekend in 1988. At Lazard Frères’ Manhattan offices, KKR and Johnson’s teams camped out in separate war rooms, crunching numbers for 72 hours straight.

Johnson’s final offer: $112/share. KKR’s final offer: $109/share.

It looked like Johnson had it. But the board chose KKR.

Why? KKR’s bid was more conservatively structured, with fewer insider perks. The board no longer trusted Johnson, whose self-interest had become glaring.

JOHNSON: I made this company!

BOARD MEMBER: We own this company.

KKR’s triumph came with a staggering price tag—$25 billion, with most of it financed through debt. The interest burden alone exceeded $2 billion annually. To stay afloat, the new RJR began aggressively shedding assets:

Del Monte was sold off.

European food operations were liquidated.

Non-core units were axed.

Tens of thousands of employees were laid off.

Louis Gerstner, a respected executive from American Express, was installed as CEO in 1989. He was methodical and disciplined, but his options were severely limited. Nearly every dollar of operating profit was spoken for by debt payments. Growth initiatives were shelved and strategic investments were delayed.

Additionally, the food and tobacco divisions clashed culturally and operationally. Tobacco remained wildly profitable but was entering a period of mounting lawsuits and regulatory scrutiny. Food, meanwhile, was capital-intensive and needed reinvestment to stay competitive—something RJR couldn’t afford.

Internally, morale was dismal. Externally, the market began questioning whether the buyout had created long-term value or merely temporarily enriched advisors and executives.

By the mid-1990s, the unraveling was underway. In 1993, Gerstner left to run IBM—a clean break from a troubled empire. KKR began disassembling the RJR Nabisco puzzle:

In 1995, parts of the company were taken public again.

In 1999, Nabisco was spun off completely and was acquired by Kraft the following year.

RJR’s tobacco unit was eventually merged with British American Tobacco.

The original vision of a private, synergistic food-and-tobacco powerhouse had collapsed. What remained were fractured parts and a bitter memory.

For all the noise, the final payoff for KKR was embarrassing. The IRR on the RJR Nabisco deal was less than 1%—a catastrophic miss for a firm that usually targeted IRRs north of 20%.

So much for creating shareholder value.

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