In 1990, Barbarians at the Gate came out as a book – considered a business classic – written by Bryan Burrough and John Helyar, both business journalists. Later, in 1993, an interesting HBO film based on the book directed by Glenn Jordan was released. Barbarians at the Gate tells an unsuccessful story of a Leveraged Buyout (LBO) attempt by a group of executives of R.J. Reynolds Tobacco Company (RJR). LBO means buying an entire company by gaining control rights through stock purchase.
The movie revolves around a ?4.9 billion merger deal in 1988 between RJR and Nabisco, a famous cookie and snack company. It was the largest LBO deal to that date. The buyout puts F. Ross Johnson, CEO of RJR (played by James Garner), as a leader of one of the U.S.'s largest firms.
Johnson turned greedy, so did other players in Wall Street. They decided to take a different turn to cash out big from the deal. The competitive bidding process was won by Kohlberg Kravis Roberts & Co. (KKR), a private equity firm run by Jonathan Pryce (played by Henry Kravis). The winning deal worth $24.5 billion bid for the merged company put $60 million in Johnson’s pocket and millions more into the pockets of bankers, lawyers, and executives involved in the deal.
But, in real terms, the deal turns sour for the company, throwing it into a debt of $30 billion. RJR Nabisco reeled under pressure for more than a decade and ended up splitting as individual tobacco and snack companies in 1999.
The film showcases a classic example of the takeover spree that happened in the financial world and how the battle for gaining control of a company ended up in a whopping deal worth $25 billion.
More than teaching personal financial lessons, Barbarians at the Gate teaches us some significant lessons on corporate greed and the execution of billion-dollar deals. That means some valuable business and leadership lessons. In short, the film shows how not to be a leader. So here, let's go through a few business and leadership lessons from Barbarians at the Gate.
Johnson made wishful yet misleading bullish projections about his company's Research and Development (R&D) department's innovation of a new type of smokeless cigarette. He also ignored the warnings of his colleagues and boosted the Wall Street expectation on his new product. Ironically, Johnson never listened to the warning from the person who revealed the secret of RJR’s under-performing business to KKR, the rival buyout firm.
Johnson failed to build confidence in the company’s stakeholders (the C-suite and the employees) while he ventured into buying out the company. A person dies as a leader when he fails to trust his people and gain their trust in return. Mutual trust is a crucial factor as one climbs up the corporate ladder -- the higher you go, the number of people you can trust and who trust you come down. In a true sense, the trust factor plays an even more important role during a crisis.
The LBO idea was given to Johnson by Henry Kravis, the CEO of a leading private equity firm KKR. However, Johnson picks another private equity firm rather than KKR to go ahead with the buyout. Johnson’s competitive mindset provokes Kravis, who made necessary moves for a successful buyout of Nabisco instead of Johnson.
In Barbarians at the Gate, the LBO eventually turns into a battle of egos rather than a value creation venture for RJR and its stakeholders. But unfortunately, the human ego is blind, and when it takes control of our mind, rationality takes a backseat, turning us into bad decision-makers.
A leader should be a people’s person who can’t afford to be selfish. As the leader works along with the people most of the time, sooner or later, people see through his selfishness and greed. It damages a leader’s image and eventually leads to his rejection or removal from the position. Likewise, leading an extravagant life and spending lavishly at the company’s expense without delivering value and higher performance damages the company, leader's image, and stakeholders.
Money is essential to exchange and store value. But it doesn’t mean that money can buy everything. Being the highest bidder doesn't guarantee the deal is all yours. Moreover, the priceless elements in the human spirit – trust, respect, and commitment among the few – cannot be purchased with money.
Power corrupts. In the movie, Johnson and Kravis have held power in their companies for a very long time. This long-term holding of power is a significant factor that corrupted both. When a person remains the leader for a long time, chances are high that complacency and cronyism creep into their personality and behavior.
In war and business, playing fair is very important. Situations wouldn’t be favorable to anyone every time. Playing fair keeps human relationships intact, and you get a helping hand when odds begin to play against you.
Not every buyout goes wrong, and like every other business strategy, it has its own advantages and drawbacks.
On the side of the pros, companies expand, remain competitive, and become more profitable. For example, We can take up the takeover of Qwest Communications and Level 3 Communications by major telecom player CenturyLink. This buyout venture provided CenturyLink with a chance to be more efficient, penetrate into new markets, and attain a competitive edge against rivals like Verizon and AT&T.