Barbarians at the Gate by business journalists Bryan Burrough and John Helyar is rightly considered a business classic. (It was also made into a hugely entertaining HBO film with James Garner as RJR Nabisco CEO F. Ross Johnson, Jonathan Pryce as buyout specialist Henry Kravis, and future Sen. (and Law & Order DA) Fred Thompson as American Express executive Jim Robinson.) It tells the story of how a group of executives from RJR Nabisco tried (spoiler: unsuccessfully) to buy the entire company in a leveraged buyout. It is an excellent example of business reporting, and an fascinating read. It also provides a number of lessons for those who negotiate on behalf of corporations. Among them:
Intangibles matter. Johnson’s first company, Standard Brands, merged with Nabisco in part because of the fact that Ross Johnson decided he liked Nabisco Chairman Bob Schaeberle. Johnson went from "Who the f*@& is this guy?" to a merger in a matter of weeks once he met with Schaeberle. (His newfound fondness for Schaeberle, however, did not prevent Johnson from effectively ousting him once the merger had been effected.) Similarly, back in 1956, RJ Reynolds decided against buying pharmaceutical company Warner-Lambert because one of RJR’s senior vice presidents visited the Warner-Lambert chairman and learned he sailed a company-owned yacht. His reaction? "This is not for us. These are not our kind of people."
So intangibles, be they personality or corporate culture, can often make or break a deal. The same lesson applies in litigation. Plaintiffs’ lawyer Jan Schlichtman famously botched a settlement negotiation in the H&R Grace litigation by throwing a settlement conference so lavish it convinced the defendants their money would be better spent fighting him than funding future conferences for other defendants.
Negotiations have costs. Throughout Barbarians at the Gate, the various parties involved in the proposed buyout worry about the fees the deal will generate. Well, some don’t worry as much as rejoice. As an executive at Shearson (one of the investment banks) swoons when he considers the money he might make:
"Oh the fees! The upfront fees alone–for advising and money lending and a ‘success fee,’ maybe $200 million in all–would be a gigantic boost to Shearson’s flagging earnings. And it wouldn’t stop there …"
(Emphasis in original.) All complex negotiations have costs like these. In addition to just the usual costs in time, bringing outside parties in costs money. And that money must be subtracted from the bottom line of the deal. (The same holds true for litigation. Accommodating objectors (often by paying them off, sometimes by increasing the value of the settlement) costs money. So does notifying a proposed class.)
Everyone leaks information, whether they mean to or not. There are, of course, a number of direct strategic leaks in the course of the various wheelings and dealings that made up the RJR Nabisco LBO. But there were also moments when trying not to leak information wound up leaking information. For example, investment banker Jeff Beck [http://www.nytimes.com/1991/04/07/books/heard-on-the-street.html] had been pestering Johnson for months to try some kind of merger or LBO. So when Johnson was considering the LBO, he stopped taking Beck’s calls. Beck immediately called Henry Kravis.
"I think it’s time to do something about RJR," Beck said.
"Why is that?" Kravis wondered.
"For some reason Johnson’s stopped taking my calls. He’s having Jim Welch call me back. We ought to just have a meeting and make an offer."
"You’re probably right," Kravis said.
Even the act of not communicating can communicate information. When the stakes are high, it is safe to assume the other side is taking back-bearings.
There are many, many more object lessons in Barbarians at the Gate. It is the perfect storm of complications in a corporate negotiation, one that contained a number of adversarial elements. As a result, it’s well worth the read, for lawyers who represent corporate defendants, and for anyone who wants to see how an intensely competitive atmosphere (much like that among class-action plaintiffs) can make even the simplest proposed deal into something much, much more complicated.