Who is F. Ross Johnson? Why did Johnson agree to the buyout of RJR Nabisco?
F. Ross Johnson was the CEO of RJR Nabisco, a tobacco and food product company, in the 1980s. Barbarians at the Gate by Bryan Burrough and John Helyar discusses the background of the RJR Nabisco CEO and why he initiated the leveraged buyout (LBO) of the company.
Read on to get the whole picture and understand what made the RJR Nabisco buyout special.
F. Ross Johnson’s Philosophy
The authors recount that from practically the beginning of his career, F. Ross Johnson’s philosophy revolved around two principles. First, he believed anything that wasn’t changing was stagnating and decaying. He would frequently change the organizational structure of his company, making sure that the company was always adapting and not becoming stagnant.
(Shortform note: Johnson’s perspective on change is controversial among business theorists. Many experts assert that you (and your company) need to be capable of adapting because change in the business environment is inevitable, but few take it as far as Ross Johnson did. At the opposite end of the spectrum, in Built to Last, Jim Collins argues that the idea that successful companies are always changing is a myth. Rather, he asserts that successful visionary companies are built on core principles that never change. This contributes to their success by giving them continuity and stability, even as they adapt their non-core business activities to environmental changes.)
Second, Johnson believed in spending money liberally. He saw restrictive budgets as a cause of stagnation, which he went out of his way to avoid. Not only did he pay his executives higher wages than competing companies, but he also provided them (and himself) with extensive perks such as company cars and apartments, company-paid membership in exclusive social and recreational clubs, and personal use of corporate jets. Johnson was particularly adept at spending company money in ways that would build his network of social connections or endear him to board members or other important contacts.
(Shortform note: While many experts advise taking a more conservative approach to spending money than Johnson did, the way he spent money arguably exemplifies John C. Maxwell’s 5th law of leadership, namely that leaders should serve others. Like former Costco CEO Jim Sinegal, whom Maxwell cites as an example of servant leadership, Johnson paid his staff above-average wages. He also went out of his way to see that his board members and other business associates were well taken care of.)
F. Ross Johnson’s History of Mergers
According to Burrough and Helyar, F. Ross Johnson grew up in a lower-middle-class family in Canada. He worked his way up the ladder at a food company called Standard Brands, where he eventually became CEO.
After Johnson became CEO of Standard Brands, he arranged a merger in which Nabisco acquired Standard Brands. Nabisco (originally an abbreviation of National Biscuit Company) was a leading food company, whose product lines included Oreo cookies and Ritz crackers. After the merger, Johnson again worked his way up to CEO and helped many of his executives from Standard Brands climb the Nabisco corporate ladder as well.
A few years later, as CEO of Nabisco, Johnson arranged a similar merger in which the RJ Reynolds tobacco company acquired Nabisco, creating the RJR Nabisco company. Once again, Ross Johnson worked his way up to CEO.
As CEO of RJR Nabisco, Johnson deployed his usual regimen of restructuring, among other things moving the corporate headquarters from Winston-Salem, North Carolina, to Atlanta, Georgia. Sales and profits increased while he was running the company, and Johnson had a good working relationship with his board of directors. He and his fellow executives had a fleet of corporate jets at their disposal and all the other perks to which Johnson was accustomed.
|Infiltrate and Conquer|
Ross Johnson’s career exemplifies a business application of Robert Greene’s 31st strategy in The 33 Strategies of War (a book whose premise is that strategies originally developed for military purposes can be put to good use in business and life in general).
Greene explains that when your enemy is so powerful that you can’t defeat them in open opposition, one strategy for taking them out is to join their organization and ostensibly work for their cause, all the while secretly advancing your own agenda.
When Johnson was CEO of Standard Brands, he was in competition with Nabisco. Nabisco was the clear market leader, and it seems unlikely that Standard Brands could ever have displaced Nabisco as market leader through conventional competitive tactics, such as marketing and pricing. When Johnson sold Standard Brands to Nabisco, it might have looked like he was giving up to the competition.
But the acquisition gave Johnson and his staff managerial positions in the Nabisco company. And within a few years, Johnson was running Nabisco, along with his staff who had come from Standard Brands. So, for Johnson and his staff, selling out to a competitor allowed them to take over the competitor from within, when they couldn’t have taken it over by other means.
Johnson used essentially the same strategy in the acquisition of Nabisco by RJ Reynolds. In this case, Reynolds wasn’t a direct competitor because it was a tobacco company rather than a food company. But, this being the case, it represented an adjacent market sector that Nabisco couldn’t readily have broken into—much less dominated—any other way.
How and Why F. Ross Johnson Initiated an LBO
According to Burrough and Helyar, LBO consultants repeatedly contacted Johnson, asking him to consider a leveraged buyout and offering their services. Initially, Johnson was resistant to the idea because he feared that an LBO would force him to adopt a restrictive budget in order to pay off bank loans. Also, he didn’t want to trade his amicable board of directors for a group of finance-consultant partners who might be less inclined to let him run the company as he saw fit.
However, Burrough and Helyar speculate that Johnson grew restless, not finding enough avenues for continued change and improvement. He also became obsessed with the company’s stock price, which dropped to around $45 per share in an economic downturn and failed to come back up. In the end, Johnson agreed to try an LBO, seeing it as the only way to address the low stock price: If Johnson and his partners bought the company, the stockholders would get a big payout and then there would be no more publicly traded stock to worry about.
According to Burrough and Helyar, Johnson partnered with the finance firm Shearson Lehman because Shearson was willing to give his executive team more generous terms for their partnership than other consulting firms. Specifically, the new board of directors would be structured such that Johnson’s team had veto power. And Johnson’s team would get 18.5% of the company’s dividends (almost twice the going rate), even though Shearson would put up all the money for the LBO (most of which they would borrow from banks or raise by selling junk bonds).
Burrough and Helyar explain that Shearson Lehman was willing to accommodate Johnson’s terms because they felt they needed the LBO to establish themselves in the LBO consulting business. They were a relatively new company that had started out facilitating wire transfers, bought out the Lehman Brothers investment bank, and was now trying to get started in the LBO consulting business. Because of the size and value of RJR Nabisco, doing an LBO for Johnson would have propelled Shearson immediately to the top of the LBO-services market.
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