In 1988, the leadership of private equity firm KKR believed that food and tobacco giant RJR Nabisco was badly run and bid for the company’s shares. KKR went on to execute one of the most notorious leveraged buyouts (LBO) in history, depicted in the book and film Barbarians at the Gate: The Fall of RJR Nabisco.
The playbook for that era’s wave of corporate control transactions went as follows: identify an underperforming company, mount a bid to acquire it with borrowed money, replace management and overhaul governance, restructure the company to help it flourish again, and eventually sell it on for a hefty return.
If you think through the chain of events required for that playbook, you soon realize that you need a significant range of capabilities to come out on top.
First, you need the analytical skills to determine the extent of the undervaluation of the company and the right levers needed to improve performance. Second, you need access to enough capital to put into the deal and, additionally, the power and infrastructure to raise additional money, be that equity and/or debt.
After all, you need the financial firepower to acquire 51% of the outstanding target shares (or the minimum that would allow you to actually exert control), including, of course, the ability to convince your stakeholders. And last, but not least, you need to have the execution power to implement all those changes that you envision could improve the performance of the company – and its stock price.
Each of these stages requires different skills: financial analysis and business acumen in the first stage, the ability to raise and deploy capital in the second stage, and managerial, operational and execution capabilities in the last one. It goes without saying that not many organizations have what it takes to line up all of these.