Merchants of Debt

Regular use of the term “leveraged buyout” (LBO) began only in the mid-1970’s. However, the technique of going deep into debt to buy a company had been well established for years, including notable examples from the 1950’s and 1960’s. Henry Kravis, George Roberts, and Jerry Kohlberg left the securities firm Bear, Stearns & Co. in 1976 to form KKR and specialize in LBOs. There were no buyout specialists at the time—the days of all Wall Street brokerages having mergers and acquisitions departments came much later—and the first year was lean.

But political and economic changes were occurring that would greatly aid high-debt financiers. The laissez-faire Reagan era was about to begin, a “credit culture” which saw a dramatic rise in consumer debt, corporate debt, and government debt. The tax code had long contained incentives favoring corporate debt over equity. As corporate tax rates climbed, business leaders and finance scholars began to take a fresh look at debt. KKR was in the right place at the right time.

Over the next several years, KKR arranged the buyout of some of corporate America’s largest companies. Household names such as Safeway and Duracell, as well as large but lesser-known firms such as Storer Communications and Beatrice, fell to KKR and its partners. The crowning glory, 1989’s RJR Nabisco purchase, turned out to be the end of the LBO boom. Anders covers these deals in rich detail, including previously unpublished information about the near-collapse of RJR in 1990.

MERCHANTS OF DEBT deals with more than financial details. The personal dynamics of dealmaking also receives plenty of attention. And unlike the KKR participants—who appear to have rarely considered the personal costs of their deals—Anders looks at what it was like to work for a company saddled with enormous debt. All in all, a thoughtful, readable account of the buyout era: how it worked and what it meant.