FREE ESSAY ON WALL STREET: BARBARIANS AT THE GATE

WALL STREET: BARBARIANS AT THE GATE

Barbarians at the Gate is a story of the largest takeover in Wall Street history. Ross
Johnson turned CEO of a company, which was the product of three merged companies,
Standard Brands, RJ Reynolds, and National Biscuit Company (Nabisco). The newly formed
company's, called RJR Nabisco, stock began to fall and never recover. Johnson along with
Shearson executives planned a leverage buyout (LBO), in which a brokerage firm (Shearson)
would borrow money from banks and buy up all the outstanding shares from the stockholders
to turn the company private. The problem with this is that the company would be put into
jeopardy of other companies that can outbid the parent company, which would lead to a
takeover. The higher the bid would lead to a bigger debt and lesser profits for the
owners of the firm.
One of the six accounting principles that was discussed in the book was the expense
principle, which helps determine performance of a company by measuring the outflows and
inflows of resources. The matching principle guides the recognition of expenses, so good
matching will ultimately lead to a better measure of performance. When KKR exercised due
diligence of RJR Reynolds, they could not figure out "other uses of cash" in the
statements obtained. "The initial projections they had obtained from RJR Nabisco was a
heading 'other uses of cash.' Beside it was a row of figures stretching out ten years,
each year ranging from 300 to 500 million dollars. Was it cash flowing in or out? Should
he add it? Subtract it? Ignore it?" (Barbarians 369). Obviously, KKR was trying to figure
out whether RJR Nabisco was a good investment or not. The debt accrued by an LBO needed
to be paid off using cash from the company acquired. The difference between expensing the
millions of dollars or recognizing it as revenues would mean a bid of 92 or 96 dollars
per share. The expense recognition method here proved to be helpful for KKR to acquire
RJR Nabisco.