Merchants of Debt: Kkr and the Mortgaging of American Business

Categories: Banking and Finance

This title is part of the Business Histories list.

Of interest:

Takeover: The New Wall Street Warriors: The Men, the Money, the Impact

The Money Machine: How KKR Manufactured Power and Profits

The Money Wars: The Rise & Fall of the Great Buyout Boom of the 1980s

The Titans of Takeover

With borrowed money, borrowed management, and a lot of nerve, Kohlberg Kravis Roberts acquired one Fortune 500 company after another in the 1980s, epitomizing both the best and worst of Wall Street's stunning rise to power in the age of casino capitalism. In the compelling book, the author explains why American business became so enchanted by debt; how KKR partners Jerome Kohlberg, Henry Kravis, and George Roberts became billionaires; and how their takeovers affected America's economic strength. This fascinating, behind-the-scenes account show how pride, jealousy, fear, and ambition fueled Wall Street's debt mania - with repercussions to millions of people.

With borrowed money, borrowed management, and a lot of nerve, Kohlberg Kravis Roberts acquired one Fortune 500 company after another in the age of casino capitalism, KKR epitomized both the best -- and the worst -- of Wall Street's stunning rise to power in the 1980s. In this book, the author explains why American business became so enchanted by debt; how KKR partners Jerome Kohlberg, Henry Kravis and George Roberts became billionaires, and how their takeovers affected America's economic strength. This fascination, behind-the-scenes account shows how pride, jealousy, fear, and ambition fueled Wall Street's debt mania -- with consequences that affected millions of people. Investors and businesspersons alike will find this expose engrossing and informative reading. This book was selected as one of the Best Business Books of 1992 by Business Week.

For more than a decade, Henry Kravis and George Roberts have been archetypes, first of Wall Street's boom years and then of its excesses. Their story and that of their firm--the biggest, most successful, and most controversial participant in the age of leverage--illuminates an entire era of financial maneuvering and speculative mania. Kravis and Roberts wrote their way into the history books by concocting one giant takeover after another. Their technique: the leveraged buyout, an audacious way to acquire a company with borrowed money, borrowed management--and a lot of nerve. Their firm, Kohlberg Kravis Roberts & Co., dominated the Wall Street scene in the late 1980s, acquiring one Fortune 500 company after another, including Safeway, Duracell, Motel 6, and RJR Nabisco. Merchants of Debt draws on more than 200 interviews, including recurring access to the central figures and their KKR associates, as well as court documents and private correspondence to couch giant financial issues in human terms. The story of KKR shows how pride, jealousy, fear, and ambition fueled Wall Street's debt mania--with consequences that affected hundreds of thousands of people. Anders addresses three questions: Why did American business become so enchanted by debt in the 1980s? How exactly did Kravis and Roberts rise to the top of the heap? What have buyouts, especially KKR's deals, done to America's economic strength? Here is a gripping saga that takes readers behind closed boardroom doors to show how star-struck young bankers, ruthless deal-makers, and nervous CEOs changed one another's lives--and the whole American economy--over a fifteen-year span.

From Turnarounds and Workouts, February 15, 2003
Review by Gail Owens Hoelscher

"For the first fourteen years of KKR's existence, the buyout firm's hallmark could be expressed in one word: debt… As KKR grew evermore powerful, Kravis and Roberts derived their economic clout from a single fact: They could borrow more money, faster, than anyone else," according to the chronicler of this high-flying firm. KKR acquired $60 billion worth of companies in wildly different industries in the 1980s: Safeway Stores, Duracell, Motel 6, Stop & Shop, Avis, Tropicana, and Playtex. They made piles of money by deducting interest expenditures from their taxes, cutting costs in their new companies and riding a long-running bull market.

The juggernaut of Kohlberg Kravis Roberts & Co. began rolling in 1976 when Jerome Kohlberg and cousins Henry Kravis and George Roberts left Bear, Stearns with about $120,000 to spend. The three wunderkind shortly invented and dominated the leveraged buyout as they sought investors and borrowed money to acquire Fortune 500 companies in dizzying succession. They put up very little money of their own funds, but their partnerships made out like bandits. Consider the case of Owens-Illinois: KKR pup up only 4.7 percent of the purchase price. The company's chairman earned $10 million within a few years, the takeover advisors got $60 million, Owens-Illinois was left "gaunt and scaled back," and about five years later, KKR took it public at $11 a share, more than twice what the KKR partnership had paid for it.

In this reprint of his 1992 books, George Anders tells us how they worked: "(t)ime after time, the KKR men presented a tempting offer. The CEO could cash out his company's existing shareholders by agreeing to sell the company to a new group that would be headed by KKR, but would include a lot of room for existing management. The new ownership group would take on a lot of debt, but aim to pay it off quickly. If this buyout worked out as planned, the KKR men hinted, the new owners could earn five times their money over the next five years. Presented with such a choice in the frenzied takeover climate of the 1980s, manages and corporate directors again and again said yes… To top management a leveraged buyout was the most palatable way to ride out the merger-and-acquisition craze."

The author includes a detailed appendix of KKR's 38 buyouts during the period 1977-1992 that presents the following on each purchase: price paid by KKR; percentage of the purchase price paid by KKR's equity funds; length of time KKR owned the company; financial payoff for the ownership group; and the annualized profit rate for investors over the life of the buyout. KKR used less than 9 percent of its own funds in 18 of the 38 cases. In only four cases did KKR put up more than 30 percent of the price. KKR owned the 38 companies for an average of about 5 years. As Anders puts it, "(a)s quickly as the KKR men had roared into a company's life, they roared off."

This behind-the-scene account shows the ambition, pride, envy and fear that characterized the debt mania largely engineered by KKR, a mania that put millions out of work and made a very few very rich. This book is a must read in understanding what happened to corporate America in the 1980s.

George Anders is the West Coast bureau chief of Fast Company magazine. He worked for two decades at the Wall Street Journal, and was part of a seven-person reporting team that won the Pulitzer Prize for national reporting in 1997.

In Merchants of Debt: KKR and the Mortgaging of American Business, George Anders of The Wall Street Journal explores not just Kohlberg Kravis Roberts & Co. but also the impact of the leveraged buyout deals it popularized. Reviewer Anthony Bianco found the book well-researched, fair-minded, and thorough in its history of transactions.

Discussing the $26.4 billion buyout of RJR Nabisco Inc., ``Anders goes beyond what has been previously published,'' Bianco wrote, with his convincing assertion that RJR's post-deal crises pushed KKR close to ruin. Leveraged buyouts in general Anders terms ``one of the most profoundly undemocratic ventures the United States had ever seen.'' Their only lasting impact, he says, was to shift wealth from the mass of corporate employees to a managerial elite allied with Wall Street.

Bianco faulted Anders for shying from sharp judgments and for failing to delve deeply into the motivations and character of KKR's dealmakers. But Anders won unparalleled access to Henry Kravis and his cousin and partner, George Roberts, Bianco noted. Crediting Anders with ``devastating reportage,'' Bianco said, ``His exhaustively researched book provides the closest look yet at KKR's inner workings.''

With borrowed money, borrowed management, and great nerve, Kohlberg Kravis Roberts acquired one Fortune 500 company after another--and changed the face of American business. Excerpted in the Wall Street Journal.

"[S]omething refreshing and important: a book that reckons seriously with Wall Street's innovations and achievements, even as it chronicles its recklessness and intrigues... [A] far more enduring contribution to understanding one of the most dynamic and disturbing periods in American business history."

"Excellent... One of the few books that a person can use to evaluate what happened in the financial 1980s. It should be required reading for anyone who got rich, lost a job or watched in consternation as Wall Street's juggernaut swept the U.S. economy."

Kohlberg Kravis Roberts & Co. (KKR) was founded in New York in 1976 by three . . . investment bankers, Jerry Kohlberg, George Kravis, and George Roberts, with the simple purpose of assisting companies to participate in management-led buyouts or leveraged buyouts (LBOs). . . . {The author} chronicles the rise of KKR during the 1980s, the 'age of debt,' and . . . {argues that} a simple formula using borrowed money could be successfully repeated over and over again in corporate takeovers.

George Anders is the West Coast bureau chief of Fast Company magazine. He previously spent two decades as a writer and editor at The Wall Street Journal. While there, he was part of a seven-person reporting team that won the Pulitzer prize for national reporting in 1997. He is a graduate of Stanford University, and has also authored a critical analysis of the HMO industry.