We pick up where we left off in Part 2. Ross Johnson, CEO of RJR Nabisco, presents a management buyout bid for $75-per-share—a number he’s certain will get the deal done without competition.

Instead, as soon as the board issues the customary press release announcing the buyout bid, RJR Nabisco is in play as the most prized buyout target on Wall Street.

Ross Johnson alienates not one, but two major players on Wall Street: Henry Kravis from buyout specialist firm KKR and Jeff “Mad Dog” Beck from junk bond specialist Drexel Burnham Lambert. It turns out $75-per-share is far from a winning bid.

What follows is the most dramatic LBO fight in history: bear hugs and tender offers, bank exclusivity plays, bidders posturing and bluffing, interlopers wanting to plant their flag in the LBO game, and directors getting ambushed in the hallways by bankers hunting for an edge.

Chapters

(01:04) Recap: Ross’s $75 management bid frames as an “inside raid”

(03:30) The board meeting and the press release that put RJR in play

(06:31) Kravis takes it personally: why KKR has to enter the fight

(07:54) Meet Drexel’s “Mad Dog” Jeff Beck (and why he matters)

(14:33) The stock becomes a battlefield: arbitrage, piling in, and momentum

(17:11) KKR goes on offense: the $90 tender offer and the greed narrative

(25:30) The auction gets hot: new bidders, higher prices, and board pressure

(42:28) The final vote—structure, certainty, and the aftermath of the deal

(45:54) Lessons learned

References

Barbarians at the Gate: The Inside Story of America’s Most Notorious Corporate Takeover by Bryan Burrough, John Helyar (link)

RJR Nabisco: A Case Study of a Complex Leveraged Buyout, Financial Analysts Journal, 1991 (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

In 1987, America is riding one of the greatest bull markets in history—until it all comes to an abrupt end on Black Monday, October 19th 1987. Portfolio insurance, a fragile strategy built on unrealistic market assumptions, helps turn a selloff into the single worst day in stock market history.

Ross Johnson, the CEO of RJR Nabisco, watches as his stock price gets cut in half in a day… even though the business and the economy are fine.

Over the next year, he tries everything from asset sales to share buybacks to convince the market there’s a lot more value at RJR Nabisco than they’re giving him credit for. Nothing works.

Meanwhile, leveraged buyouts are hot on Wall Street but that’s the one solution Ross Johnson isn’t willing to try. He’s a brilliant political operator who can manage board members, who loves perks, and hates constraints. But above all, he can’t stand that the market keeps pricing RJR Nabisco like a doomed tobacco company. That frustration overcomes his aversion to LBOs, and he makes his move on October 19th, 1988—exactly one year after Black Monday.

Chapters

(00:43) Welcome + recap: from junk bonds to the LBO era

(03:35) 1987 at the top: bull market euphoria, Berlin Wall optimism, Fed hikes

(05:24) Portfolio insurance: Black-Scholes in the wild and the “mechanical” selling logic

(09:58) Black Monday: the crash day and why it shocked everyone

(11:35) RJR’s stock collapse: the bargain that changes the story

(11:45) Meet Ross Johnson: perks, power, and the 80s CEO archetype

(28:17) LBOs 101: the mortgage analogy + why leverage can create value

(31:54) ERISA & pensions: Prudent Man Rule clarification unleashes institutional capital

(41:22) KKR’s rise: Henry Kravis, fund economics, and the LBO machine

(52:03) Ross’s playbook: buybacks, tobacco overhang, and the $75/share MBO spark

References

Barbarians at the Gate: The Inside Story of America’s Most Notorious Corporate Takeover by Bryan Burrough, John Helyar (link)

RJR Nabisco: A Case Study of a Complex Leveraged Buyout, Financial Analysts Journal, 1991 (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

The 1980s were an iconic decade on Wall Street. Michael Milken and his team at Drexel were key players in sparking the wave of buyouts that were emblematic of the era.

Before all that, in the early 1970s, a young Michael Milken joined Drexel to focus on low-grade bonds. He had discovered the research of W. Braddock Hickman, which concluded low-grade bonds could generate attractive investment returns, and he became obsessed. He was ambitious, smart, and an outsider when he got to Wall Street. Within a decade, he would be at the center of it.

In this episode, we tell the origin story of the high-yield bond market—and how Michael Milken, from a backwater desk at Drexel, turns a stigmatized corner of finance into the most powerful funding engine on Wall Street.

At first Drexel focused on trading “fallen angel” bonds. Then they moved aggressively into underwriting new high-yield deals, and created a flywheel: more issuance, more buyers, more liquidity—all underpinned by a rigorous knowledge of the market that no one else could match.

Along the way, we pull out lessons that rhyme with modern cycles: why market “infrastructure” matters as much as the math, how scar tissue from the last decade warps risk-taking, and how a productive innovation can—at scale—start to fuel excess.

Chapters

(04:06) Wall Street in the 50s/60s

(07:25) Michael Milken’s background

(11:24) Intro to bonds and market structure

(12:56) Braddock Hickman research and the logic for high-yield bonds

(18:34) Michael Milken lands at Drexel

(23:42) The 1970s, stagflation and brutal markets

(30:41) Michael Milken almost leaves Drexel then he gets capital to manage and doubles it

(49:13) Expanding the market by creating new high-yield bonds from scratch

(57:48) High yield fuels the rise of leveraged buyouts and corporate raiders

References

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)

The High-Yield Debt Market: 1980-1990 by Richard Jefferis, Jr. (Federal Reserve Bank of Cleveland) (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Innovations in Finance, Medicine, and Education with Michael Milken, Capital Allocators Podcast by Ted Seides (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.