by George P. Baker, George David Smith
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Product Description
A widespread misunderstanding concerning leveraged buyouts (LBOs) is the belief that they accomplish little but the ruin of companies and the loss of employment. How else could it be? Until recently, journalists, including much of the business press, have depicted LBO specialists as generally greedy, if not sinister, forces whose activities compound the dislocations of modern American economic and social life. This kind of criticism reached a crescendo in the press and in Congress at the end of the 1980s, and Kohlberg Kravis Roberts found itself in the middle of the controversy. Based on interviews with partners of the firm and on unprecedented access to KKR's records, George P. Baker and George David Smith have written a definitive account of how KKR has approached LBOs in a book that will appeal to the specialist and general reader alike. The authors focus on KKR's founding, evolution, and innovations as ways to understand issues in modern American business. In examining KKR as a unique form of enterprise--one that subscribes to a set of alternative perspectives on business and value creation--the book bridges the gap between public perception and academic knowledge of how financial innovation impacts economic life. The firm's approach to leveraged buyouts was an important aspect of the corporate restructuring and governance reforms in the American economy from the mid-1970s through 1990 (the years of what some have called the "leveraged buyout movement"). KKR and other companies fundamentally altered the prevailing perception of the role of debt in the modern American corporation and established an alternative model for organizing and managing corporate enterprises. KKR financed the companies it acquired with high levels of debt, while linking their ownership to management. It then imposed rigorous monitoring by the board of directors over the companies in its portfolio. This combination of factors forced managers to concentrate not on growth but rather on how to achieve value through whatever means was most appropriate to the company's circumstances. The purpose of the leveraged buyout was to realize, or "create," value in companies by reforming their management systems. KKR's approach to restructuring the relationship between owners and managers in a highly leveraged firm rested on a basic principle: Make managers owners by making them invest a significant share of their personal wealth in the enterprises they manage, and they will have stronger incentives to act in the best interests of all shareholders.
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Average Customer Review:
2 of 2 people found the following review helpful:
 Good primer/introduction to LBOs, 2007-03-15
If you're relatively new to the subject and want a good primer/introduction to LBOs, as well as some background history on the leveraged buyout and on KKR, this is a good read. It's reasonably quick and easy to read without being too dumbed down. I think that, among others, one group that would really benefit from reading this book are college students (or even MBA students) who are interested in eventually working in private equity but who don't currently know much about it.
As a brief summary, this book includes:
1) A discussion of the rationale for leveraged buyouts - from the standpoints of both the economics (to the buyer) and corporate governance (LBOs as one solution to the classic principal-agent problem)
2) A history of KKR and of the leveraged buyout in general. It goes back to the founding of KKR and to very early LBOs.
3) A discussion and brief analysis of a number of real world LBOs - both successful and failed. This is probably the most useful part of the book, as it gives you some feel as to the factors that can lead to a successful (or failed) LBO and helps you learn from some of the mistakes of the past.
I was interested in the subject from the perspective of an equity analyst interested in identifying potential LBO targets. The book, naturally, doesn't provide a framework for identifying LBO targets (nor did I expect it to), but it was a very good introduction/primer on the subject that, when combined with other reading and research, helped me develop my own framework for identifying potential LBO candidates.
0 of 0 people found the following review helpful:
 A fine book on the LBO philosophy of KKR, 2006-08-05
The book, The New Financial Capitalists, provides the reader with more than just a cynical rant of corporate America, management, corporate finance, and corporate restructuring. It is a refreshing read in that it offers the reader with a logical understanding of the problem(s) facing corporate America and the solutions provided by KKR - i.e. the LBO - which attempt to remedy the problem(s). The book is well worth the price.
1 of 1 people found the following review helpful:
Hey, MBAs! This book is for you!, 2005-07-12
When I thought about buying this book, I was looking for several things. First, the technology of the private equity business--comprehensively discussed case studies of real buyouts, successful and failed. Second, the history of the business-I wanted to understand hidden laws and tendencies. Finally, I wanted to learn about other great players on the market.
Well, I found all the above plus much, much more. What's more, it took me just two weeks to go through the book-the language and style are light and interesting.
6 of 7 people found the following review helpful:
Finance Capitalism and Corporate Excess, 2004-05-28
KKR is a truly unique institution. Are they merchant bankers, acting as fiduciaries in behalf of their clients? Or is it accurate to derisively call KKR takeover specialists, rapacious and always on the lookout for corporate prey? It is indeed difficult to pin a generic label on what KKR is doing--it depends on which side of the political fence you are in--but what we do know is that KKR is the acknowledged leader of the leveraged buyout, a branch of private equity investing which allows investors to profit from sizeable anomalies between a company's potential value and its current value, in part through the introduction of substantial levels of debt in a company's capital structure. As Baker and Smith explains: "By employing high levels of debt...they minimized the cost of buying the equity, which they shared with the target companies' managers. Assuming that the cash flows of the acquired businesses would be more than sufficient to repay the borrowing, [KKR's] success depended on a combination of timely debt reduction and the promotion of longer-term efficiency.""The New Financial Capitalists" is by far one of the best books dealing with KKR and LBO finance in general. Apart from providing an inside track with regard to understanding the raison d'etre behind buyouts and their critical success factors, this book has a wealth of information regarding specific transactions led by KKR, of which the $31 billion buyout of RJR Nabisco is undoubtedly the most well-known. The authors conclude that LBOs and, by extension, the existence of private equity takeover specialists such as KKR, yield long-term benefits to the economy which are far in excess of the intermediate costs such as employee dislocation and onerous debt servicing. KKR sought to break new ground in enhancing shareholder value: it compelled investees to maintain a focused business strategy and to divest or spin off underperforming operations, and it was highly instrumental in making corporate America realize that capital is a scarce resource which must be judiciously employed. As an instrument of financial and managerial reform, KKR helped reconcile the interests of corporate managers and shareholders, by requiring senior executives to have a direct economic stake (i.e., become stockholders) in the companies they manage. The analysis of some of KKR's failures underscores that, by using leverage as its weapon of choice, KKR is in effect a high-wire act. However, the presence of debt in the capital structure is also extolled as a disciplining force for managers who have become used to high free cash flow levels and low debt. Thus, what KKR and other LBO practitioners are in effect saying is that a company's operating and investment decisions are not completely independent of its debt-equity ratio. This book deserves to be read because it is an absorbing study of leveraged takeovers seen through the lens of a pioneering firm.
3 of 3 people found the following review helpful:
any interest in lbos, this is your guide, 2002-12-31
KKR was the first name I heard while researching the Private Equity marketplace for a college paper. It also became the name heard mostly afterwards and rightfully so. Jerome Kohlberg, Henry Kravis and George Roberts are obviously extremely smart and confident guys, fortunately the book exhibits moments of vulnerability; which is helpful for any financial entrepreneur. The only shortfall is that the book isn't longer. I was excited while reading some of the chapters, keep in mind that this is a finance book not the Lord of the Rings. This book is terrific. Enjoy
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