BUSINESSLBOs may be a cure for haughty HMOsStreet Smarts. By Scott Gottlieb, MD, AMNews contributor. Jan. 15, 2001. For many, the $25 billion leveraged buyout of RJR Nabisco came to epitomize Wall Street's decade of greed. Culminating a culture of finance forged during the go-go years, the 1988 deal symbolized the Street's singular focus on money. The closing dinner that LBO firm Kohlberg Kravis Roberts threw to commemorate the deal has long been remembered on Wall Street. In the grand ballroom of New York's Pierre Hotel, 400 investment bankers who were made rich off the financial fiat feasted on lobster, veal and a three-foot-high cake decorated with edible replicas of Nabisco products -- all washed down with Dom Perignon. Over the next five years, RJR Nabisco's new financial owners set about dismantling the venerable company. The parts were worth more than the whole. The leveraged buyout bankers had amassed huge amounts of debt to take over the company. The bondholders needed to be paid. Using cash from the rich cigarette operations, they retired the debt and pocketed the rest. This celebrated deal, the subject of the book Barbarians at the Gate and a movie by the same name, is how most people understand Wall Street's leveraged buyout firms. In health care, many managed care companies are attracting the attention of the same leveraged buyout shops that brokered extravagant transactions such as Nabisco. But health care deals are unlikely to have the same destructive effects. They may even inspire management teams to clean up the industry's worst abuses. Leveraged buyouts fulfill a useful role. They keep management honest. When a stock price fails to reflect a company's true value, it's often because a business is poorly run or management teams have failed to inspire investors. It's in these cases that a firm becomes easy prey for buyouts.
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Copyright 2001 American Medical Association. All rights reserved.
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