The New Financial Capitalists | George P. Baker

Summary of: The New Financial Capitalists: Kohlberg Kravis Roberts and the Creation of Corporate Value
By: George P. Baker


Venture into the world of corporate mergers and acquisitions with ‘The New Financial Capitalists: Kohlberg Kravis Roberts and the Creation of Corporate Value’ by George P. Baker. Discover how Kohlberg Kravis Roberts (KKR) innovatively employed leveraged buyouts (LBOs) to revolutionize the landscape of corporate ownership. Delve into the four waves of historical merger and acquisition activities that have shaped the United States economy, and examine how KKR extracted value from under-performing assets using these LBOs. Experience the successes and failures of KKR, and gain insights into their strategies, organizational structures, and their impact on the industries involved.

KKR’s Innovative Role in Corporate Mergers and Acquisitions

Kohlberg, Kravis Roberts (KKR) is a pioneer in the realm of corporate mergers and acquisitions with their innovative use of leveraged buyouts (LBOs). KKR’s LBOs altered how corporate ownership changed hands, especially with under-performing or poorly managed firms. Despite some controversy surrounding the corporate giant’s methods, they remain one of the most well-known and notorious LBO players in the industry. KKR’s actions shifted the power to resolve a distressed company’s performance issues from corporate management to KKR, disrupting traditional corporate practices.

The Four Waves of Mergers and Acquisitions

The book describes the four significant waves of mergers and acquisitions (M&A) that occurred in the US economy. The first wave was financial capitalism in the late 1800s to early 1900s, where companies needed to consolidate to raise funds for large infrastructure projects. The second wave saw the rise of managerial capitalism after World War II, where managers controlled companies despite not being owners. The third wave was conglomerates in the 1960s, where companies acquired unrelated businesses. Finally, the fourth wave in the late 1970s was marked by leveraged buyouts (LBOs) and hostile takeovers. The book highlights KKR’s success in using LBOs to extract value from under-performing assets, resulting in visible successes and failures such as the RJR Nabisco LBO.

The Paradox of Debt

People in the US have contradictory views towards debt. While historically indebtedness was frowned upon, it has now become a tool for amassing wealth. The societal aversion towards carrying debt started changing in the early 1960s with the bootstrap acquisitions. KKR’s Jerome Kohlberg modernized the process by adding the role of management as owners. KKR became a principle investor as well as a merchant banker financing acquisitions. They adopted the LBO strategy, where the pro forma plan involved ten to twenty percent equity and eighty to ninety percent debt, repaid within five to seven years. KKR’s success with Houdaille set the stage for the rapid growth of the LBO tool in the 1980s. With pension fund investment and the use of junk bonds from Drexel Burnham Lambert and Michael Milken, KKR acquired several companies including Motel 6, Storer Communications, Owens-Illinois, Beatrice, and RJR Nabisco.

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