(FORTUNE Magazine) – Fifteen years ago this fall, the barbarians of Wall Street stormed the gates of RJR Nabisco, vying to buy the world's No. 2 cigarette maker. The company was also a cookie maker, of course, but it was the $2 billion thrown off by tobacco each year that made investment bankers salivate and set off a six-week bidding war, culminating in the mother of all LBOs.

The winner, with a bid of $25 billion: Kohlberg Kravis Roberts. The loser, ever since: RJR. When the company recently announced it would slash its workforce by 40% and henceforth promote just two brands (Camel and Salem), it was finally acknowledging that it may be in the same condition as some of its best customers: terminal.

Some of RJR's woes are peculiar to the besieged tobacco industry, but they mostly point to a more universal truth. The aftershocks of a singular seismic event can go on for years, eventually crumbling the foundation of even the mightiest business. The event here was the 1988 LBO, and the man who started it--then-CEO Ross Johnson--is vilified to this day in Winston-Salem, N.C.

To be fair, the company was going downhill as far back as the 1970s. Philip Morris became the market leader by capturing young smokers with Marlboro, while RJR contented itself with selling smokes to baby-boomers' dads. As Johnson once cheerily explained to me, "Every time a World War II vet dies, Winston loses market share."

What the LBO did was accelerate the decline. KKR had a $30 billion debt burden; Philip Morris had a golden opportunity. While RJR used its tobacco cash to pay off junk bonds, its rival plowed profits right back into the business. It beefed up its sales force, plastered the Marlboro Man on more billboards, and cozied up to wholesalers with incentives. By 1991, Philip Morris had grown its market-share lead by an impressive eight points, to 44% vs. RJR's 28%. RJR didn't retire its LBO debt until 1999--by selling overseas operations--and in the meantime Philip Morris toyed with its competitor, like a cat with a wounded mouse. In 1993, Philip Morris cut cigarette prices by 20%, knowing that RJR would have to do so too, and that it was far less able to take the profit hit. From 1991, when KKR took 60% of the company public, to 1995, when the firm swapped the last of its shares for Borden stock, RJR's market value shriveled about 50%.

KKR's legacy wasn't just poor returns on its LBO but poor leadership. They brought in CEOs from other industries--first Lou Gerstner, from American Express, then Charles Harper, from ConAgra. They were not only unschooled in tobacco but uncomfortable with it, in stark contrast to Philip Morris's seasoned cigarette marketers like Geoffrey Bible. RJR's run of curious CEO choices culminated with Steve Goldstone, who came to the job from the Davis Polk & Wardwell law firm. Yet there was a sad sort of logic to his appointment at the end of 1995. Things had gotten so bad that managing RJR's cigarette brands no longer took precedence--fending off tobacco lawsuits did. Goldstone played a big role in the 1998 settlement of a massive class-action lawsuit, brought by 46 state attorneys general against Big Tobacco. That removed a huge shadow from over RJR and enabled it to split the tobacco and food businesses into separate companies, a move that major shareholders like Carl Icahn had noisily advocated.

Yet with that settlement, the renamed, stand-alone R.J. Reynolds Tobacco Co. only slipped further down the slope. Starting in 1999 and continuing 25 years, RJR must make around $2 billion a year in payments to the plaintiffs. It passed along the cost to its customers, raising the price of its cigarettes seven times since 1999.

The other Big Four tobacco companies, which had settled, pushed through big price hikes too. That opened the way for a pesky new breed of discounter--small cigarette makers, which could radically undersell the majors because they were not saddled with suit payments. The upstarts have captured 12% of the cigarette market, much of it at RJR's expense. Those wizened old Winston smokers are price-sensitive and have abandoned RJR in droves. In the first half of 2003, RJR's sales dropped 18% from a year earlier, to $2.6 billion, while operating income fell 59%, to $275 million.

Whither RJR? It could be bought by British American Tobacco, which would combine the company with its U.S. subsidiary, Brown & Williamson (imagine Winston-Salem without Winston or Salem). A second scenario is another leveraged buyout. Imagine that. But don't expect the barbarians to be back: They've already picked over RJR thoroughly and departed, leaving behind only the wounded. --John Helyar

JOHN HELYAR is co-author of Barbarians at the Gate, the bestselling account of the RJR Nabisco buyout.