Nabisco takeover sets new records for greed

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"Revulsion, disgust are the words that come to mind on this deal. Morally I find it repugnant. Financially I find it frightening." Thus it was that Wall Streeter and moneymanager Michael Harkins sized up the $25 billion buyout of RJR Nabisco Inc.

This transaction, which has been headlined as "a deal that even Wall Street found disgusting," was actually a routine takeover operation that has been performed on thousands of companies in the last few years.

What has drawn so much attention to the Nabisco buyout is the record price paid ($24.9 billion), the millions of dollars collected by lawyers, bankers, and takeover artists-and the staggering load of debt piled on a company that has been only mildly profitable.

The name of the game Profits is the name of the game in the business world. It is the drive for profits that turns the wheels of RJR Nabisco, producing a vast array of consumer products from Shredded Wheat to Oreo cookies to deadly Winston cigarettes.

Presiding over this huge conglomerate was C. Ross Johnson. As chief executive officer, he was charged with producing efficiently, selling profitably, and distributing these profits to shareholders. For this Johnson was paid a salary, stock options, and executive perks that kept the wolf far from the executive door.

But greed knows no bounds. Johnson wanted more. He wanted to be a multi-millionaire. And he knew how he could do it—get rid of the 112,000 stockholders who were always clamoring for dividends and keep RJR Nabisco all to himself (and a few friends). He would also be safe from other corporate raiders, since there would now be no shares on the market.

Johnson proposed to eliminate Nabisco's 112,000 shareholders by operation LBO, Leveraged Buy Out. In October, Nabisco stock was selling for around $56. Johnson proposed to offer the stockholders $75 a share. This would cost about $17 billion. The money could be raised by selling bonds based on the assets of this huge conglomerate.

On Oct. 19, Johnson presented his proposal to his board of directors. Here Johnson's excessive greed turned what might have been a routine approval into a frenzy of bidding that alarmed the Establishment from Wall Street to Washington.

Call for more bids Johnson had made a cheapskate bid for the company. The true value of the stock is closer to $90. As stockholders, the directors did not want to be shortchanged. They also thought a $100 million special management fee for Johnson and his associates pushed greed even beyond the norms of Wall Street avarice.

Johnson said he intended to share some of the money with some of the 15,000 enployees—sometime. The directors were not impressed and called for more bids. They were soon coming.

Kohlberg, Fravis, Roberts & Co. (KKR), buyout specialists, came in with an offer of $94 a share. The Johnson group then upped their bid to $101. KKR roared back with a offer of $106. Management went $2 better at $108. KKR went to $109. Desperate, Johnson came back with a complicated bid said to be worth $112. The directors said it was no better than $109.

To break the deadlock, the directors asked a question. Would the winner be willing to freeze employees' contracts and benefits till the end of 1991? KKR said yes. Johnson said no, and lost the company.

Paying $109 for shares that were worth only $90 might look like a losing game. But KKR cannot lose. They are not playing with their own money. They put up only $15 million, less than 1 percent of the $25 billion. The rest was borrowed.

Who would lend that kind of money? Plenty of people, if the interest rate is high enough! And the interest rates on these bonds are high, all the way to 40 percent. Managers of pension funds, who want to look good in the short run, grab these bonds. Sure they are risky, really junk bonds, but the risk is further down the road. It is today's bottı 0m line that counts on Wall Street.

Winners and losers

Newspapers described the last ‹ ays bidding on Nabisco as a "feeding fre nzy" percent in value. John Creedon, president of Metropolitan, said, as he saw $1 billion go down the tubes, "What is being do Line threatens the very basis of the capital list system."

The buyout artists counter that they are strengthening capitalism by shaking up realize even IBM could be seized by financial privateers.

The debt bubble More alarming is the loss of $313 billion in shares that have been taken out of the market from 1984 to 1987. These certificates of ownership of American industry have been replaced by $341 billion in IOUs. This new debt added to the already existing corporate debt gives the staggering total of $1.8 trillion!

Lawmakers are mumbling about curbing the "excesses" of corporate raiders. They look on them as aberrations in an otherwise rational system. But they are finding that raiders, far from being marginal, are an