For Ross Johnson, the Winnipeg-born chief executive officer of RJR Nabisco Inc., it was the ultimate gamble in a career of controversial risk-taking. By offering $29.7 billion for RJR, Johnson, his management team and Wall Street partners appeared to have clinched control of the American tobacco and food giant. Then, last week, a stunning turnaround took place in the highest-stake takeover battle in history. An RJR board of directors committee accepted New York City investment bank Kohlberg Kravis Roberts & Co.’s rival bid for RJR, the 19th-largest industrial company in the United States—even though Kohlberg’s offer was $840 million lower. And some critics say that Johnson’s abrasive style of doing business may have lost him not only RJR but his job, as well.
Johnson has never shied from controversy. Twice before, companies he has directed have been swallowed by bigger ones, and each time he emerged to run the new one. But observers say Johnson had so alienated the RJR board that it was willing to accept Kohlberg’s lower bid because that firm persuaded them that it would take better care of RJR’s employees.
Even so, analysts say that Kohlberg, whose offer must still be approved by RJR shareholders, spent far too much for RJR. And there is also concern that by paying nearly $30 billion for RJR—a price equal to more than the combined annual gross domestic production of Canada’s four Atlantic provinces—Kohlberg
has opened a new frontier in the world of corporate takeovers. Leveraged buy-out specialists such as Kohlberg make huge profits by borrowing heavily to buy control of companies. They then sell off the target company’s assets to pay for the debt and, at the same time, realize new profits. With the selloff of RJR, analysts say that other well-known companies could also become buy-out victims.
The RJR chairman first announced his own leveraged buy-out plan at a dinner at the Waverly Hotel in Atlanta on the night before a board meeting in October. At the time, the former accountant argued that he was only anticipating the inevitable. The high yields available from leveraged buy-outs were attracting vast amounts of investment capital and forcing 5 investment bankers to look x for ever-larger targets. Johná son said that RJR, with its
combination of well-known food and cigarette operations, made it an ideal buy-out candidate. His biggest mistake may have been his anticipation that the board members would support him. But they may have cooled when they realized that for their $24-million investment, Johnson and six fellow RJR managers would receive an 8.5-per-cent stake in the company, a holding worth $240 million. And the figure could have risen to more than $1 billion if the selloff had proceeded as Johnson had hoped. The directors, one of whom anonymously termed Johnson “a raider from the inside,” felt obliged to open up the auction.
The six-week bidding war reached an apparent conclusion on Tuesday, Nov. 29, when Johnson’s team, Kohlberg and First Boston Corp. all submitted final bids of more than $112 a share. A day later, Kohlberg claimed victory. Johnson issued a terse statement: “I am proud of the fact that we put the best bid on the table the first time and this time.”
The victors will not have long to savor their apparent success. The RJR acquisition will more than quadruple Kohlberg’s existing debt of $5.6 billion to nearly $26 billion. Facing $2.8 billion a year in interest on the debt, it will have to quickly start selling assets. There are expected to be plenty of buyers. Said Pavlos Alexandrakis, consumer goods analyst at New York City brokerage house Argus Research Corp.: “My feeling is that Kohlberg should come out pretty well on this.”
But losing is a new experience for Johnson. After stints at Canadian General Electric Co. Ltd. and the T. Eaton Co., he became president of Standard Brands Ltd. of Canada and, in 1976, chairman of Standard’s American parent—but only after an acrimonious boardroom struggle. Since he became chief executive of RJR five years later, he has continued his flamboyant style—shuffling divisions, transferring managers and employees and gambling $1.2 billion on Premier, the so-called “smokeless cigarette” that he argues will reverse the decline in North American tobacco use. Paul Desmarais, chairman of Montreal-based Power Corp. of Canada and a personal friend, described Johnson as “someone who doesn’t waste any time making up his mind.” Outside the office, Johnson, also a friend of Prime Minister Brian Mulroney, maintains the same dizzying pace, jetting across the continent, entertaining lavishly and associating with sports celebrities including former hockey star Bobby Orr and lawyer Alan Eagleson.
Johnson may have lost more than a company. Observers say that he will likely lose his position at Nabisco if the deal goes through. But he and the defeated RJR management group will not leave without a reward. According to documents filed with the Securities and Exchange Commission, RJR’s top 20 corporate officers are eligible for up to $62 million in severance payments when control changes. But that may not compensate for having lost the biggest corporate prize in history.
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