Doubts on Buyouts
The $11-billion proposal by Philip Morris to take over Kraft Inc. and the $17-billion tentative leveraged-buyout plan by which the managers of RJR Nabisco hope to become the owners of that vast tobacco and food conglomerate are attracting substantial attention. So they should.
Two questions should be central to consideration of these proposals:
--Are they in the interests of the stockholders?
--Are they in the interests of the American economy, including consumers?
We have serious doubts.
Take Philip Morris, for example. The Wall Street Journal reports that many business observers do not have high regard for its management of those companies it has already taken over. The company’s interest in expanding its food operations is understandable, for that is where the growth is. But an expansion on this scale raises uncomfortable questions about the impact on competition, including competition for supermarket shelf space, and ultimately on consumer choice. The enormously profitable sales of Marlboro cigarettes have put Philip Morris in an enviable cash position. Some Philip Morris stockholders may wonder why the cash would not be better directed into more generous dividends.
In the case of the managers of RJR Nabisco, the leveraged-buyout proposal raises the same questions that have attended other bids by managers to buy out the companies they run. Who is the real winner, the manager or the stockholder? Is the national economy strengthened by the process, which inevitably leads to selling off portions of the corporation to pay off the debts of the leveraged buyout? This, in turn, has often been accompanied by layoffs of workers. How is it that $250 billion is reported available in credit to managers prepared to buy out their own companies? Does that profitable business for banks limit the credit for more productive investments? Furthermore, the evidence suggests that a leveraged buyout by corporate executives can never be consistent with their fiduciary responsibilities to the stockholders. In a sense, leveraged buyouts are the ultimate insider trade. How can managers be expected to negotiate the best deal for stockholders when they are seeking the best deal for themselves?
