RJR Managers Catch Heat Over Takeover Tactics
With its rich trove of brand-name products, RJR Nabisco was a corporate treasure chest waiting to be discovered. But when RJR’s own management reached for the gold last month, critics cried foul.
RJR executives used their privileged position to try to engineer the sale of their company at an unfairly low price and enrich themselves at the same time, says a vocal collection of influential stockholders, bondholders and other observers.
“Compared to this kind of thing, Ivan Boesky was just a shoplifter,” says Ralph Whitworth, director of United Shareholders Assn., an activist group in Washington.
For their part, the managers deny that they’ve done anything wrong. Rather, they say they’ve helped shareholders by starting an auction that has already brought $100-a-share bids for what in October was a $55 stock.
The titanic fight for control of RJR Nabisco will leave more than one entry in the record books. The struggle will be remembered for the record-breaking $20-billion-plus takeover bids. For the unprecedented legal and banking fees. And for the controversy.
Leveraged buyouts have been controversial for years, but the sheer scale of the RJR deal has given new weight to questions of whether these deals unfairly enrich corporate managers at the expense of shareholders who are supposed to be their bosses.
In a leveraged buyout, a group of top managers borrow most of the money to buy control of their company, then pays off the debt with profits from operations or from sales of pieces of the company. Here, RJR managers and their allies at the Shearson Lehman Hutton investment bank have proposed a buyout, while two other groups, led by the Kohlberg Kravis Roberts buyout firm and the First Boston investment bank, are offering competing bids.
The next act in the drama is scheduled to take place Tuesday, when the committee of RJR directors that is running the auction receives a second round of formal bids for the company. The five directors on the committee have indicated that they may accept a bids or may themselves sell off some of the firm’s assets, which include such famous brands as Winston and Camel cigarettes, Nabisco crackers and A-1 steak sauce.
‘Nervousness’ About Tobacco
RJR management has come under fire on several counts. Critics say they tried to win the company with an unfairly low opening bid, and also worked out a deal with Shearson that would have given them an unusually rich package of benefits from the deal.
F. Ross Johnson, head of the management group, had suggested to his board that the company should be put up for sale since he was unable to raise its market stock price. The reason, he said, was the public’s nervousness about tobacco companies, which many fear may still face new government regulation or legal liability judgments.
The management’s opening offer of $75 a share looked like a generous one, compared to the market value RJR’s stock, which was then trading at about $55.
The critics, however, point out that many Wall Street analysts were valuing the company at $100 or more.
And they note that offers for the company have since moved far higher. The management group says its current offer is worth $100 a share, while the KKR-led group values its proposal at $94, and First Boston’s entry may be worth as much as $118 a share.
The difference between management’s opening $17.6-billion offer and the current top offer of $27 billion means that there may be billions “flopping around in there that the management group could have had all to itself,” said Whitworth.
He contended that management probably expected that its bid would have been the only offer, considering that it was so much bigger than any other takeover bid ever made. The management’s acrimonious fight against the KKR offer also suggests “they didn’t think there’d be other bidders,” Whitworth said.
Other takeover specialists say it is unusual for the directors of a company in a buyout to begin an auction of the company, as RJR’s outside directors did.
Flushing Out Bids
Jack Nussbaum, an attorney at Wilkie, Farr & Gallagher in New York and senior adviser to the Johnson group, insisted that the $75-a-share offer was not a formal bid.
“It was a figure that was announced to see if other bids could be flushed out,” he said. Even so, it was a 34% premium over what RJR shareholders had, he noted.
Nussbaum insisted that the management was not shocked that other bids materialized. “It didn’t surprise them that there was competition, although they obviously would have preferred to do the deal themselves,” he said.
The managers’ first offer did provoke anger from some big institutional shareholders.
Robert A. G. Monks, president of a shareholder advisory firm called Institutional Shareholder Services, said he asked 12 clients their views on the management offer.
Six, he said, were disturbed enough that they were willing to go to court to stop it. The investors put off those plans, however, when the company’s directors opened an auction of the company, and higher bids emerged, Monks said.
Management’s action “raises essential questions about the propriety of leveraged buyouts,” he said.
Criticism has also been leveled at an incentive package that the managers worked out with Shearson. Under its terms, about 10 RJR managers would initially pay $20 million for an 8.5% stake in the company. On completion of the deal, the stake’s value would be about $200 million.
If the value of their equity grew at about the usual rate, in five years the executives would own about 20% of a company--a stake worth about $2.6 billion. They are also entitled to special salaries and bonuses from the package.
In addition, the RJR team has caught flak for a package of “golden parachutes”--special severence compensation given out to benefit executives who have lost their jobs in a takeover. This package would give Johnson and more than 100 other RJR executives more than $125 million, no matter how the takeover fight turns out.
‘Acted Like Pigs’
News of the package, which was presumably first leaked by RJR’s competitors, brought sharp reactions from others in the takeover business. If the incentive package included the reported benefits, “that would be really wacko,” said Joseph L. Rice, president of the Clayton & Dubilier leveraged buyout firm. “That would show poor judgment on both Johnson’s part and Shearson’s.”
Said a leading buyout practitioner, who asked to remain unidentified: “They acted like pigs.”
RJR adviser Nussbaum said the package was contained in a draft of a deal that was discussed with Shearson but ultimately scrapped. He wouldn’t, however, provide details of the deal that was adopted, saying the company wouldn’t disclose details of a confidential negotiations.
When details of the incentives were first disclosed, Johnson wrote the special directors committee to say management groups often receive 8% to 19% equity stakes as an incentive. He also said he planned to distribute the stock to a wider group of managers.
Other critics have spoken up, too. Smith Bagley, grandson of company founder R. J. Reynolds and a major shareholder, wrote the directors’ committee chairman to complain of the leveraged buyout proposal.
The shareholders “have been paying these top executives . . . handsomely, to run the company for the stockholders’ benefit and not to acquire it at the shareholders’ expense,” wrote Bagley, who is a philanthropist and Democratic fund-raiser.
Directors’ Image Brightened
Bagley complained of earlier moves he said hurt the shareholders interests, including a buyback of 21 million shares last April at $53.50 a share and what he said were costly advance studies and other research on the benefits of restructuring the company and selling parts of it. He also objected to the managers’ moves to activate a “poison pill” anti-takeover device, to fend off acquirers unacceptable to them.
RJR declined comment on the Bagley letter.
If the auction has hurt the image of RJR management in some quarters, it has brightened the image of the outside directors committee. While many expected them to back the managers’ buyout proposal, they instead actively solicited the alternative offers.
Do their actions show that complaints about leveraged buyouts are not justified? “I think this reflects well on the system of checks and balances,” said Gerry Angula, managing director of a New York leveraged buyout firm called First Capital. “The system works.”
Others are less convinced. Some contend that the directors invited bids because they wanted to move with particular caution in light of the enormous size and publicity of the proposed deal.
And they said the contest isn’t over yet.
“At most companies, I still believe this would have been an open and closed deal for the management,” said Whitworth. “Leveraged buyouts can mean great things for shareholders, but they’re also subject to tremendous abuses.”
