BIG, BIGGER, BIGGEST : KKR gets high marks for management on its way to becoming the largest U.S. conglomerate.

Thanks to its unprecedented $24.5-billion winning bid for RJR Nabisco, the investment firm of Kohlberg Kravis Roberts has cemented even further its reputation as a deal maker par excellence , a financial juggernaut that is changing the face of corporate America.

But while KKR and its top partners receive top marks for their takeover acumen, they also score reasonably good reviews from analysts for managing companies they have acquired, if profits for KKR’s investors are measured.

KKR will become the nation’s largest conglomerate when it adds RJR Nabisco to a stable of at least 25 other companies that it controls or in which it has significant interests.

Through cost-cutting, asset sales, acquisitions or strategy changes--and giving on-site managers autonomy to run day-to-day affairs--firms controlled by KKR, such as Oakland-based Safeway Stores and Owens-Illinois, the Ohio maker of containers and tableware, are better off now than they were before being acquired by KKR, many takeover experts say.

These and other companies are expected to be sold back to the public for much more than their acquisition price, yielding handsome profits that represent up to 40% or 50% annual returns for the life insurance companies, pension funds and other institutions investing in KKR-managed limited partnerships that make the acquisitions.

“Generally speaking, they’ve done excellently for their investors,” says Martin Sikora, editor of Mergers & Acquisitions magazine.

“They must be doing a good job or we wouldn’t be making money,” says Daniel J. Kelly, deputy director and general counsel for the Massachusetts Pension Reserves Investment Management Board, a major investor in KKR partnerships.

Nonetheless, questions remain about KKR. Some analysts say the firm has done well more because of shrewd deal making--buying companies cheap with artful financing and then selling their assets--than because of management brilliance. The firm’s tactics also have been hit by labor union leaders and consumer advocates who say its buy-and-sell methods lead to layoffs and other dislocations. At Safeway, for example, thousands of workers were laid off.

“They’re absolutely first-rate deal makers. But I’m not necessarily sure that management was their hot button,” says Thomas V. Bonoma, a Harvard Business School professor who has served as a consultant to KKR and a director at a KKR-controlled company that the investment firm sold in 1987.

Perhaps the biggest question is what will happen to some of the firm’s more recent acquisitions if the economy lurches into a recession, which many economists fear might begin next year. Many of KKR’s firms are still saddled with heavy debts that could become harder to service if the economy dips as assets become harder to sell and profits decline.

The companies KKR has amassed make up an impressive and diverse group. The firm pioneered the modern leveraged-buyout market in the late 1970s. In these LBOs, KKR acquires firms through heavy borrowings to be paid off from the target firm’s cash flow or the sale of assets.

Major Food Retailer

Using such borrowing clout, KKR has bought some 35 companies over the years, with relatively little of its own or investors’ money. KKR aims to acquire those companies and then unload them within five to seven years at a profit--either by spinning off assets or selling shares back to the public.

With such a strategy, KKR has become one of the nation’s largest food retailers, owning major stakes in Safeway Stores, Stop & Shop Cos. of Boston and Fred Meyer Inc., based in Portland, Ore. KKR also is a major player in the lodging business, through its control of the Motel 6 and Red Lion Inns chains. It also has interests in forest products and natural resources firms.

And now it will become a major player in food processing, with RJR Nabisco to be added to its biggest current holding, Beatrice Cos., which it acquired in 1986 for $6.1 billion in the largest LBO in history until RJR Nabisco.

KKR has managed to control these disparate firms largely by not getting involved in day-to-day management, an approach largely dictated by its remarkably lean staff of about 16 professionals.

Instead, KKR retains current management to run everyday affairs, as it did at Safeway, or hires new managers, as it did with Beatrice, Fred Meyer and Red Lion--and plans to do with RJR Nabisco.

“For the most part, they’ve taken the position that they’ve acquired good management and will let management run it,” says Sikora of Mergers & Acquisitions magazine.

KKR usually puts one or more of its partners on the acquired firm’s board. And KKR’s role is primarily to help with four major tasks: reducing debt, selling assets, cutting bureaucracy and controlling capital expenditures.

Incentive for Management

The task of monitoring companies and making deals falls to KKR top dogs Henry R. Kravis in New York and George R. Roberts in San Francisco, along with the firm’s three other partners, Robert I. MacDonnell, Paul E. Raether and Michael W. Michelson. Each is responsible for overseeing different companies.

Another key to KKR’s technique: Give top management a major ownership stake to boost their incentives. With no public shareholders, there is theoretically less pressure on those managers to produce quarterly earnings gains.

Perhaps a typical case of KKR’s management techniques has been Safeway, acquired through an LBO in 1986 for $4.2 billion.

The grocery chain’s pre-buyout top management was retained, and given a 15% ownership stake. KKR also has sold numerous assets to pay down debt, including the sale of Safeway’s Southern California stores to Vons Cos. Now debt stands at about $3 billion, down from more than $5 billion at the time of the buyout.

KKR played an instrumental role in those transactions, but “KKR has never tried to tell us how to run grocery stores,” Peter A. Magowan, Safeway’s chairman and chief executive, has said. “They’ve been very active in helping shape the disposition strategy--what to sell and how to sell it.”

But by selling underperforming operations, the grocery chain actually has increased operating profits, even though revenues have been reduced by a third and the number of stores has been cut almost in half, says Robert E. Bradford, a Safeway senior vice president.

Key Acquisitions

“Safeway post-buyout is a much stronger company than before,” says Douglas K. Le Bon, vice president of special investments at Wilshire Associates, a Santa Monica firm that serves as a consultant for several institutions investing in KKR partnerships.

But KKR does not always make its mark by selling or dismembering companies. At Owens-Illinois, a glass manufacturing firm that KKR acquired via LBO in 1987 for $3.7 billion, KKR has sold off some operations but also made a key acquisition earlier this year of Brockway, a major competitor.

KKR also has added new units at Red Lion and Fred Meyer to the point now where their sales exceed those at the time of KKR’s financings, says James C. George, investment manager for the Oregon Public Employees Retirement System, a major investor in KKR partnerships that own those and other firms.

“This is not just a group that buys companies and sells them,” George says of KKR.

The firm also has helped some firms adjust their strategies, George says. Motel 6, for example, has added units, increased rates and added services such as telephones and advance reservations in part to cater to business travelers who pay their own expenses, he says.

Nonetheless, some critics contend that KKR’s story is not all roses.

Some restructurings at such companies as Safeway should have happened anyway, some analysts concede.

And at Beatrice, returns from asset sales are not meeting original projections, some analysts say. While the company already has sold off many non-food operations, such as the International Playtex brassiere maker and the Avis car rental concern, it has had difficulty selling what’s left at what it deems to be satisfactory prices.

Nonetheless, many investors in Beatrice say they are pleased with their returns so far. Kelly of the Massachusetts pension board says his fund has already received $3.6 billion from the deal, more than its $3.1-billion original investment.

THE KKR COMPANIES

% of shares Company controlled by KKR Beatrice 88% DAW Forest Products 98% Dillingham 75% Duracell 88% L. B. Foster 13% Idex 56% M & T 98% Malone & Hyde * Marley 26% Fred Meyer 67% Fred Meyer Real Estate 90% Motel 6 88% Owens-Illinois 90% PacTrust 88% Printing Finance 80% Red Lion Inns 75% Safeway 85% SCI Television 45% Seaman Furniture 80% Stop & Shop 92% Storer Communications * Union Texas Petroleum 39% U.S. Natural Resources 49% Jim Walter 83% W-I Forest Products 44%

*Pending Source: Kohlberg Kravis Roberts & Co.