(3 of 7)
Many Wall Street insiders thought the KKR bid was as self-serving and hasty as Johnson's offer had been. "They broke the golden rule by injecting their egos into a business decision," said one financier who knows KKR well. "They went after RJR Nabisco to protect their franchise as the largest dealmaker."
The directors' invitation attracted a third and scrappy new bidder who helped turn the fight into a virtual Who's Who of finance and industry. Assembled by the First Boston investment firm, the group of newcomers included Jay Pritzker, the Chicago-based chairman of Hyatt Corp., his wealthy family and Philip Anschutz, a Denver oil billionaire. First Boston also wooed Harry Gray, the retired chairman of United Technologies, and several other high- rolling investors. The group came into the bidding with a show-stopping but tentative offer of cash and securities worth up to $26.8 billion, or $118 a share, for RJR stock that traded for $56 a share in mid-October.
That bid, quickly dubbed a "Chicago submarine" because it would torpedo the competition, easily surpassed both rival offers. The Johnson team had bid $23 billion, or $100 a share, while KKR had proposed a package worth $21.6 billion, or $94 a share. Board members extended the deadline until Tuesday, Nov. 29, to take any counteroffers and allow time to study each proposal. If none is accepted, the directors could supervise an RJR restructuring themselves.
The donnybrook was only the most colossal of the deals that persisted last week in rearranging the U.S. corporate landscape. Hospital Corporation of America, the nation's largest hospital chain, ended more than a month of dickering and agreed to be acquired for $3.6 billion in an LBO put together by the company's management. Triangle Industries, which just two years ago acquired the packaging division of American Can in an LBO, agreed to be bought for $1.3 billion by Pechiney, the state-owned French metals firm.
Leveraged buyouts seemed like a small-time, unglamorous financial gimmick when KKR began hawking them on Wall Street in the mid-1970s. But the arrangements were an immediate hit with managers who saw the wisdom of taking their companies private to escape corporate raiders. LBOs were also a boon to promising firms that wanted to grow outside Wall Street's harsh spotlight.
Perhaps the most attractive feature of LBOs is that they give managers a sizable chunk of equity in newly structured companies. By using borrowed money to buy out the stockholders, executives can cash in their old shares at a profit even as they become owners of their firms. The managers are then free to sell parts of the business at a handsome profit. The ultimate payoff comes when they put their companies back on the market. The sale of well-run corporations can return up to 100 times the amount of a manager's original investment. With investors lured by such prospects, the value of completed LBOs soared from just $13.4 billion in 1984 to $76.8 billion so far this year. Since 1985, four of the ten largest LBO acquisitions have been made by KKR.