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Some deals have fallen short of their fanfare. KKR hailed the purchase of Beatrice as the "deal of the century," but wound up getting stuck with businesses that have not yet found buyers. "Beatrice was overadvertised as a spectacular deal when it was really just a good one," said one investor. "Everybody's making money; they're just not making as much money as they thought they would, or as fast as they could."
At RJR Nabisco, the benefits of LBOs were hardly lost on Johnson. Born in Winnipeg, Man., he had parlayed a keen eye for a deal and the nerves of a gunslinger into the top job at three major corporations. He was president of Standard Brands, the producer of Planters nuts and Baby Ruth candy bars, when it merged with Nabisco in 1981. Four years later, as Nabisco's president, Johnson sold out to RJR Reynolds for $4.9 billion and soon became president of the merged company. After adding the title of chief executive officer in 1987, he swiftly moved RJR Nabisco headquarters from Winston-Salem to Atlanta, sold the Heublein liquor business and slashed the corporate staff from 1,000 to 400. The dapper Johnson, a friend of such sports figures as hockey star Bobby Orr and broadcaster Frank Gifford, is described as a "charmer" by one associate. Another warned that when the boss was displeased, "swift as a sword, he would chop your head off."
Amid the brawl for his company, Johnson has remained aloof from most outsiders and workers at RJR Nabisco headquarters in the elegant Galleria complex north of Atlanta. "We don't know what is going on," says an employee. "Some of us are going to lose our jobs, but we don't know who, or where." Feelings of helplessness were hardly confined to the South. Said a 15-year employee at an RJR Nabisco cookie plant in Fair Lawn, N.J.: "When you're at the bottom of the ladder and you got money men at the top, you take it one day at a time."
Whoever wins the grab for RJR, a highly leveraged takeover could add more debt to the U.S. economy than any previous business deal. All told, corporate debt has climbed from some $965 billion in 1982 to $1.8 trillion this year, a rise from 32% to 37% of U.S. gross national product. LBOs can be especially worrisome of borrowing, because they replace virtually all of a company's equity with IOUs that must be repaid. A sudden downturn can thus put a firm heavily in hock out of business. "High leverage is unsafe, not just for a company but for the entire economy," says M.I.T. economist Franco Modigliani, a Nobel laureate. Modigliani adds that while the debt mountain has not yet grown perilously high, "LBOs are reducing the safety. Management loses the power to do many things. It has no margin for error and less margin for additional risk."
A company mired in debt can ill afford to build new plants or develop new products, since most of its earnings go to pay off borrowings. The shortage of investment can then dampen U.S. growth and damage the ability of American firms to compete abroad. In a slump, the impact can be dramatic. A study by the Washington-based Brookings Institution, a liberal think tank, estimated that a new recession could jolt 10% of major U.S. companies into bankruptcy.