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Under the guidance of Kravis and Roberts, KKR has become a Wall Street steamroller. Its biggest buyouts include the Beatrice food conglomerate for $6.2 billion and the Safeway grocery chain for $4.5 billion. But while KKR is well known as an investment adviser, few people realize that it has become one of the largest industrial holding companies in America. Though KKR readily sells off pieces of the firms it buys, it usually retains some core businesses. Of the 35 companies it has acquired, KKR still has control of 23. As a result, KKR has become a huge conglomerate. The companies it controls produce everything from French colonial furniture to dairy products. If KKR were classified as an industrial company, according to FORTUNE magazine, its estimated $38 billion in annual revenues would make it the seventh largest in the U.S., just behind General Electric.
KKR has also become a cash machine with many ways of making money. To begin with, KKR charges investors in its buyout funds annual management fees amounting to 1.5% of their investments. Companies taken private by KKR pay the firm 1% to 2% of the purchase price for handling the transaction. But the really big money rolls in when KKR starts to sell off divisions of the companies it acquires. So far, KKR has taken in $7 billion by unloading parts of Beatrice. In recent years the investors in KKR's buyout funds have earned annual returns of about 30%. Says James George, manager of Oregon's $9 billion public-employee retirement fund, which has invested $640 million with KKR: "The secret of KKR's success is that it makes an awful lot of money for its partners." Agrees Gus Oliver, a general partner in Coniston Partners, another Manhattan investment firm that specializes in takeovers: "KKR's success reflects the compounding effect. Because of its track record, it can attract all the capital in the world. Because of its capital base, it can do any deal in the world."
Maybe, but the RJR Nabisco deal will put that assertion to a stern test. The struggle for the huge company began two weeks ago, when it was announced that a group of managers led by chief executive Ross Johnson, 56, was considering making a $17.6 billion buyout bid, to be put together by Shearson -- not KKR. The announcement came after Johnson delivered a startling message to the RJR Nabisco board of directors: "This company ought to be in play." News of the buyout proposal stunned Henry Kravis, who felt betrayed by Shearson's chairman, Peter Cohen. For one thing, Kravis and Cohen, 41, were friends and former classmates at the Columbia Business School. Moreover, Kravis had previously spoken to Johnson about a buyout of RJR Nabisco. Now it seemed to Kravis that Cohen was trying to steal the deal. Actually, Johnson had brought the idea to a trusted friend: James Robinson III, chairman of American Express and Cohen's boss.
Determined not to let the RJR Nabisco deal get away, Kravis demanded that Cohen come by KKR's Manhattan offices. Chewing out Cohen in front of Shearson aides, Kravis demanded a major role in the buyout, sputtering, "This is my franchise!" Cohen walked out, suggesting they talk again in a few days. But before that talk took place, Kravis delivered a thumping counterpunch: a $20.6 billion buyout bid for RJR Nabisco.