Rjr: Big Buyout, Big Fizzle

"We were charging through the rice paddies, not stopping for anything and taking no prisoners," said Henry R. Kravis, leveraged buyout king and general partner of Kohlberg Kravis Roberts & Co., describing the bidding war for RJR Nabisco Inc. in the best-selling Barbarians at the Gate. Strange, how the biggest, wildest deal of the '80s, the $25 billion LBO of RJR is now so quietly coming to closure, ending a celebrated chapter of U.S. financial life.

Yet, perhaps not so strange. On Mar. 20, Goldman, Sachs & Co. sold the last of KKR's shares in RJR. Not many would have believed it in 1988, but the deal's lasting legacy is turning out to be one of bitterness, especially for investors. Just check the numbers. KKR bought the company at $5.62 a share on an adjusted cost basis, and it unloaded its final 8% stake for a mere $5.73 seven years later. For investors such as large public pension funds, the RJR Nabisco deal turned out to be a bust. The bidding war with CEO Ross Johnson and his management team pushed the company's price far higher than its true economic worth, especially in light of the company's tobacco liability and the later impact of Marlboro Friday.

But that's the nature of risk, right? Not for everyone. It turns out that the risk was not shared equally by all the parties to the deal. While KKR didn't make much of a profit on its own direct investment in RJR, just like other investors, the firm extracted steep fees for services rendered. It received $75 million in transaction fees for the original deal, $60 million for advising the company over the years, and $279 million for additional management fees. Investors? Well, they get the short end of the stick, and KKR gets to control the money they put into KKR's LBO fund until 2000. KKR is putting the money into Borden stock, banking on a big payoff down the road.

Are there any lessons from all this? Perhaps only that greed often comes with a price tag. Investors might ponder that the next time they get carried away.

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