Authors: Richard Kluger
With this basic concept in place, Storr moved smoothly in international banking circles, seeking to build a hefty war chest in the form of loan commitments for the takeover venture. This was no small task, for he could not divulge the names of Philip Morris’s likely prey without risking a leak that might drive up the purchase price unbearably; thus, the loan pledges were made blind and necessarily tentatively, pending news of the actual takeover target. American banks were uneasy about such dealings, partly out of fear that the loan commitment might represent a conflict of interest—
i.e.
, if the target company was already a client of theirs—and no doubt partly because of Philip Morris’s less than glittering record when it had diversified in the pre-Maxwell era. Storr turned more to overseas lenders, especially Japanese banks awash in credits from their nation’s bulging balance-of-trade payments surplus. Within a year, Storr had built a $6 billion takeover chest.
But which company in the food business? Why not the biggest, Philip Morris asked itself, and so rested its gaze on General Foods Corporation (GF), a goliath with $7.5 billion in annual sales and 56,000 employees. By the numbers alone, a takeover of GF would mean a major reconfiguring of its corporate structure for PM, then grossing $14 billion a year with a payroll of 68,000. But if it could be accomplished, would GF be worth the price it could command?
General Foods was a high-class operation, certainly, run by well-bred people in a country-club atmosphere in suburban Westchester County north of New York. Its management, though, was viewed as sleepy and overly reliant on its great old trademarks; indeed, 75 percent of its sales came from brands that were top in their field, including Jell-O gelatin desserts, Maxwell House coffee, Birds Eye frozen foods, Log Cabin syrup, and Oscar Mayer bacon. And even its laggard product lines, like Post breakfast cereals, included some great old names like Grape-Nuts, which dated back to the nineteenth century. In internal documents and discussions about their prey, Philip Morris executives code-named GF “Brew” after its top rank among U.S. coffee sellers; about one-third of its sales were derived from the beverage. The trouble was that, as with cigarettes, per capita consumption of coffee had peaked in the ’Sixties, and the volatility of coffee-bean harvests kept the retail prices on a roller coaster. Though its largest grossing product, coffee yielded only 21 percent of the food company’s net, making it a decided drag on earnings.
Overall, Wall Street found GF to be an underachiever and unaccountably in
the doldrums. It had doubled its net over the ’Seventies, keeping pace with inflation and then some, but during the first half of the ’Eighties its revenues had only inched ahead, and dividends had actually failed to keep pace with inflation. Management was seen as too soft, slow, overgrown, and expensive. Its executives were said to take Friday afternoons off in nice weather and had lavished $50 million on a new headquarters building in Rye Brook, near Long Island Sound—an industrial palace of gleaming white aluminum sheathing that resembled a Disney version of the Taj Mahal remodeled as a world-class resort hotel. To make up for stagnant sales of its established brands, GF had spent $2 billion on plant improvements and the purchase of new lines like Ronzoni pastas, Entenmann’s bakery goods, and Oscar Mayer with its fast-growing Louis Rich turkey business, popular with increasing numbers of health-conscious Americans and economically more profitable than chicken because the bigger birds yielded one-third more meat per man-hour of processing. There were other signs as well that GF was waking up to the changes in U.S. dietary habits. It had moved into convenience foods, a boom item now that more than half of all married women held jobs outside their homes, and was doing well with a new entry in the health-food field—Fruit & Fibre cereals—but it was fighting an uphill battle against Kellogg and General Mills, because it had failed to market and innovate with vigor for too long.
GF, then, appeared to be rallying itself. With talk of annual earnings increases of 3 to 5 percent after inflation, it made an enticing package for Hamish Maxwell and his advisors. Still, they were not mesmerized by it. Food was a complicated business, and GF’s in-place management was lackluster, but the company would give Philip Morris a very large foot inside the door of a highly respectable industry—and their cigarette profits could buy them time to appraise the food managers who came with the deal, to learn from them, and if need be, to replace them. But the transformation could not be accomplished peremptorily, for Maxwell wanted PM, as newcomers to the industry, to avoid being tarred as a bunch of corporate roughnecks.
By 1985, Wall Street was expecting a shakeout in the crowded and murderously competitive food industry. Sluggish General Foods seemed a likely takeover candidate, and its stock price rose. If and when Philip Morris walked off with it, the resulting combination would become the nation’s largest consumer products company, surpassing Procter & Gamble. But before PM acted, its vanquished chief tobacco adversary, Reynolds, grabbed the honor by snatching up a glittering trophy of its own.
IV
IN
1984, its first year under the lash of chairman Tylee Wilson, R. J. Reynolds Industries put up numbers that were every bit as good overall as Philip Morris’s under its new boss, Hamish Maxwell, even though PM had knocked RJR off its tobacco pedestal.
Wilson acted promptly to do what predecessor Paul Sticht had felt the time was never ripe to get done: jettison its cash-gobbling Sea-Land shipping subsidiary by spinning it off to its employees. Del Monte, after being slimmed down through thirty-eight plant closings, was doing better now, pushing new lines of canned goods like sugar-free fruits and low-salt vegetables. Kentucky Fried Chicken was expanding, too, especially abroad, and when RJR entered the soda business, it did not make the same mistake Philip Morris had with Seven-Up; Reynolds steered clear of Coke and Pepsi by buying up Canada Dry and Sunkist, which sold mostly mixers and flavor drinks that the industry leaders did not bother with. By earning 7 percent on its non-tobacco business, a good deal better than Philip Morris had managed to do with Miller and Seven-Up, RJR posted overall figures remarkably close to PM’s—a consolidated profit margin of just under 20 percent and a 25 percent return on equity. More successful than Philip Morris so far per dollar invested in the food business, Reynolds was now casting about the same waters as its New York rival, and early in 1985 Ty Wilson put in an exploratory call to the chairman of the fourth-ranking company in the food industry: Nabisco.
Holding on hard to a 40 percent share of the cookie and cracker market through such household-name brands as Premium saltines, Ritz crackers, Fig Newtons, Lorna Doone, Chips Ahoy!, and top-selling Oreo, Nabisco was somewhat smaller than General Foods but more profitable; its margin on sales and return on equity were 5.4 percent and 19.1 percent, respectively, compared with GF’s 3.7 percent and 16.8. Even so, Nabisco had shared GF’s reputation as a somewhat stodgy and conservative outfit. The same could not be said, however, of its CEO, R. Ross Johnson, who had held the job for only three years when RJR’s Wilson phoned him up to talk merger.
Johnson was Wilson’s polar opposite. The RJR chief was a rigid and methodical professional manager with an often impolitic directness. Johnson, at fifty-three, the same age as Wilson, was breezy, wisecracking, and gregarious, a talker and tinkerer rather than a corporate martinet, with the rangy, wavy-haired good looks of a fashion model in his mod aviator glasses, wide ties, and leather outer coat. He was a consummate gamesman, good on the golf course and even better at corporate politics, disarming everyone he encountered with a deep-throated laugh and a self-deprecating manner. Claiming that he had no
functional skills as a businessman, Johnson in fact had a decided knack for detecting soft spots in monthly sales and earnings reports, sensing when he could obtain top dollar by selling off a troubled division, and buttering up older executives or those who outranked him before reaching for their mantle when they faltered. Adept as neither a manager nor a marketer, he was too impatient to fix the ailing parts of whatever company he ran, preferring to replace them with new, more amusing ventures. He thrived on action, rarely bothering to project where a business ought to be headed five years down the road. He was part Falstaff in a business suit, part Peter Pan with a mean golf swing, and part piranha scenting blood in roiled waters.
Just four years before Ty Wilson summoned him, Johnson had had a similar call from Nabisco while he was running Standard Brands, a sizable consumer goods outfit whose Canadian subsidiary he had revitalized and thus got himself switched to the fast track. Despite his limousine lifestyle in a horse-and-buggy company run by a tyrannical and somewhat sour overlord, Johnson’s on-line performance and pleasing personality won him pals among fellow Standard Brands executives. A palace coup landed him in the CEO’s job, where he busily pruned and added, and before his limitations as a manager could become apparent, he and his company were brought in to Nabisco to liven up the place and fatten earnings. By turns antic and brutish, Johnson charmed and shoved his way upward; within three years of the merger, he again had become CEO of the company that had taken over his. Wholly a pragmatist, Johnson specialized in firehouse management as Nabisco’s boss, planning little but responding quickly to emergencies, like Kellogg’s challenge to Shredded Wheat, a Nabisco mainstay, and Procter & Gamble’s sortie into the cookie business with a soft, chewy line that Johnson repulsed by bringing out a similar line dubbed Almost Home.
In proposing a Reynolds takeover of Nabisco, Wilson found Johnson likable—everyone did—and supposed him manageable. Mostly, he was impressed by Nabisco’s financial sheet, which Johnson, a trained accountant, knew how to massage into sinewy shape. The amiably reached takeover package of cash, stock, and bonds totaled $4.9 billion, then the richest U.S. corporate marriage ever outside the oil business, and made RJR Nabisco, as the new company was soon to be called, the second largest consumer products company on earth, trailing only Unilever. Johnson became president and chief operating officer, with a pledge from Wilson that he would step aside after a few years and cede his sporty adjutant the chairmanship.
Demoted in the process was Reynolds President Edward Horrigan, the combative, un-mod fireplug who was no match in style or quick-wittedness for Johnson. The latter now descended on Winston-Salem like a lubricious “Professor” Harold Hill come to River City, Iowa, to disarm the natives. The town was agog as he breezed in with his beauteous blond second wife, who was half
his age, bounced around in a Jeep to show he was a down-to-earth guy, had folks in for dinner instead of waiting for them to break the ice, outplayed most of the local talent on the golf course, and on the weekend jetted all over the country to play famous courses and consort with celebrated sports figures. His executive style was also unnerving to staid Reynolds executives, who were not used to bosses who habitually arrived late at meetings—people did not pay attention to you if you were punctual, Johnson once suggested—and did not join in the usual pre-business chat about family and fishing. Johnson and his Nabisco crew, based in suburban New Jersey, were privately disdainful of the bloated staffing and slow and easy ways of the dominant tobacco division. His impatience would occasionally spill over in the form of his pet put-down of a subordinate’s unprofound analysis: “That was a blinding glimpse of the obvious.”
Nabisco benefited from RJR’s cash riches by a plant modernization program and adapted the cigarette business’s knack for line extensions with, for example, mint-flavored and giant-sized versions of the Oreo cookie. But Johnson, as the company’s food czar, craved a more exciting game. His impatience with dawdling divisions soon manifested itself as Wilson authorized the sell-off of Del Monte’s frozen food line, the KFC fast-food chain, the soda business, Morton salt, the Patio and Chun King specialty food lines, and—just a few weeks after RJR had bought up the big Almadén winery—Heublein and the whole alcohol business, unloaded in part because of Johnson’s capricious view that a liquor company without a leading Scotch brand was like a baseball team without a shortstop.
Wilson, meanwhile, was self-destructing in the chairmanship. He seemed not to sense the precariousness of his standing with the Reynolds board, whose members were unappreciative of what they perceived in him to be a certain high-handedness and irreverence toward them. Tensions rose, along with concerns about how the chairman comported himself socially. “We were not comfortable with him,” recalled board executive committee chairman Paul Sticht, who had reluctantly endorsed him for the job, “and Ross Johnson was doing a pretty good job of undermining Wilson by then.”
Matters reached a critical point when board members learned that the RJR tobacco people had spent tens of millions over five years on a top-secret experimental cigarette project code-named “Spa” without ever apprising the directors. Housed in bunkerlike quarters in downtown Winston and intended to reverse RJR’s sagging cigarette market share, Spa was a kind of successor to Liggett’s abandoned palladium brand, likewise designed to be a less hazardous smoke, but the Reynolds effort was far more inventive: it would reduce the toxic by-products of the combustion process by virtually eliminating them; instead of burning, the tobacco was warmed by a glowing charcoal rod that would never get hot enough to ignite it and thus produced almost no smoke.
The trick was to get it to taste enough like a regular cigarette and then present it to the public in a way that did not tacitly cast the company’s established brands as health perils. The project was kept hush-hush to the point where RJR public-relations head David Fishel was ordered to deny its existence, telling press inquirers in 1985, “I don’t know anything about it. We don’t know of anything that makes a cigarette unsafe, so how could we be working toward a safer cigarette?” In fact, many people at RJR knew about Spa, and not a few outside the company, but RJR’s board was not let in on the secret project, funded under the chairman’s discretionary prerogatives and hidden in the corporate research budget. When confronted, Wilson and Horrigan somewhat lamely cited their fears of preliminary disclosure of the effort and possible leaks from board members, all of which amounted to a statement of no-confidence in the directors, at whose pleasure Wilson served—and they were not pleased.