TIME: Almanac 1995

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<text id=89TT2348> <title> Sep. 11, 1989: Churning In The Shark Tank </title> <history> TIME--The Weekly Newsmagazine--1989 Sep. 11, 1989 The Lonely War:Drugs </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 58 Churning in the Shark Tank </hdr><body> A founder of mighty KKR accuses the firm of dirty dealing They set up shop quietly in 1976 with just $3 million in capital, but within a decade they became a revolutionary force on Wall Street. By last year the leveraged-buyout firm founded by Jerome Kohlberg Jr., Henry Kravis and George Roberts seemed virtually invincible. The firm's crowning achievement was last December's $25 billion buyout of RJR Nabisco, the biggest takeover deal in history. The firm's victory transformed Henry Kravis, with his slicked-back hair, Savile Row suits and socialite wife (clothing designer Carolyne Roehm), into Wall Street's pre-eminent symbol of power and panache. In its short history, Kohlberg Kravis Roberts has acquired three dozen companies (estimated total cost: more than $60 billion), 13 of which the firm still controls. But now KKR's luster is being tarnished by the greed and backbiting that have become legendary in the world of high finance. Last week it was disclosed that Kohlberg, who left KKR two years ago but retained a financial interest in the firm, has filed suit in New York Supreme Court against his partners. He accuses them of illegally appropriating part of his share of the profits and suggests that other investors may also have been deprived of their rewards. The legal battle could be fierce. Said a leading corporate raider: "You're going to find them devouring each other. It's clearly going to be a suicide mission for both sides." Even before the suit was filed, KKR faced unexpected problems. In the past month two of the firms that it helped acquire in leveraged buyouts said they were unable to make payments on their debt. In the wake of these setbacks, Wall Street dealmakers are asking what was once an unthinkable question: If KKR's investors become spooked, will the firm's gushing money pipeline dry up? Kravis and Roberts responded to the suit with a prepared statement: "We are saddened that Mr. Kohlberg felt it necessary to sue . . . We believe he is wrong both as to the facts and his interpretation of the agreement between us." KKR's patriarch, Kohlberg, 64, acted as tutor to Kravis and Roberts from the early '70s, when the two cousins worked for him at the Bear Stearns investment firm. As co-head of the corporate-finance department, Kohlberg, along with his proteges, pioneered some of the first LBO deals. After leaving to form their own firm, t$hey initially arranged buyouts of unglamorous heavy-industry companies. All went smoothly until the mid-'80s, when a generation gap emerged. Kravis and Roberts, 19 years younger than their mentor, saw hostile deals as the future of the business. Kohlberg balked and in 1987 left the firm over "philosophical differences." His severance contract stipulated that his share of the firm's profits on all future deals would gradually decline, from 20.5% in 1987 to 7% in 1995. Now Kohlberg charges his partners with breaching that contract. Kravis and Roberts, he argues, plotted to wrongfully reduce his share in KKR deals by transforming "old" deals into "new" ones through a series of refinancings. In one case, the 1981 acquisition of a manufacturing firm called Marley, Kohlberg says, his share of the profits was unfairly slashed last year, from 32% to 17.6%. In a statement, Kohlberg declared that he "took this step with extreme reluctance." But some Wall Street investors suggest that Kohlberg was all too quick to sue over a partnership squabble. Says money manager Pierre Rinfret, who heads a firm bearing his name: "Kohlberg wants something, and he feels that the only way to get it is to threaten to ruin his former partners' reputation." The most provocative aspect of Kohlberg's suit is its implication that other investors in KKR deals may also have got burned. Beginning in 1986, Kohlberg alleges, KKR decided that it would boost its stake in some of its acquisitions by buying out its investors at prices far below what they might have commanded if the companies had been sold to outsiders in the open market. (By this time, KKR general partners included Robert MacDonnell and Paul Raether.) Kohlberg suggests that the KKR partners assumed complete control of their acquisitions with the intention of selling the properties and pocketing huge profits on their own. Kohlberg may be speaking for other unhappy investors in KKR's deals who feel that the company has become too greedy and aggressive. To some deal-makers outside the firm, KKR's escalating fees seem unconscionable: $60 million for the $5.3 billion 1986 acquisition of the Safeway supermarket chain, $75 million for the RJR Nabisco buyout. While most of KKR's acquisitions have paid impressive returns to its investors, some of its smaller holdings are struggling. Last month Nashville's SCI Television, 45% owned by KKR, disclosed it would be unable to make its Sept. 30 debt payment. Soon afterward, Seaman Furniture of New York, which KKR acquired in 1987, missed a payment on its debt obligations. Seaman's auditor suggested that the company might not survive as a going concern. Even so, KKR's second biggest buyout, the $6 billion takeover of Beatrice in 1986, has paid handsome returns. KKR's partners nearly doubled their original investment of $402 million, collecting $783 million within 15 months of the deal's completion. While the payback on the RJR Nabisco deal is still uncertain, KKR has succeeded in reducing the firm's debt load by selling off more than $2.5 billion in assets. Kohlberg's lawsuit may inspire KKR's investors to drive harder bargains with the firm. But Kravis and Roberts have not come this far through meekness or contrition. As they battle their former mentor and fight to preserve KKR's power, the spectacle is likely to throw light on some intriguing details about a secretive company and its powerful leaders. </body></article> </text>