TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/091189/09118900.024

Text File | 1990-09-17 | 6KB | 106 lines

BUSINESS, Page 58

Churning in the Shark Tank

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.