Chapter 15, Part 1

By Frank Tursi, Susan E. White and Ken Otterbourg
JOURNAL REPORTERS
© Winston-Salem Journal

After spending half his career in the dog-eat-dog world of advertising in New York, Jerry Long moved to Winston-Salem in 1973 with his promotion to a senior marketing position at RJR Foods. When he describes the executives he met at company headquarters, the word he keeps returning to is ''nice.''

Reynolds executives Paul Sticht (left) and Colin Stokes talk with Capt. Hendon Berger aboard one of Sea-land's containerships. (Journal File Photo)

''I found them to be very nice people, very kind people, somewhat old-fashioned in their thinking,'' Long said.

''After 16 years of working in Manhattan, you're trained in hand-to-hand combat. When I came down here and saw the people here, they didn't have the sophistication that you had up there in New York. There was a feeling of honesty and sincerity that always existed in RJR management. Nice guys, OK. I don't know anybody who I ever knew who I could honestly say wasn't a nice guy.''

As part of his orientation, Long was asked to give a speech to some of the company's top executives, including J. Paul Sticht, then president of R.J. Reynolds Industries, and Colin Stokes, the company's chairman.

The R.J. Reynolds Tobacco Co. was once the largest cigarette company in the United States with a powerhouse of best-selling brands: Winston, Salem and Camel. But times changed, and as the case against smoking became more pronounced in the 1960s, RJR failed to adapt to the marketplace. Its rivals would eventually rush past it, and RJR's efforts to catch up would have a profound impact on the company and the cigarette industry.

''Well, now I am in Winston-Salem,'' Long began, using the age-old speaking ploy of starting with a joke. ''By some degree, I really thought that I had reached the end of the Earth. I probably didn't, but I sure as hell can see it from here.''

A few people laughed. Most didn't. Stokes was in that last group. He stalked out at the next break. Sticht took Long aside and explained that Stokes was fuming. It was just one more straw on the camel's back, another dig by the men streaming into Winston-Salem to reshape R.J. Reynolds Industries.

Ever since the first cancer scares of the 1950s, the men who ran Reynolds Tobacco had been looking for a way to diversify from the U.S. cigarette market.

Bowman Gray Jr., who died in 1969, had once remarked: ''We'd go into almost anything, except the mule trade.''

By the mid-1970s, they had accomplished the goal. The company's sweep was mammoth and global. Its holdings included: Sea-Land Industries, which had revolutionized the shipping business; Aminoil, a midsize oil company; Archer packaging; and a collection of canned- and frozen-food companies.

It made for sweeping images in the annual reports that the company sent out each year. There were photographs of bustling ports, whirring food lines and roughnecks wrestling crude from oil fields. But behind the growth was a nagging question: What was its purpose?

One executive summed up the strategy this way: ''To get big.''

RJR's efforts at diversifying its empire in the 1960s and '70s would leave a lasting mark on the company. It would set up a long-running conflict between the men who ran the cigarette company, affectionately known as the ''milking machine,'' and the executives at these other, less-profitable subsidiaries. And it brought outsiders into the company's executive offices who often had little knowledge of and patience for the hallowed Reynolds Way, the company's long-held system of values that had bound RJR since the early days.

The executives who ran Reynolds up to that point had been cloistered in Winston-Salem. They were unaware of the messy business practices found where its new holdings operated. The education they got in the ways that work got done elsewhere would be lessons not quickly forgotten.

Most important, while Reynolds was spending time and money on oil wells and cargo ships, it neglected the milking machine, both here and abroad. That, too, would have consequences down the road.

The Happy Problem

Diversification began with a happy problem. Reynolds Tobacco made too much money. In 1960, for example, the company earned $102 million on sales of $749 million. There was a practical limit to how high it could increase its dividend or how much it could invest in new equipment.

''You had a choice,'' recalled John Dowdle, a former treasurer. ''You either find something else to invest in for the benefit of the shareholder, or give it to the shareholder. That was the genesis of diversification.''

Throughout the 1960s, RJR bought a handful of small companies. These were unglamorous food manufacturers that churned out frozen foods, sweeteners and beverages. None had anywhere the clout or panache that Reynolds had.

''Hawaiian Punch, Chun King, My*T*Fine pudding. I mean, holy mackerel,'' recalled J. Tylee Wilson, a former president of RJR Foods and later chairman of RJR Nabisco. ''Patio Foods. . . . We had no critical mass. It was profitable, we had it turned around, we had some momentum. But it was one of those cases where eventually we were going to have to sell it or put it together with something else and gain some critical mass so it could leverage itself in the market.''

Hawaiian Punch was the best of the bunch. But tobacco executives looked at their growing collection of canned and frozen goods and chuckled. It was a far different world than cigarettes. Nobody woke up in the morning needing a cup of College Inn broth before going into work. A joke making its way through RJR said that a heavy user of Chun King was someone who bought the products twice a year.

Part of Reynolds' diversification program was the purchase in 1970 of the American Independent Oil Co., better known as Aminoli. (Journal File Photo)

So RJR the eager buyer went looking for a bigger deal. It just so happened that an eager seller was close at hand. His name was Malcom McLean.

By 1969, McLean was a Winston-Salem legend, a businessman brimming with ideas and ability. He had grown up poor in Maxton in western Robeson County, then built a trucking company and moved it to Winston-Salem, where he got rich hauling freight, including RJR's cigarettes.

But McLean had bigger plans. He was waiting for a trailer to be unloaded at the docks in Hoboken, N.J., when he got to wondering whether the trailer itself could be loaded onto the ship, then attached to another truck at its port of arrival. McLean thought it would save time and labor costs.

McLean couldn't act on his dream -- at least not yet. The government didn't allow truckers to own shipping companies. So in 1955 he sold his interest in McLean Trucking for $25 million, moved to New York, bought the Waterman Steamship Corp., and went to work trying to sell his concept of container shipping to a hostile and skeptical world.

It took more than a year of fighting and tinkering to get the details right. Two tankers had to be converted. A special container that could fit on a truck chassis was needed. The SS Maxton made its maiden voyage between Newark and Houston in April 1956. McLean was making money by 1959, and he kept adding routes and bigger ships. In 1964, he opened a 101-acre port at Elizabeth, N.J. Within two years, he was carrying containers across the Atlantic and Pacific oceans. As America's involvement in the Vietnam War grew, McLean reaped a windfall carrying cargo to Southeast Asia.

The advantages to McLean's system were obvious, and other shipping lines rushed in. They built bigger ships, larger gantry cranes and more sophisticated containers. Malcom McLean was in a bind.

He needed cash to compete. He found it at Reynolds Tobacco, which agreed in January 1969 to buy Sea-Land for $530 million in cash and stock. McLean joined the RJR board, and the company was now in the shipping business. In addition, its nontobacco side doubled, to 26 percent of revenue.

Winston-Salem's close-knit business community gushed over the deal, basking in the glory of two companies whose roots were in the city, more or less. ''Malcom McLean,'' said one, ''is the smartest man to hit this town since R.J. Reynolds himself came down the road.''

Years later, it's difficult to find an executive to defend the Sea-Land purchase. Even Sticht, a board member at the time the deal was approved and in later years the chief executive who would keep writing the checks for Sea-Land's unending building programs, won't rise to its defense.

''There was a lot of diversion of management attention and, second, Sea-Land never really contributed very much to the value of our shares. At least that's what we believed. We had a lot of money wrapped up in something that wasn't producing value to the shareholders . . . and we were diverting a lot of management attention away from what we should have been putting that time on, that whole broader diversification of the company's business. Not only diversification by additional consumer products, but by diversifying the company geographically.''

Before buying Sea-Land, Reynolds had run its foods divisions through the tobacco company. But Sea-Land was a far bigger and more complicated entity, with sales of $180.5 million.

A reorganization was needed. So was a name change. In May 1969, a holding company was created: R.J. Reynolds Industries.

The move made business sense. The tobacco men couldn't run a shipping company and a cigarette company at the same time. RJR wasn't the only tobacco company wrestling with its corporate identity. American Tobacco reorganized under American Brands in 1969. Still, Reynolds executives were sensitive about the symbolism of taking out ''tobacco'' at a time when Congress was trying to tighten the screws on the industry.

Alex Galloway, the company's new chairman, told shareholders at the company's annual meeting that the change didn't reflect any less interest in tobacco, ''even though, coming now in the face of stepped-up attacks on tobacco, it might encourage industry critics to jump to that conclusion.''

The company was also beginning to worry about the liability associated with selling cigarettes. Dowdle wanted to create a parent company that would own all of Reynolds' businesses, including the tobacco company. The theory was that any lawsuits involving the tobacco company would stop with the tobacco company and not affect sister businesses such as foods and shipping.

With the blessing of David Peoples, the executive vice president of the tobacco company, Dowdle made the presentation about the holding company to the board and it seemed to be accepted well by the members, with one glowering exception: Henry Ramm, the company's general counsel.

''I think the tension that crept into it crept into it because of Henry,'' Dowdle said.

Ramm questioned the idea of transferring liability to protect the company's other assets. He did not think that the move would offer the kind of legal protection Dowdle thought it would and did not like the idea that it was being discussed.

''He could see things pretty far down the line,'' Dowdle said. ''He felt like we should not be talking about that and using that as a reason for doing it, because it might come back to haunt us if somebody sued us or the tobacco company down the road sometime.''

And so when Reynolds talked publicly about the reasons for setting up a holding company, the legal reasons were omitted. It was being done to streamline the business organization and to better sort out responsibilities in the growing empire.

''That was Henry,'' Dowdle said.

The Money Hole

Sea-Land's executives liked to say that they took Reynolds international, since most of the tobacco honchos had never been west of the Mississippi River.

In many ways they were right. The purchase of Sea-Land had sent Reynolds into foreign territory, a rough-and-tumble world far removed from the Reynolds Way. Rabidly anti-union, RJR now owned a company that was at the mercy of longshoremen. A crippling dock strike along the West Coast in 1971 brought that message home. ''It's like a vein being opened and the blood draining out,'' Peoples said at the time. Overseas it was worse. There were customs officials and politicians, each looking for a little favor. ''The name of the game is cargo,'' noted one competitor. ''Morality is a secondary issue.'' (Forbes footnote)

Perhaps it all could have been tolerated if Sea-Land delivered profits as well as it delivered cargo. But it didn't. Sea-Land was an industrial-strength lesson in the old saying that ''a boat is a hole in the water that you throw money into.'' By the end of 1974, Reynolds had sunk more than $1 billion into Sea-Land. Some years, the lion's share of the company's capital budget went into shipping. Tobacco factories could wait. Sea-Land built huge terminals in New Jersey and Hong Kong and added to its fleet of containerships. The investment wasn't paying off. The company would have a good year, then a bad year. There was none of the comforting consistency found in the cigarette trade.

Sea-Land's biggest expense was fuel. In 1970, RJR bought its own gas station, so to speak, paying $56 million for the American Independent Oil Co., better known as Aminoil. The company's refinery was in the neutral zone between Kuwait and Saudi Arabia, still considered a part of the world that treated American businessmen well. Although the deal's genesis was ensuring an inexpensive supply of oil for Sea-Land's cargo ships, RJR would begin pumping millions into oil exploration, trying to get Aminoil to the size to compete in the global hunt for oil.

A Clash of Cultures

On paper, the subsidiaries of R.J. Reynolds Industries were equals. In practice, they weren't. Most years, domestic tobacco provided about half the revenues and two-thirds of the profits.

''The company was, to characterize it, a tobacco company with other interests,'' Wilson said. ''Everybody got along, but the Aminoil guy was only interested in Aminoil and felt that he never got the money to drill for new reserves that he wanted. (The Sea-Land executive) never got enough money to get the ships, tractors, or containers or whatever he wanted. They knew where the money was coming from but in a sense they resented the dominance. . . . Yeah, everyone got along, but it was a strange bunch of bedfellows, I'm here to tell you.''

There was bound to be tension as executives from different companies and different industries jostled for power at RJR's headquarters. ''It was a very competitive situation, but you'll find that in most companies to varying degrees,'' Sticht said. He saw the competition as good for Reynolds, a company that he believed was short on home-grown executive talent. By his thinking, the brash outsiders could only help shake things up.

As the outsiders moved in, the culture of the Camel came under assault. The newcomers detested the New Year's Day sermons that the tobacco men found so uplifting. Many didn't find comfort in all the talk about thrift and selflessness and the Reynolds Way, the company's long-held system of values that had bound the company since the early days.

Rodney Austin, the company's personnel manager at the time and an apostle of the Reynolds Way, was once speaking to the CEOs of the subsidiaries in Winston-Salem when he saw Mike McEvoy, the chief executive of Sea-Land, pass a note to one of those present. The person read it, smiled, and tossed it into a trash can. Austin retrieved it after the meeting. ''How long are we going to have to listen to this shit?'' it read.

The spats went both ways. Gerry Gunzenhauser came to Winston-Salem in 1972 as a finance officer with RJR Foods. The food companies -- then and now -- didn't have the profit margins of cigarettes, and their executives were not highly regarded by many tobacco employees, particularly the rank-and-file.

''Among a number of people we were kind of considered those people from New York who run that little business we picked up along the way,'' Gunzenhauser said. ''Sometimes secretaries who worked for the tobacco company asked secretaries who worked for foods, `How can you work for those Yankees?' ''

And then in 1974, there was a small miracle. The company that R.J. Reynolds had founded turned 99, and the far-flung empire built with cigarette profits was hitting on all cylinders. In the midst of a recession, R.J. Reynolds Industries had its best year. Sea-Land's earnings had increased nearly 10 times, to $145 million. Aminoil's earnings had soared as well, to $86.3 million. Wall Street was rethinking its lukewarm attitude toward the company and its wide-ranging holdings. Dun & Bradstreet, the financial-ratings firm, named RJR one of its five best-managed companies in America.

Chairman Colin Stokes wasn't a man to brag. He had 40 years at the company, and tooting your own horn wasn't part of the Reynolds Way that he knew. Between puffs on a Winston, he told Dun's Business Review in December 1974, ''We'll let the results speak for themselves.'' Unfortunately they would. Sea-Land's earnings dropped sharply the next year. So did Aminoil's. And as 1976 began, the second-guessing over RJR's diversification would begin again. By then, company officials had a bigger problem on their hands. A political scandal was unfolding that would shake the company to its core.

• Coming Monday: Innocence Lost