Chapter 24, Part 1

By Frank Tursi, Susan E. White, Steve McQuilkin and Ken Otterbourg
JOURNAL REPORTERS
© 1999 Winston-Salem Journal

It started with lunch. Not just any type of lunch, but the sort that was taking place with increasing frequency during the 1980s as U.S. corporations merged and bought each other with frightening speed.

At the table in a Manhattan office building were J. Tylee Wilson, the curt and often brusque chairman of R.J. Reynolds Industries, and F. Ross Johnson, the free-wheeling and restless chief executive of Nabisco Brands.

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.

Both were men who appeared to be at the top of their games. Wilson, the marketing technician, was remaking RJR into a com the accountant with the gut for big ideas, was happily dusting his rivals in a bruising battle known as the ''cookie wars.''

Wilson had flown up from Winston-Salem in April 1985 to discuss a deal with Johnson, a merger between RJR and Nabisco. Over sandwiches, they tossed around some ideas and agreed to meet again in a few weeks.

''Philosophically,'' Wilson would say at the time, ''this man and myself are coming from the same place.'' (Business Week footnote; Wilson discusses the RJR-Nabisco merger.)

RJR's $4.9 billion purchase of Nabisco in June 1985 would be a watershed event in the company's history. It was the big deal that RJR had been searching for since the 1960s. By most yardsticks, Nabisco was an ideal purchase. Financially strong with killer brands and a swagger in the marketplace, it was a company whose executives enjoyed crushing the competition. The RJR team -- to its dismay -- would find that out soon enough.

Three's a Crowd

Wilson and Johnson's first discussions about joining their companies had involved a merger. But when it became apparent that Nabisco's stockholders would take a huge tax hit, the deal was changed to a flat-out purchase.

Although the terms changed, RJR's management still approached the deal as a merger of equals, the acquisition being a formality. ''What we didn't want was a we-they if we could possibly avoid it,'' Wilson said. ''We were somewhat successful, but not to the extent that I would have wished.''

A key issue surfaced early. Where would Johnson fit in with the new company?

Wilson was the chairman and chief executive of Reynolds Industries. Ed Horrigan was the president and chief operating officer.

Wilson first proposed an office of the chairman, consisting of himself, Johnson as the number two, and Horrigan as the vice chairman, number three. Everybody could live with that, even Horrigan, who swallowed his pride and made a speech to the board about teamwork and the greater good. Then Wilson dropped the bomb. Horrigan was left out. It was to just be a two-man show, Wilson and Johnson.

Horrigan exploded. ''You screwed me,'' he yelled at Wilson. ''If I knew you were going to do that, then I never would have supported this thing.''

Horrigan threatened to recant his statement to the board unless Wilson put him back in the chairman's office. Wilson relented. Horrigan was in.

But a bridge had been burned between teammates, men who had steered RJR through the difficult shoals of the early 1980s. Horrigan blames Johnson as much as Wilson for trying to cut him out.

''Ross didn't want any complications from day one,'' Horrigan said. ''He wanted to focus on one person, not two. Ty was not that way. Ty was never deceitful, he was never cunning. He was an organization man, is what we called it in the old days. He dotted the I's, he crossed the T's -- he delivered.''

Ross the Boss

Ross Johnson was a new type of executive for Winston-Salem, about as far removed from the Reynolds Way as a man could get. He had the build of an ex-jock, a mop of shaggy hair and a good-looking younger wife from a second marriage. In a town that preached piety and frugality, he liked nothing better than a party on the company tab.

''Ross was a citizen of the world,'' said David Fishel, a longtime RJR public-relations executive. ''He was not a guy who was tied to anything. He was a guy who thought nothing about getting on an airplane, flying all night, meeting all day, going out to dinner, sitting in a bar until 2 o'clock in the morning and starting all over again.''

Johnson threw himself into trying to make sense of RJR. (Journal File Photo)

Johnson was born in Winnipeg, Canada, and he had begun his career as an accountant and then light-bulb salesman with Canadian General Electric. It was an inauspicious start, and he wandered in the middle ranks of retail and manufacturing until he got a job in 1971 running Standard Brands' Canadian division. The company was a lot like its name sounded: a plodding maker of yeast, margarine and coffee. Johnson hit it like a hurricane. He fired most of the top executives, brought in a new crew, got results and a promotion to the company's New York headquarters. He was on his way. (Fortune footnote; description of Johnson's career.)

By 1976, Johnson was running Standard Brands. He got the job by toppling the company's longtime chairman in a nasty internal battle that showed Johnson's sixth sense for corporate politics. He had wooed the company's directors, blind-sided the opposition and threatened to quit if he didn't get his way. He won, and over the next five years he brought his own personal stamp to the stodgy company. Executive pay zoomed. There were company apartments and private jets, and a corporate-planning staff that revolved around wherever Johnson and his inner circle were drinking that night. The financial results were mixed. (Burrough, Helyar footnote; description of Johnson's career.)

Five years later, Standard Brands merged with Nabisco. With its stable of well-known products such as Ritz crackers and Oreo cookies, Nabisco was an outfit with a culture and deliberateness not too different from RJR's. Meetings were early and started on time. Everything was planned. Johnson would change that, too.

He came in as president and chief operating officer. Nabisco was a powerful company, and like many powerful companies, was complacent about its leadership position. That changed in 1982, when Frito-Lay introduced its Grandma's line of soft cookies. The next year, Procter & Gamble rolled out its own version, through Duncan Hines. Johnson scrambled the jets. He put his lieutenants in charge of marketing and R&D and started the Almost Home line in 1983. By 1984, the war was over. Nabisco, backed by its distribution and sales clout, had won. Johnson became the CEO of Nabisco. A year later, Wilson came calling. (Business Week footnote; description of Nabisco's marketing in the cookie wars.)

Milk and Cookies

At the time of the deal, RJR was twice the size of Nabisco. But its profits were four times greater. In that sense, little had changed since RJR's first wave of diversification 15 years earlier. Tobacco still paid the bills. Nabisco, for all its prowess and clout in supermarket aisles, just didn't kick out the cash like RJR.

Still, RJR paid a hefty premium for Nabisco, about $91 a share, more than $40 above its price a year earlier. ''You don't buy a Cadillac at Chevrolet prices,'' Wilson said to the naysayers.

The attraction was obvious. The Nabisco deal allowed RJR to combine its Del Monte unit with the resources of a larger foods company. Nabisco also owned the Planters nuts and Life Savers candy brands. Like cigarettes, these were popular items at the displays in front of checkout counters. That had possibilities down the road, too. No one knew quite how to fit the Heublein and Kentucky Fried Chicken businesses into the equation.

Nabisco's bedrock business was crackers and cookies, and in many ways it was similar to the cigarette trade. There was the basic brand, such as Ritz crackers, and then the endless styles that marketing types had dreamed up to satisfy a particular taste.

But there was one crucial difference. Nabisco was all about milk and cookies. There were none of the unsettling lawsuits over smoking and health, no talk about addiction, lung cancer or emphysema. Like it or not, Nabisco, a wholesome company with a wholesome image, was now tied into the nasty and public fight over smoking.

The first inkling of the realities of this new arrangement came when Horrigan found out about a Fleischmann's margarine tie-in with the American Heart Association that also urged people not to smoke. He hit the roof. The campaign was dropped.

The Nabisco people pushed back. The no-smoking signs in the company's sprawling headquarters complex in East Hanover, N.J., became a point of pride.

Johnson and his wife, Laurie, moved to Winston-Salem, to a house near Old Town Club. Young and athletic, she was referred to by the blue-haired women of Buena Vista as ''Cupcake.'' She wasn't in town enough for it to bother her. When she wasn't joining her husband on his business trips, she was shopping in New York or playing golf.

Johnson threw himself into trying to make sense of RJR and its players. He would let Rodney Austin, RJR's vice president of human resources, talk endlessly about the company's history and lore.

Jerry Long was the president of Reynolds Tobacco at the time. He said that Johnson was a brilliant guy and a dreamer. ''The man saw the blue sky. Of anything you talked about, he could look at something and make an unrealistic, positive appraisal of it,'' Long said. ''That is projects, not people. He could stretch that in his imagination, and his imagination defied anything that I've seen in my life. He had a lot of foresight. He was a gambler. Some people felt that in the old days he would have been a great Mississippi riverboat gambler because he could really roll the dice. He was very clever.''

That type of thinking and outlook didn't fit in well with RJR's old-guard leadership, some of whom were still around. ''The mixture of oil and water would seem simple,'' Long said.

The New Order

For all his smarts, his discipline and skill in marketing, Tylee Wilson was just about tone deaf when it came to the politics of his company's board of directors. Most CEOs treated their directors like royalty, flattered them, gave them corporate perks. Wilson didn't.

Truth be told, he didn't think much of many of them, and he wasn't shy about saying so. Part of the problem was that most of the board was loyal to J. Paul Sticht, whom Wilson had pushed into retirement in 1983. Sticht was still around, serving as the chairman of the board's executive committee, and Wilson hadn't been able to put more than a handful of his own selections on the board. It was a wobbly arrangement for any CEO and one that Johnson sensed immediately as ripe with possibilities.

Horrigan knew Johnson's track record. In previous jobs, they had each been in the tea business, and Horrigan had kept track of Johnson's rise and his methods of doing so. ''He was a different style guy than Ty,'' Horrigan said. ''Ross was able to develop a more harmonious relationship with the board. However he did it, that's his style, that's his schtick.''

Despite their falling out, Horrigan offered Wilson a warning: ''Ty, this guy is after your ass.''

Johnson began flying to New Hampshire to visit Sticht at his home there, chatting up the old man. Sticht's beef with Wilson extended to his current treatment as chairman emeritus. Wilson had banished him from the World Headquarters, where the action was, to downtown, a no-man's land of sorts. Johnson visited other directors as well, slowly sowing the seeds of dissent over his boss, Wilson. ''I was too trusting,'' Wilson said. ''I had my eye on a different ball. I'm a lousy politician. I've always been a lousy politician. I was more interested . . . in nudging the peanut up the hill.''

Marshall B. Bass, a former senior vice president of RJR Nabisco, said that Wilson never saw the train coming. ''He may have known it, but it was coming faster and with greater momentum than he visualized it,'' Bass said.

It all came to a head in the summer of 1986, while RJR was in the process of selling its Kentucky Fried Chicken business to Pepsi. Sticht and Johnson had gotten wind of a new type of cigarette that RJR was developing, a breakthrough product that didn't burn tobacco.

Wilson was called to heel at the July 1986 board meeting. True to form, he was unapologetic. The cigarette was still in the development phase. Sure, Wilson told the board, he had spent more than the $50 million spending limit required without board authorization, but that was over several years and the cigarette wasn't even close to becoming ready to market.

''We didn't know if we could make it, we didn't know how it would taste, OK?,'' Wilson said of the experimental cigarette, later called Premier. ''And we were terribly concerned about a leak. We had had situations before where things had been discussed in the board room and suddenly they were out in the public domain. So we shrouded this thing with secrecy.''

The board's members, led by Sticht, pushed back. They resented Wilson's lack of trust in them.

''You're sitting there and the CEO has made unauthorized major capital expenditures,'' said a former director of RJR Nabisco. ''That is a very tough dilemma for you. How far can you let someone go with that? That what got Tylee.''

Then Johnson struck. He told board members privately that he was thinking of leaving RJR Nabisco because there was only room for one CEO and it was obvious that the board's choice was Wilson. The seed was planted, and Johnson waited.

''It was a setup,'' Horrigan said. ''But the guy who set him up was Ross. I went down to Kiawah (S.C.) to tell Jerry (Long) that the fit's going to hit the shan.''

RJR's board typically didn't meet in August. It was vacation time for the captains of industry who ran one of the country's biggest consumer-products companies. Meeting in a teleconference, they staked the company's future on a new horse. Wilson was out. Johnson was in.

''I had predicted it would take him 18 months,'' Horrigan said. ''It took him 11.''

By year's end, Johnson's team occupied most of the key spots in RJR's corporate bureaucracy. Bass was one of the few survivors. John Dowdle, the treasurer, was gone. So were Gwain Gillespie, the chief financial officer, and Ron Sustana, the head of public relations. Even Austin, whose slavish devotion to RJR had been rewarded two years earlier with a promotion to senior vice president and his photo in the annual report, was forced to retire. It was his reward for a year of giving Johnson advice.

''Rodney thought he was in high cotton, and all of a sudden, he was out,'' said Horrigan, who respected Austin's loyalty and sense of history. ''Ross did it with panache, that was the way he was. People went away not as a sorry S.O.B. with Ross, but `gift-wrapped.' ''

The editorial page of the Winston-Salem Journal took note of all the changes and wondered disapprovingly whether RJR had bought Nabisco or vice versa. ''Looks as if someone may have underestimated the cookie monster's appetite,'' the paper wrote in November 1986.

Unfortunately for Winston-Salem, Ross Johnson was just getting hungry.

• Coming Tuesday: An Ill Wind Blowing