Chapter 27

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

F. Ross Johnson was officially chief executive of RJR Nabisco for only 15 days when he stuck a dagger in the heart of proud Winston-Salem. Less than two years later, he showed what he could really do if given some time: He put the staid city in the center of what was then the biggest business deal in history and made its tradition-bound corporate patriarch the object of a Wall Street feeding frenzy.

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.

By the time he floated away on his golden parachute in 1989, most people in Winston-Salem were only too glad to see him go. He had lost his bid to buy RJR Nabisco and had come to symbolize the corporate excesses of the go-go 1980s, a decade of mega-mergers and leveraged buyouts that made millions for the executives and investment bankers who engineered them. Johnson so typified the breed of executive who rose to power during the decade that the editors of Time magazine put him on their cover.

''If you are a shareholder in RJR and your chief executive officer's face is on the cover of Time with the word `Greed' under it, how would you feel about your investment in that company, past or present,'' said J. Tylee Wilson, whom Johnson ousted to attain RJR Nabisco's top spot. ''And the image that he created throughout the organization while he was the chief executive officer was vastly different than anyone had ever seen. We never had anyone as flamboyant as this guy running RJR.''

The ease and the apparent glee with which Johnson spent RJR's money on limos and airplanes, condos in New York and villas in Colorado offended Winston-Salem's sensibilities and clashed with the old Reynolds' culture of frugality.

''He was as unlike a chief executive of R.J. Reynolds as you could have possibly described,'' a former Reynolds lawyer said of Johnson. ''If you called up central casting, you'd say send me the anti-Christ for a tobacco company. Here's a guy who used to advertise Oleg Cassini suits on billboards in New Jersey with a gold chain around his neck. That's not the culture.''

Though it had made lots of money for many RJR stockholders, the leveraged buyout that Johnson triggered became an unseemly six-week spectacle of Yankee investors bidding obscene amounts for America's 19th-largest corporation and Winston-Salem's bedrock institution. The price was steep. Piece by piece, the winner would dismantle the company to pay off a mountain of debt. History and tradition and past grandeur would mean nothing. The company's fate would be sealed. Any hope -- no matter how meager -- of catching high-flying Philip Morris would be gone.

All that, though, might have been forgotten in time. After all, it was just business. But one word Johnson uttered made it personal. One word earned him the lasting enmity of an entire city.

Bucolic.

It's a nice word that rolls easily off the tongue.

Bucolic.

It's most often used to describe cows grazing in a rolling pasture, an apple pie cooling on the windowsill of the farmhouse, a shepherd tending his flock. Ross Johnson, though, didn't have those or some other pastoral scene in mind. He was talking about Winston-Salem, trying to describe why he was fleeing town and taking RJR's corporate headquarters with him.

Johnson had decided soon after arriving in Winston-Salem in 1985 that the town wasn't big enough for him. He loathed having to constantly referee disputes between the corporate staff in the World Headquarters Building, nicknamed the Glass Menagerie, and the tobacco chiefs downtown. ''Corporate and tobacco are armpit to armpit in this town,'' Johnson complained to a board member. ''It's not a healthy situation.''

His drinking buddies at Nabisco, ''Johnson's Merry Men,'' as they were called, refused to move south. Ed Horrigan, the chairman of the tobacco company, could hold his scotch, but Johnson had few others he enjoyed being with. ''You had a town of 140,000 people, where you've got 17,000 people working for the company and 10,000 retirees, and you can't breathe,'' he said.

Johnson began laying his plans to move the corporate headquarters soon after the vote by the RJR board in August 1986 that made him CEO the following Jan. 1. New York and Dallas were considered and ruled out. Atlanta was appealing because it was nouveau riche and overbuilt. Prime office space could be had cheaply and immediately. After winning over the three local directors on the board, Johnson figured that the rest of the board would see it his way, and he began to discreetly negotiate a lease for 11 floors in an unremarkable glass tower in a suburban shopping center called The Galleria.

The story broke five days before the board was to vote on Johnson's proposal. Winston-Salem was shocked. The Winston-Salem Journal, in an unusual front page editorial, implored the company to stay put. ''For the soul to survive, the head belongs with the heart,'' the newspaper wrote. A major stockholder, who was left cooling his heels for half a day in Johnson's outer office after the boss refused to see him, stormed home and composed an angry letter. ''We built the foundation of this company when you were in knee pants,'' he wrote.

The RJR board, though, sided with Johnson, and voted on Jan. 15, 1987, to move RJR's corporate headquarters and its staff of 300 to Atlanta. It attempted to soften the blow by donating the World Headquarters to Wake Forest University. Johnson would later attempt to make up for the loss of corporate jobs by moving the company's Planters LifeSavers' headquarters to Winston-Salem.

Though perceived by many in Winston-Salem as a slap in the face, the move made perfect business sense, said Dale Sisel, a longtime executive in RJR's international tobacco business. ''If you have a $50-billion, world-class company doing business around the world, staying in a town like Winston-Salem wasn't consistent with the image you wanted to convey and, even more importantly, with how employees in the company looked at the business,'' he said. ''We had to grow out of this small-town family way of managing a business and recognize that we were a worldwide business and had to operate accordingly.''

If Johnson had said something like that to a reporter for the Atlanta Journal-Constitution after the board vote, he might have escaped much of the invective that was later directed at him. But, no, he had to say that the move was necessary if RJR Nabisco expected to attract young professionals. ''They are interested in the arts, or they are interested in education,'' Johnson told the reporter. ''They look for, not only their own style of living, but for peers like themselves. You're not going to find that in a Winston-Salem or a Greensboro.''

That snub was bad enough for a city that had long prided itself on its cultural heritage and was the home of a major university. Johnson, though, wasn't done. Winston-Salem, he said, was just too ''bucolic.''

''Honk If You're Bucolic,'' read a bumper sticker that became a hot item. Crude cartoons showing Johnson scaling the Reynolds Building like King Kong popped up on company bulletin boards all over town. Though he steered clear of Winston-Salem after the move, Johnson showed up to play in the Vantage Pro-Am golf tournament at Tanglewood Park. He arrived by helicopter and was accompanied by body guards. Johnson was teamed with the popular Arnold Palmer. ''Nice drive, Arnie,'' someone in the gallery hollered at one hole. ''Too bad you have to play with that son of a bitch.''

A rootless man whose idea of home was where the Gulfstream jet happened to be parked, Johnson was stunned by the emotions he had unleashed. ''Jesus Christ, Exxon takes 7,000 jobs out of New York and nobody bats an eyelash,'' he said. ''I move a few hundred jobs out of here and I'm Attila the Hun.''

The tobacco people over in the Reynolds Building, though, were happy to see Johnson and all his cookie people leave, said David Fishel, the head of RJR Tobacco's public-relations department at the time. ''The feeling at the tobacco company was, `They're out of our hair. Go to Atlanta and let us do our business,' '' he said. ''The press was writing doom and gloom stories. We wanted to whisper in your ear, `Time out, fellas. We ain't all that unhappy at what just happened.' ''

Drifting Apart

Jerry Long, the president of Reynolds Tobacco, knew full well how Johnson operated. He had watched him replace longtime RJR executives with his own people and whittle down the corporate staff on whims. ''If that department head or that person did not jump at any kind of wild idea that the man had, I don't think the person was around for a week,'' Long remembered. ''You were for him or against him.''

Tylee Wilson had warned Long that his time would come. Long knew that. He was nobody's yes man. He had argued passionately with Johnson that Premier, RJR's revolutionary ''smokeless'' cigarette, wasn't ready for test markets. Johnson ignored Long, gave control of Premier to Horrigan, who did what the boss wanted. Premier bombed and was pulled from the market in less than four months. The internal fight over Premier created a rift between Horrigan and Long, who had come up together under Wilson. ''I'm certain after Johnson took over that Ed was having a big fight with Jerry over Premier,'' Wilson said. ''Ed was representing Johnson's view, and Jerry was opposed to what they wanted to do. That may have resulted in a lot of bad blood.''

The gulf between the two widened for reasons that differ depending on which side of the precipice the observer is standing. Horrigan, said Wilson and Long, enjoyed the power of being Johnson's right-hand man. Some of his underlings called him Little Caesar or the Little King behind his back. ''Ed changed. Ed became a different guy (after becoming chairman of the tobacco company),'' Wilson said. ''He became very, very full of himself.''

Horrigan aligned himself with Johnson, becoming part of what he called the boss's ''rat pack.'' That meant distancing himself from Long. A clash was inevitable, Long said.

''I had the reputation of doing what was right for the company and right for the people and right for the customers,'' he said. ''But at that time he (Johnson) felt Horrigan would do about anything he wanted him to do. It didn't make any difference to me. . . . Horrigan was extremely politically ambitious, and he wanted to regain the position of the No. 2 person in whole company.''

Horrigan, of course, sees things differently. ''Ross' elevation to CEO created a different environment. Totally different environment; rightly or wrongly,'' he explained.

''And Jerry, I don't think, was comfortable at all or happy in that new environment. And Jerry's a very vocal guy, as you know. I think in many ways he became his own worst enemy. You know the expression, 'You can go along or get along'. I think what happened there was an environment created that put Jerry in a different kind of position than he was perceived by people, and it just made for a very difficult environment. It was not easy.''

The end came one day in October 1987, when Horrigan, according to Long, asked him what it would take for Long to leave quietly. Long said he pulled from his shirt pocket a list he had compiled months earlier and had carried with him in anticipation of that moment. Horrigan, though, doesn't remember a list of demands. In either case, Long was gone.

Said Horrigan: ''To this day I regret what happened. . . . Changing people results in changing politics in companies and, sadly, the politics in that company changed overnight when we acquired Nabisco. . . . It created a sixes and sevens mentality, which was detrimental to the best interests of the company. Jerry and I got caught up in that.''

The Selling of RJR

The stock market collapsed Oct. 19, 1987, and RJR and much of corporate America took a beating. RJR's stock had been selling in the mid-70s, but plummeted into the low 40s. To Johnson, the stock price was a report card. A high price meant that the stockholders were making money and he was doing his job. A low price, conversely, meant that the stockholders were unhappy and he could be looking for another job. The price was never high enough to suit Johnson, though he realized that investors' perceptions of tobacco and the fear of lawsuits dragged it down.

To boost the price, Johnson explored buying another food company, entering joint ventures or spinning off the tobacco company.

He finally settled on something entirely different. A year to the day after the crash, Johnson shocked Winston-Salem by announcing that he was heading a management team, which included Horrigan, that wanted to take the company private through a leveraged buyout. In such deals, which were the rage on Wall Street during the 1980s, some cash is put down and the rest of the purchase price is financed, using the company as collateral. To pay off the debt, the new owners try to cut costs and sell off assets.

Johnson and his team offered the company's board of directors $75 a share, or about $17 billion. As he had expected, the company's stock, which had been selling for $56 a share, jumped $21 in one day. The announcement, though, had another effect. The genie was out of the bottle, and, in the parlance of Wall Street, RJR Nabisco was now ''in play.''

Investment bankers and lawyers salivated at the multimillion-dollar fees that such a deal would generate. Others were motivated by ego and the desire to be part of what was surely to be the biggest buyout in history.

The RJR board received other bids, but the two main competitors were Johnson's group and Kohlberg Kravis Roberts & Co., the New York investment firm headed by Henry Kravis that was the recognized leader in leveraged buyouts. For six weeks, the two captured the nation's headlines as they increased their bids back and forth. Kravis finally won on Nov. 30, 1988, with a bid of $109 a share, worth $25.4 billion. The offer was almost double the size of the previous largest takeover, and all but $5 billion of it was borrowed. RJR was saddled with a debt that was more than the combined national debts of Bolivia, Uruguay, Costa Rica and Honduras.

The deal became the decade's opulent climax. Leveraged buyouts fell out of favor, and nothing like it was tried again.

The buyout, as Johnson had hoped, provided a one-time bonanza to stockholders, who saw the value of their Reynolds shares almost double in six weeks. Wilson, though, wonders whether stockholders wouldn't have been better off in the long run without it. ''Remember who got rich,'' he said. ''The bankers got rich, the investment bankers got rich, the leveraged-buyout firm got rich, the senior executives in the company got rich. And the shareholders got what, $100 a share? That's great. But how do you know that the shareholders wouldn't have gotten $200 a share split how every many times down the road.''

Johnson resigned in February 1989 when Kravis took over. For his troubles, he walked away with more than $60 million in RJR stock, bonuses and pension payments.

Forfeiting the Race

Kravis' side had won, but the tobacco company would pay a steep price. With the deal went any hope of ever catching Philip Morris. Unable to brake the slide in its mainstay Winston and Salem brands, which appealed more to older smokers, RJR finished 1988 with a 31.7 percent domestic market share, a drop of nearly a full percentage point in a year. Much of RJR's lost ground was being taken by archrival Philip Morris, whose Marlboro man continued to gallop away with more than half of all new smokers. ''We're eating their lunch,'' said Frank E. Resnik, the president of Philip Morris USA. (Business Week footnote, Resnik quote.)

With a U.S. share just shy of 40 percent in 1989, Philip Morris began using its clout to grab even more of the market. It rolled out an incentive program that offered higher margins and discounted services to wholesalers who exceeded certain sales goals. After capturing as much as half of some West Coast markets, Philip Morris smelled blood and took aim at RJR's southeastern stronghold. It beefed up its sales force, threw money into advertising and tried to wrest prime shelf space in grocery stores from RJR brands.

''What hurt the company, was the perception, the accurate one, on the part of our competitors, principally Philip Morris, that with $30 billion in debt that we were carrying a heavy load, and I think that they adjusted their strategy to reflect that,'' noted Sisel. ''In other words, they became more aggressive in things like pricing, in things like marketing spending, in things like business development, recognizing that we as a company simply wouldn't be able to match what they were doing because of that $30 billion in debt. So it really changed our competitive posture.''

When he ran the company, Wilson still thought he could regain the lead from Philip Morris. Johnson, though, had a much more short-term and pragmatic approach.

''To him, being the dominant player was not that big of a deal,'' Sisel said. ''He wanted a lot of earnings, a lot of cash flow; he was interested in the price of the stock, short term. So I would say, if you were going to pick a clear line of demarcation, I would say it happened at that time, and it was probably reinforced by the KKR buyout where they didn't have the luxury of being able to worry about No. 1. They wanted to be a strong competitor but they had to be more concerned with earnings and cash flow.''

The new owners cut 2,000 jobs and brought in consultants to examine every phase of the business and where every dime was going. ''You had to basically spend all your time justifying why you were doing something,'' said Yancey Ford, a sales executive at the time. ''And so you would give these consultants all this information _ and they would write it down and give it back to you.''

At one meeting during the transition period before the official transfer of RJR to its new owners, Horrigan bristled when KKR consultants questioned why he needed money to buy new cigarette-making machines. He was flabbergasted when they told him they wanted to raise the price of Doral, RJR's value brand that led that segment of the market.

''Then I demeaned some little red-haired, porky guy there,'' Horrigan remembered. ''I said, `You don't know a goddamn thing about marketing. You're asking me questions and I'm answering them. You're telling me you can raise the price of Doral and I'm telling you you can't. It will be the end of the brand' .''

Horrigan resigned on Feb. 13, 1989, four days after KKR took over. Kravis replaced him as CEO of the tobacco company with Jim Johnston, an RJR refugee who left the company in 1984 after a dispute with Horrigan and Long. When he left, Johnston had been the executive vice president of marketing who had earned his stripes in RJR's international tobacco business. But the company he was returning to had changed.

Kravis lured Louis V. Gerstner Jr. from American Express in March to head RJR Nabisco. He took over a company that was far removed from the one that provided stretch limos and penthouse apartments to Ross Johnson and his cronies. Several Johnson allies quit almost immediately.

''I came in to be CEO, but I was CEO, CFO, general counsel, head of tobacco operations, and at one point, there was no treasurer,'' Gerstner said. And there was little infrastructure at RJR's temporary New York office. Lunch in AmEx's dining rooms was replaced by a call to a deli. Instead of a limousine to take him from his home in Greenwich, Conn., Gerstner found a 4-year-old car that kept breaking down. At 3 p.m. one Friday in June, 1989, Gerstner tried to send a document by messenger only to find that his support staff had gone home. He didn't know that employees worked the summer hours of Nabisco's suburban New Jersey headquarters. (Business Week footnote, Gerstner quote.)

By 1990, Gerstner had sold off more than $3.5 billion of RJR Nabisco's assets, issued $4 billion in junk bonds, hired a management team, discontinued Premier, moved corporate headquarters to New York, and ordered cost cuts. ''His management style was to question, to probe to provide support, but he very rarely insisted on doing things his own way,'' Sisel said. ''He gave the guys who ran the operating units a lot of freedom to run that business as they saw fit as long as he was aware of what you were trying to achieve and was satisfied that it made some sense. The demands being made on us were not unrealistic. They were pushy, they were tough, they were aggressive, but they weren't unrealistic.''

But they did little to prevent Philip Morris from widening the gap. By 1991, Philip Morris commanded 44 percent of the domestic market, an almost five-point rise since Johnson put his company in play. RJR during that same period had slipped more than four points to 28.3 percent. The race was over.

''It was a damn near impossible job to try to hold the market share,'' one member of the RJR board said. ''Here was Philip Morris, no leveraged buyout, making hay internationally and domestically. You can't blame the whole history of their (RJR's) downturn on the buyout, but it was sort of the crowning blow.''

• Coming Monday: The King Has Dirty Clothes