WHEN THEY FORGOT THE NUTS AND BOLTS
© by Mark Reutter
Posted 5/8/06
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Between the corporate raidings of Victor Posner in the 1970s and 80s and the Chapter 11 trawlings of Wilbur Ross since 2001, lies a key figure: Henry R. Kravis.
Beginning in 1979, Kravis took Posner’s insights about hostile buyouts of public companies to a new level. Kravis and his partners created limited private partnerships to buy large public companies through the issuance of high-yield debt.
The investment bank Drexel Burnham Lambert, led by Michael Milken, raised enormous amounts of “junk bonds” (high-risk, high-yield subordinated debentures) to finance these leveraged buyouts, or LBOs. By the mid-1980s, the Kravis-Milken-LBO-junk-bond steamroller was in high gear, squashing scores of companies with blitzkrieg raids.
Not wishing to miss out on the fun, Victor Posner teamed up with Milken and arbitrageur Ivan Boesky to “park” (or hide) stock in Fischbach, a construction corporation under Posner’s sights for a hostile attack.
The maneuver got the attention of both the Securities and Exchange Commission (SEC) and Rudolph “Rudy” Giuliani, U.S. Attorney for the Southern District of New York. Posner was subject to sanctions for fraud and insider trading in relation to Fischbach; Milken and Boesky went to jail; and Drexel Burnham Lambert crashed and burned as the junk-bond market took a nosedive.
But the story does not end there. Entering Chapter 11 bankruptcy in 1990, Drexel hired Wilbur Ross, then restructuring chief at Rothschild’s, to pick through the dying embers. The most notable offspring of the Drexel restructuring was Apollo Management, which specializes in buying and selling “distressed assets” not unlike present-day W.L. Ross & Co.
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But I digress. To return to Henry Kravis: After grabbing public companies with borrowed money, Kohlberg Kravis Roberts & Co. privatized them and pulled out the carving knives (divisions sold, payrolls slashed … the usual, which was still quite unusual in the 1980s, except for those unfortunate firms raided by Posner).
The resulting “lean and more efficient” entities were sold back to the public at a big markup. A panoply of brand-name companies were thus squeezed through the KKR meat grinder: Safeway, Beatrice, Borden, Playtex, Samsonite, and, most famously, RJR Nabisco.
The 1987 movie “Wall Street” captured the animal spirits of the time. As memorably played by Michael Douglas, corporate raider Gordon Gekko declares to the stockholders of Teldar Paper: “I am not a destroyer of companies. I am a liberator of them. The point is, ladies and gentlemen, that greed – for lack of a better word – is good.”
Some very good non-fiction books sliced through the complexities of LBOs and junk bonds, including The Predators' Ball (1989), Barbarians at the Gate (1990), and Den of Thieves (1991). But none of them examined the effects of Kravis’ machinations from the viewpoint of Main Street America. Max Holland’s case study of the Burg machine-tool company did – brilliantly. I reviewed the book for The Washington Monthly:
When They Forgot the Nuts and Bolts (PDF format)
Holland’s When the Machine Stopped is not currently in print. It should be, lest we forget the nuts and bolts of an era that helped send America’s manufacturing base spinning into long-term decline.
Meanwhile, Kravis is still very much in circulation. No longer the dark-haired scene setter accompanied by fashion designer (and now ex-wife) Carolyne Roehm, Kravis has elevated himself into a benefactor of good causes and patron of the arts.
He has established the Henry Kravis Internships for Teachers of Color and donated $15 million for a center for cardiovascular health at Mount Sinai Medical Center. He has chaired the board of overseers at Columbia University’s Graduate School of Business and been active on the boards of the Metropolitan Museum of Art and New York City Ballet.
Having tacked clear of the Giuliani/SEC probes and gained a second wind from the influx of global capital, Kravis, now 62, is eager to enter the next phase of his career. On May 3, 2006, KKR Private Equity Investors LP debuted on the Euronext Amsterdam Exchange. The initial public offering (IPO) will allow investors to participate in KKR’s investments without needing the minimum $25 million traditionally required to participate in the buyout firm’s activities.
KKR hopes to trade on its “golden name” to sell 200 million shares of stock at $25 a share, which will be partly bundled into a new $10-billion KKR fund to buy up companies worldwide. With banking powerhouses Citigroup and Goldman Sachs managing his Amsterdam IPO and investors eager to pile into the “next big thing,” one supposes that Kravis’ latest dream of gold will come true.