Harvard's Double-Stuff Deal

MY friends like Oreo cookies. I like Oreo cookies. The other day we bought a bag of them and ate it over a weekend.

We bought the cookies before last week's news that the management of RJR-Nabisco, a publicly-held consumer products conglomerate, had proposed a $17 billion offer to buy stock and take private ownership of the company. It was the largest buyout bid in history.

Shortly afterwards, the Green Berets of the financial world at Kohlberg, Kravis, Roberts (or KKR, as the company which introduced "leveraged buyouts" to the world is known) announced a $20 billion bid for RJR.

Apparently a lot of people with a lot of money are interested in what is happening.

To illustrate further, remember that last week also saw the sale of another American household name and producer of consumer products, Kraft Inc., to Philip Morris Companies Inc. for an estimated $13.5 billion. Each year, Kraft sells $10 billion worth or products like Cheez Whiz, Miracle Whip and something called Frusen Gladje. Philip Morris makes items such as cigarettes, beer, coffee, lunchmeat and Jell-O.

NOW, without going into detail about the web of financial transactions which makes such staggering deals possible, one point should be made: while stockholders benefit from lucrative buy-out offers for their stock (the largest shareholders usually being company directors), and while buyers make huge amounts of money by breaking up acquired companies and selling them piece by piece or strengthening them before reselling the whole, all the billions of dollars spent, invested and earned in this matter do not go directly to any economic production.

In other words, enormous sums of money, time and attention are being paid out simply to gain even more staggering amounts of wealth.

"These are insane times," the vice chairman of a Cleveland-based industrial company was quoted in The New York Times. Stephen R. Hardis with Eaton Corporation explains that loading a company with debt in a buy-out at the expense of expansion or research is simply bad business.

Efficiency is not the only issue.

"Everyone I talk to has the same feeling, that there is something sick about a society where you can get filthy rich by doing this sort of deal," said MIT's 1987 Economics Nobel Laureate Robert M. Solow in the same article. "It is an activity about as far from Florence Nightingale as you can get, and that is what underlies the discomfort people feel."

Suddenly, eating an Oreo isn't so easy.

I bought the Oreos two weeks ago. They cost $2.97 and that will go to the company that produces Oreos--Nabisco--and help finance the sale of cancer-causing cigarettes to people on the other side of the world. It may even help finance taking the company into private hands so it is answerable to no one but itself. Until this week I had no idea buying an Oreo could have such ramifications, but that's the way the cookie crumbles.

The financial world often seems to whirl over our heads, but then suddenly entangles us without our knowledge in enterprises from which we might like to keep distant. But who's to place blame? Let him who has never had a Double Stuff cast the first stone, right?

Well, not exactly. While ignorance can be forgiven, willful ignorance cannot. And that brings us to Harvard Yard, and the investment practices of this University.

HARVARD students benefit from and contribute to a $4 billion institution which, while perhaps trying to do the right thing, often can't predict what that thing is; or, when it believes it knows, finds that overlooked details can suddenly pose ethical or practical problems.

Harvard is a major player in the KKR bid, contributing a big chunk on the $2.3 billion downpayment for the takeover of RJR. But as a condition for investing in KKR last year, the University gave up virtually any say of what KKR will do with the money, which is in part our money.

Last summer, the University learned that two of America's largest tobacco producers in which it owns stock--RJR and Philip Morris--practice unethical advertising in underdeveloped nations. Apparently surprised by this discovery, Harvard demanded an explanation and considered withdrawing its investment from the companies.

SUCH ethical considerations, however, become somewhat of a mockery in the face of the KKR bid. The takeover of RJR means that the University will "make a killing" on the portion of the company it owns when KKR or RJR managers bid top dollar for its share. Essentially, the University hit the daily double--if KKR wins, the downpayment it makes for RJR will include several million Harvard dollars it invested in KKR last year. Harvard will eventually get a healthy return on that portion, too.

All of which means Harvard will "make a killing" off of a company it is currently considering divesting from because of ehtical considerations. Such misfortunes (to say nothing of fortunes), befall those who intentionally enter the financial world with eyes closed.