Money the New-Fashioned Way

THE anatomy of the recent leveraged buyout of RJR Nabisco by the firm of Kohlberg, Kravis, Roberts--helped out by some $20-40 million from Harvard's endowment--sounds great on paper and is worth as much. Leveraged buyouts, in which huge companies are bought and sold and divided and merged solely for the purpose of raising the stock values, are running wild in America.

Imagine yourself as the owner of a bank and having a company president come to you saying, "Have I got a deal for you! Loan us enough money to help us buy our company back from the stockholders. We'll offer so much that they can't refuse. Then we'll streamline it by firing employees and selling subsidiaries.

"Of course, with all our asssets tied up in paying off the huge loans we've accumulated, we can't afford to develop new, better products that will make us stronger in the long run, but that's okay because in five years we'll sell our stock publicly again and make back 10 times what we invested. This assumes that the economy and inflation continue an upward trend, because if they don't we'll go bankrupt, but what's life without a little risk?"

More than risky, it seems downright foolish to put an entire company on the line for no better reason than abject short-term greed; still, buyouts are popular among today's large-scale financiers, people who are no longer innovative entrepreneurs who build companies from scratch, but tricky accountants who raise dividends any way they can. Now, following the example of Ross Johnson, the chief executive officer of RJR who tried to take over the company for himself, they don't work for the stockholders--they work for themselves.

After all, the only ones that lose out when a leveraged buyout is closed are the government, since the loans taken out by companies are tax-deductable, the economy, since leveraged buyouts have caused the level of business debt to double to more than $1.8 trillion in the past five years, the company employees who are often either laid off or uprooted across the country by the restructuring process, and the consumers, who don't get new products at better prices, but the same products at higher prices because a hostilely-bought company has to use all available funds to pay off billions in debt rather than research and marketing. But gee, leveraged buyouts sure make money for the people who organize the deals. If all Ross Johnson's plans had worked out, he stood to make approximately $1 billion within 10 years.

OF course, the stockholders, especially large ones, don't do badly either. Harvard, for instance, will not only see an approximately 40 percent return on the $20-40 million it invested in KKR's takeover fund, but being in the interesting position of helping raid a company they own stock in, they will get huge returns from those holdings when the new owners sell off parts. The closing of the takeover deal earlier this month meant that RJR stock was worth $109 per share--quite a bit more than than the $56 per share it was worth on the market before the highly-publicized takeover war began, but that's the magic of buyouts.

Harvard claims to be above the messy business of making money, but did you ever wonder just how moral a university can be? Not only did Harvard devote endowment funds to an ethically questionable, not to mention financially risky, hostile takeover for no other purpose than to quickly turn a profit, but they did it over a company in which they were a major shareholder. This same company, RJR-Nabisco, has not only received harsh criticism and censure for agressive and unethical business practices in many Asian and Third World nations but is also the fourth largest investor in the apartheid state of South Africa.

Harvard contended that it did not have any control over the decision of KKR to take over RJR and claimed that it could not back out of the deal. The Commonwealth of Massachussetts pension fund, which had also originally committed funds to KKR's limited partnership, pulled out because it did not approve of the hostile takeover process or RJR's connections to South Africa. Harvard's administrators, however, saw nothing wrong with donating University resources to this scheme.

Analysts agree that leveraged buyouts serve no one but the dealmakers. Professor Robert Reich at the Kennedy School has said of the RJR takeover that it "clearly exposes the greed and rapaciousness of so many of these takeovers." As the University is run more and more like a corporation, it seems to be losing--no matter how much its administrators protest--its moral purpose, so that the only standards in visible practice are those dictated by the University's own greed.