Barbarians at the Gate

by Bryan Burrough

  With Reynolds gripped in bitter political squabbling, Sticht struggled to find a successor he could recommend to the board. A director named Ronald Grierson came to him with an idea. Grierson was a distinguished Briton, vice chairman of British General Electric. In Europe, Grierson told Sticht, companies often went to handwriting experts when confronted with tough decisions like this. And so an oracle on such matters in Switzerland was consulted. She looked at writing samples of the successor candidates and shook her head morosely at each: not competent…couldn’t be trusted…and so on down the line.

  Sticht stalled. Some believed he didn’t want to make a decision. He was in his mid-sixties, but felt as if he were in the prime of his late-blooming career. Then, just as those inside the company held their breath waiting for his final decision, Sticht made an even more startling announcement: He had agreed to buy a company named Heublein for $1.2 billion. What he got was a good liquor business (Smirnov, Inglenook Wines), a mediocre fast-food business (Kentucky Fried Chicken), and Heublein’s chief executive, Hicks Waldron, a fourth succession candidate. Waldron had spent most of his career at General Electric, a breeding ground for modern managers, and had a patina of polish Sticht found lacking in the others. Waldron wasn’t unmindful of the succession war gripping Reynolds. There were only a few key terms to Heublein’s sale, as far as Waldron was concerned: a price of $63 a share and a promise that Tylee Wilson wouldn’t be made chief executive.

  Now the succession situation grew even more complex. In October 1982, Sticht turned sixty-five and told the board he couldn’t yet recommend a candidate to replace him. Instead he asked for and received permission to stay on an extra year. There was little doubt his request would be approved: Since the mid-seventies, Sticht had been packing the board with his supporters.

  In an era when many American companies favored weak-willed, rubber-stamp boards, Reynolds directors were unusually strong-minded. Among their most outspoken members was John Macomber, chief executive of Celanese, the chemical company. Macomber was chairman of the board’s compensation committee, which was looking after the succession matter. He was Eastern Establishment through and through—Yale undergraduate, Harvard Business School, Lincoln Center board, International Chamber of Commerce—and close to Sticht. Sticht was on the Celanese board and had been on the search committee that installed Macomber in his job.

  As far as the Reynolds succession went, Macomber was an anybody-but-Wilson man. Celanese did $25 million of business a year with Reynolds, selling it material for cigarette filters. But Reynolds bought twice as much from Eastman Kodak, and when Macomber lobbied Wilson for more business, Wilson—no corporate politician—bluntly told him: “You’re our secondary supplier for two reasons: quality and service.” Macomber simmered. “I will not be on the board of a company run by Tylee Wilson,” he declared.

  Vernon Jordan, the former Urban League president, was another director tight with the Macomber-Sticht axis. He, too, served on the Celanese board. As a partner in the Washington law firm of Akin, Gump, Strauss, Hauer and Feld, Jordan was well disposed to any chairman who put him on his board. Sticht would often have Jordan along as his guest at Bohemian Grove, the exclusive northern California corporate retreat, a superb place for the lawyer to do some rainmaking.

  Juanita Kreps also owed Sticht. A longtime professor and administrator at Duke, Kreps was the token woman on Reynolds’s board even before attaining modest fame as Jimmy Carter’s secretary of commerce. Sticht had gotten her on the board of Chrysler, where he was a director. Sticht had Reynolds make handsome contributions to the Duke University Endowment, of which Kreps was a trustee. Kreps got credit at Duke for the gift; Sticht’s name got attached to the largesse. At Duke there was a J. Paul Sticht chair for international studies and a J. Paul Sticht fellowship for graduate business-school study, for a deserving alumnus of his alma mater, Grove City College.

  Another Sticht supporter was Grierson, who Sticht also maneuvered onto the Chrysler board. Sticht could also count on Albert Butler, of Winston-Salem, who headed a family textile business and, for many years, a Moravian good-works foundation. Butler was a creature of the local establishment who summered at Roaring Gap, golfed at Old Town, and sat on the boards at Wachovia and Wake Forest. Butler had been thrilled to be tapped for Reynolds’s board and was utterly passive once on it.

  Bill Anderson, chairman of NCR Corporation, was the kind of international businessman that Sticht could only pretend to be. Anderson had grown up in Shanghai and spoke several Chinese dialects. He had spent four years as a Japanese prisoner of war during World War II, and afterward was chief witness at a war crimes trial that sent thirty of his Japanese captors to prison. He had seen heavier scenes than the succession mess, at which he seemed slightly bemused.

  It was a powerful board and squarely in Sticht’s pocket. But if the directors pampered Sticht, they felt no obligation to treat his subordinates—or his successors—the same. Reynolds executives seethed at the way board members put them through the second degree. “Paul had his own bevy of directors; they knew everything and management knew nothing,” Ed Horrigan recalled years later. “He and they were using the company as a vehicle for self-aggrandizement.” Horrigan’s hostility was apparent to all—some board members called him “that trigger-happy whiskey salesman”—hurting his chances for the top spot. “Always remember, they’re only in it for themselves,” the personnel chief, Rodney Austin, told colleagues. “They’re mostly whores, pimps, and panderers.”

  The succession scramble had been dragging on for two years when, in the wee hours of a Saturday morning in early 1983, Austin awoke Horrigan with a phone call to pass along a tip from one of the directors. Stuart Watson, the former chairman of Heublein and now a Reynolds director, had gone before the succession committee and made a case for his man, Hicks Waldron. The committee had bought it, Austin said; it looked like Waldron, the dark horse, had the job.

  As Horrigan raged at the development, Austin suggested it wasn’t too late to recover. “But your only hope is to get together with Ty and Jerry Long [tobacco’s number-two man] right now and stop it from happening.”

  That weekend Horrigan, Long, and Wilson met and agreed: Waldron had to be stopped. The best way to do that, they reasoned, was to use themselves as leverage. If they could bury the hatchet and form a united front behind either Wilson or Horrigan, they could derail the Waldron express.

  On Monday, Wilson met with Sticht and delivered him a handwritten letter. “We cannot accept Hicks Waldron as chairman or as CEO,” Wilson wrote on behalf of the three men. “We believe the selection of Waldron as your successor would be an unnecessary sellout. We assume the committee believes the retention of the proven successful principal executives of this company is vital to its future. However, the selection of Waldron would result in the three of us leaving the company.” It wasn’t right that someone with no tobacco experience should get the job, the letter went on. Especially because the best candidate was right under the board’s nose. “We respectfully conclude that I am the most qualified candidate to succeed you,” Wilson wrote.

  As much as Sticht detested their demands, the trio had him in a corner. He couldn’t lose his top three tobacco executives, not with Philip Morris poised to pass Reynolds as the nation’s top tobacco company. Sticht sent the succession committee copies of what was already being called, by the few who knew of it, “the midnight letter.” The directors were also furious, and they were also in a corner.

  As they thrashed about for an answer, Macomber was even advanced as a possible compromise candidate; it wouldn’t be the last time he would do so. Debate ran on for weeks. During a marathon parley after the April annual meeting, there was still strong sentiment for Waldron. Finally in May, at a Saturday meeting of the succession committee in Winston-Salem, Sticht made his recommendation. The board reluctantly consented. Sticht flew to Heublein headquarters in Hartford, Connecticut, to break the news to Waldron. “Hicks, I’m going to do something that I’m
afraid isn’t in the best interests of the shareholders, but I’ve got to do it,” Sticht said. “I’m naming Ty chief executive.”

  Elevated to chief executive in 1983, Tylee Wilson set to work reshaping Reynolds. Like many in the New Guard, Wilson’s background had been in consumer products, and it was there he believed the company’s future lay. He spun off Sea-Land to shareholders in 1984, and sent Joe Abely out to sea with it, ridding himself of a potential challenger. Wilson sold Aminoil the same year for $1.7 billion, just before oil prices went into free fall. Wall Street analysts praised the changes and issued “buy” recommendations on Reynolds stock. Business Week chimed in with a laudatory cover story, declaring “The Consumer Drives R.J. Reynolds Again.”

  They were smart moves. After its troubles during the seventies, Reynolds’s tobacco business had begun what would become a long decline. In 1983 cigarette sales had crested and would fall a steady 2 percent each year to come. The rise of the antismoking movement—the “antis,” Reynolds partisans spat—was taking its toll. By the early eighties, less than a third of Americans smoked. Federal excise taxes on cigarettes were doubled in 1983, to 16 cents a pack. Tobacco remained a fabulously profitable business—prices were still raised twice a year—but even die-hard industry partisans saw the twilight ahead. By diversifying, Wilson was simply readying Reynolds for the inevitable.

  Horrigan was named Wilson’s president and chief operating officer. Their alliance was a shaky one, but Wilson owed Horrigan for his role in drafting the midnight letter. Now, much as Wilson had grated on Sticht, Horrigan grated on Wilson. When he had questions about the tobacco business, Wilson bypassed Horrigan and went to his henchman Jerry Long, who replaced Horrigan as president of the domestic tobacco business. A stickler for detail, Wilson criticized Horrigan for his weekend trips to Palm Springs, where the Horrigans had a home. Even though Horrigan often took along other executives, Wilson thought the trips more personal than corporate, and challenged Horrigan’s use of a corporate jet.

  “Ed, you’re really, really stretching,” Wilson said.

  Horrigan bristled. “You’re challenging my integrity.” When internal auditors later forced Horrigan to reimburse Reynolds for some trips—at the going rate of twice first-class airfare—Little Caesar threw a fit.

  Wall Street may have liked Wilson’s ideas about remaking Reynolds, but they were greeted somewhat less enthusiastically by Paul Sticht: Wilson was, after all, undoing a decade of his work. On his retirement, Sticht remained a powerful board member—maybe the most powerful—and kept close tabs on Reynolds’s inner workings. Wilson did everything possible to freeze him out. Sticht’s life revolved around the corporate jets, but when Wilson felt his trips were for personal business, he made sure Sticht was charged for them. A retired chairman was entitled to an office and a secretary, and Sticht got one—but in the old headquarters downtown, away from his beloved Glass Menagerie. “Sticht is going to be my sexual consultant,” Wilson was heard to say. “When I want his fucking advice, I’ll ask for it.”

  But Sticht simply couldn’t let go. He called department heads with questions or observations. He took calls from Hicks Waldron, passing along his former Heublein colleague’s complaints. One of the sorest points was the head of Del Monte’s fresh fruit division, Sammy Gordon. He was a favorite of Sticht, who liked the business and whose son worked for Gordon. Sticht used the talkative Gordon to disseminate anti-Wilson gossip, Wilson thought. Sticht defended Gordon for running his business like the freewheeling banana trader he was.

  Gordon’s style ran counter to Wilson’s bedrock belief in what he called “process and procedure.” Wilson lived for the trappings of bureaucracy: When it came to corporate decision making, he was confident that if one went through the right steps and approvals, the right conclusions would follow. “Process,” Wilson told a gathering of senior executives shortly after taking office, “can speed the smooth and orderly flow of most routine activities and permit us to devote valuable management time to exceptional or unanticipated concerns.” As a maiden speech, it was an earnest declaration of principles. But it betrayed a rigidity and coldness that wouldn’t win Wilson allies when he most needed them.

  Wilson would sometimes wander around headquarters, trying awkwardly to make small talk with middle managers. But he couldn’t shed his brusque nature. When he thought the executive dining room was being cluttered by too many lower-level types, he ordered higher admission standards. “R.H.I.P.,” he crisply explained, then translated: “Rank has its privileges.”

  From the outset, Wilson’s relations with the Reynolds board were shaky. None of the directors condoned his strong-arm tactics in winning the chairmanship, and his treatment of their friend Sticht wasn’t appreciated. Wilson tried to build bridges, in his fashion. He sent directors briefing papers between board meetings. He scheduled one lunch a year with each director, during which he took copious notes as his guest aired whatever was on his mind; Wilson kept the notes in little books, one for each director.

  But where it mattered most, Wilson fell hopelessly short. John Macomber was still pestering him for business and getting rebuffed. When Vernon Jordan pressed for more legal work, Wilson would coolly reply that, as a nonlawyer, he couldn’t judge whether there was anything appropriate; he referred Jordan to Reynolds’s general counsel. In contrast to chief executives such as Paul Sticht and Ross Johnson, who played their boards like a personal symphony orchestra, Wilson had a tin ear.

  He further alienated Sticht and the board by diminishing an institution dear to their hearts, the International Advisory Board. Since its formation in the seventies, it had become a prime junketeering vehicle for Reynolds directors. Wilson cut the meetings back from two a year to one and removed Sticht as the board’s chairman, making the job a staff-run function. Wilson knew all the changes weren’t met with pleasure by Sticht or his board cronies, but both profits and the stock price were up, and he couldn’t conceive of anyone arguing with his results.

  After unloading Aminoil and Sea-Land, Wilson began preparations for his biggest move yet, an acquisition that would fulfill his grand vision to mold Reynolds into a consumer-goods superpower to rival Procter & Gamble. Wilson set up a task force of Reynolds staffers and representatives of the company’s longtime Wall Street investment bank, Dillon Read & Co., to sift through and rank the candidates. After many months and countless computer studies, they came up with three recommendations.

  Second runner-up was PepsiCo, which scored seventy-five on Wilson’s acquisition-lust scale. Wilson approached it first, in part because he knew its chief executive, Wayne Calloway. But Wilson found Calloway as ice-cold as a Pepsi. “There’s no way I’ll discuss that with you, and if you come at me hostile I’m going to fight you all the way,” he said. Wilson backed off.

  First runner-up, with a score of seventy-six, was Kellogg, the cereal giant. But half its stock was controlled by a trust, and Wilson doubted the trust would sell. That left the company that was number one, with eighty-one points. Wilson demurred only briefly, because he didn’t know the chief executive. According to his task force, Reynolds’s ideal marriage partner was Nabisco Brands, headed by a breezy, likable Canadian named Ross Johnson.

  “Oh, yeah, I know who you are,” said Johnson, who had bumped into Wilson a few times over the years.

  The two chief executives met the following week over sandwiches at Johnson’s midtown Manhattan office, and Wilson laid out his plan. Reynolds, he explained, needed a major acquisition to ease its reliance on tobacco, and he thought Nabisco fit the bill perfectly. As they spoke, the two men leafed through each other’s annual reports.

  Relaxed and chatty, Johnson played it coy, not responding immediately. Wilson suspected Johnson would be receptive: He had picked up rumors that Nabisco and Philip Morris were sniffing at each other, and he thought Johnson would be motivated to sell. To make certain, Wilson threw in a sweetener. The two of them were the same age, Wilson noted, but he had no plans to remain chief until s
ixty-five. Wilson told Johnson he planned to retire in two or three years, and hinted strongly that Johnson would get first crack at replacing him as head of their combined companies. The two talked terms and agreed that if they chose to pursue a merger, a tax-free stock swap made sense. They parted with plans to meet again in several weeks. Both had board meetings in the meantime, and each could get word on whether to proceed.

  Wilson had left Johnson’s office sky-high, his grand vision apparently within reach, but when he met with his directors in late April 1985, he found them cool to the idea of merging with Nabisco. Some were downright angry. This would be the biggest deal in Reynolds history: Why hadn’t the board been told about it beforehand? The reason, Wilson noted testily, was that he and Johnson had had only the most preliminary of chats: no money on the table, no obligations, just a first date. What about this business of promising Johnson a shot at the chairmanship? the board members protested. Succession was their prerogative. The directors didn’t like the idea of a tax-free merger, either; if any deal was done, Reynolds ought to do the buying. In a stern rebuke, they ordered Wilson to back off.

  Wilson remained confident. “This is still going to happen; it makes so much sense,” he assured Horrigan over lunch. “But the next time Ross Johnson isn’t going to have so much power. We’ll be the acquirer. All he’ll get is vice chairman.”

  The talks, in fact, rekindled within weeks. A small army of Wall Street lawyers and investment bankers were brought in, and, the directors having been convinced, Reynolds agreed in principle to acquire Nabisco for cash. The lone sticking point was the price. Then, during the negotiations, Nabisco stock began rising, a sure sign that word of the talks had leaked.* Johnson took it as an opportunity to wheedle more money out of Wilson. At $80 a share, Wilson said he could go no further. “Well,” Johnson said, “you’re not gonna get a deal at eighty bucks.” The logjam broke when Wilson agreed to throw in preferred stock, which brought the price to $85 a share, or $4.9 billion, at the time the largest merger ever to take place outside the oil industry.