A number of friends thought the dismissal of trusted advisers such as Carbonell underscored some unsettling changes in Johnson. For the first time, he was attracting media attention. Fortune profiled him in a puffy cover story that summer as “America’s Toughest Marketing Man.” “He specializes in taking break shots at neatly racked old cultures and replacing them with an organizational mix of turbulence, vigilance and guts,” it gushed. “In three reorganizations, he sent 2,650 corpocrats back to line jobs or out into the wilderness.” Johnson, it went on, “has been shoving the noses of his managers up against the window of the future.”
Business Week was less impressed. It noted RJR’s low stock price, its fuzzy long-term outlook, and the tobacco company’s declining performance. The magazine at first looked like it was headed for an even tougher story, spotlighting Johnson’s lavish spending and questioning his operating ability. But the company put on a full-court press to squelch it. Martin told editor-in-chief Stephen Shepard a biased reporter was out to do a hatchet job and threatened to withhold future access to RJR. The story appeared in tamer form, and Johnson was bothered by only one line. It noted that he would routinely press a $50 bill into a wine steward’s hand. “Christ,” said a distressed Johnson, “it’s been years since I tipped that little.”*
Johnson’s friends came to rue the two pieces: The man was beginning to believe his reviews. “America’s toughest marketing man,” they feared, was really becoming America’s most out-of-touch marketing man. He was fond of bragging that his relations with the grocery trade were worth four or five market share points—hundreds of millions of dollars. But the only supermarket executives he spent much time with these days were a group of three ex-jocks with whom he loved to play golf. Johnson called them “the Buffaloes.”
At the same time the man who had made a science of stroking directors was growingly cavalier about his board meetings. They were fewer and farther between—only one would be held between May and October 1988—and were increasingly sloppy affairs. Staffers would arduously put together slide presentations on the financials, only to see Johnson scrap them. “Screw the slides,” he would say. “We’ll tell them the numbers are good.” Scrapped, too, was Johnson’s habit of rehearsing for the meetings.
As he had at Standard Brands and Nabisco, Johnson seemed to be losing interest in operating the company. More and more he concentrated on only two things: having fun and goosing the stock. A new catch phrase replaced the old “BGO” on Johnson’s lips. “Ah,” he took to saying, “fuck it.”
In July, Ed Robinson and Harold Henderson, worried that the company’s continuing low stock price made it vulnerable to a takeover, got permission from Johnson to approach Shearson Lehman about shoring up its takeover defenses. They wanted a “top-drawer” study, an array of plans that could be erected at the first sign of a hostile raider. Johnson considered a takeover unlikely, but Henderson insisted they be prepared for the worst.
Shearson was the logical choice to do the study. Johnson was on the American Express board, and he knew both the Shearson chief, Peter Cohen, and the American Express chief, Jim Robinson. “Let’s go to Shearson with every study and piece of crap we’ve got, have them look at all the scenarios, and see what they have to say,” Johnson said. “If somebody wants to buy us, what would they buy us for and what would we do.”
American Express’s July board meeting was breaking up when Johnson first approached Cohen with the plan. “Andy Sage is going to be giving you a call,” he said. “He wants to have a very private conversation with you about the company.” In late July, Andy Sage and several Johnson aides met with Cohen in his lower Manhattan office overlooking the Hudson River. They wanted all options explored: a wide variety of recapitalization plans as well as partial and full buyout proposals. Sage insisted on strictest secrecy. The mere hint of the project’s existence, he knew, could prove a self-fulfilling prophecy. Word a company was worried about a takeover invited speculation, which inevitably drew speculators. Only five Shearson executives, including Cohen and Tom Hill, were cleared to work on the plan. Hill came up with a code name whose irony wouldn’t be clear until months later: Project Stretch.
At the same time, Johnson got the RJR Nabisco board to approve a set of antitakeover provisions Robinson and Henderson had drawn up with the help of a Wall Street law firm, Davis, Polk & Wardwell. The board also approved severance arrangements known as “golden parachutes” for each of the company’s top ten officers. Most large U.S. companies have similar pacts, which are often considered part and parcel of antitakeover contingencies. The only thing unusual about RJR Nabisco’s was their size: all told, they were worth $52.5 million.
One thing puzzled staffers in the company’s treasury department. At Johnson’s direction, money for the parachutes was placed in protective trusts known as “rabbi trusts.” Under the trusts’ terms, if RJR Nabisco changed hands, the new owner couldn’t touch these funds. To the treasury staffers, it almost looked like Johnson was preparing for something.
As they searched for solutions to Johnson’s concerns about the stock, everyone who analyzed the problem mentioned the possibility of a leveraged buyout. It was a standard solution to any company whose stock drooped. An LBO, of course, wasn’t so much a solution to the problem as an end to it. Going private simply took the stock out of the public’s hands. Every investment banker urged Johnson to consider it.
Soon LBO ideas were arriving, uninvited, over the transom. Dillon Read proposed a partial LBO it called Project Tara. Johnson’s old Standard Brands sidekick, Ruben Gutoff, suggested a scenario his consulting firm called Project Reo. The subject even came up one night when Johnson was sitting with neighbors around a pool. “Gee,” one said, “why don’t you take your company private?”
To each, Johnson replied he wasn’t interested. “No way,” he told a gathering of lieutenants in July. “Why would I want to do something like that? I’ve got a great life; I’ve got a great company just the way it is.” But at least one of the men at lunch that day thought Johnson’s denial rang hollow. Peter Rogers had known The Pope too long. When Johnson thought an idea dumb, he would dismiss it with a withering one-liner. Rogers, walking out with John Greeniaus after lunch, said, “Methinks the lady doth protest too much.”
For the time being, though, Johnson seemed curious about every possible scheme but an LBO. His grandest occurred to him in July. For months he had been trying to interest Philip Morris in combining the two companies’ international businesses into a joint venture. Philip Morris had expressed interest in acquiring RJR Nabisco, but Johnson suggested a joint venture instead. Horrigan, of course, hated the idea. Consort with the enemy? Run up the white flag? But at Johnson’s urging, he had met with his opposite number at Philip Morris. After months of on-again, off-again talks, Johnson had scrapped the idea. Even if they came to terms, he suspected that foreign governments would object to the merger on antitrust grounds.
Now, in late July, Johnson called Philip Morris’s chief executive, Hamish Maxwell, with a new idea. Unlike their predecessors, the two men got along well; Johnson, it seemed, could get along with anyone. They met for dinner at RJR Nabisco’s suite at the Regency Hotel in New York. In deference to his host, Maxwell smoked a Winston while listening closely as Johnson laid out his plan.
“Let’s face it,” Johnson said. “Diversification isn’t working for us, and it isn’t working for Philip Morris. We still both trade as tobacco stocks.”
It was only half true. In their core tobacco businesses, Maxwell was running the Queen Mary and Johnson the African Queen. Philip Morris’s lead brand, Marlboro, had an ever-widening lead over Reynolds’s brands, fatter profit margins, and cash flow that dwarfed RJR Nabisco’s. Institutional investors—the big pension and mutual funds who could make or break stocks—typically chose just one tobacco stock for their portfolios, and more often than not it was Philip Morris. With their support, Philip Morris stock had risen 25 percent since the beginning of 1987, while RJR Nab
isco’s, after spiking up and down, was flat. Portfolio managers liked Philip Morris’s predictability. They thought they knew where Maxwell was going. They never knew what Johnson was up to.
As Maxwell listened, Johnson proposed that Philip Morris and RJR Nabisco combine their respective food businesses—Nabisco and General Foods—into a publicly traded joint venture. RJR Nabisco would own 37·5 percent, as would Philip Morris; the remaining 25 percent would be traded publicly. The great value attached to the public stock, Johnson said, advancing Jeff Beck’s old theory, would heat up both parents’ stocks.
“I think we can create an eighteen-billion-dollar company with a lot of zip in it,” said Johnson. Then he laid down the capper. “And I’ll run it for you.”
Once the two food companies were combined, Johnson proposed to resign as chief executive of RJR Nabisco, leaving the remaining tobacco company for Horrigan to manage. It was an outlandish proposal, but Johnson was betting Maxwell might go for it.
“Ross, it’s a brilliant idea,” Maxwell said when Johnson finished, “but joint ventures have problems.” The logistics alone were daunting: so many people being thrown together from so many companies. Even if Johnson and Maxwell got along, he went on, was there any assurance that their successors would? Still, Maxwell told Johnson he would give it some thought.
Two weeks later, in mid-August, Maxwell called back. Sorry, he said, Philip Morris isn’t interested. There were simply too many problems. Johnson tried to shrug it off. It wasn’t as if he had nothing else up his sleeve to boost the stock. There was always Premier. For now, though, he wanted to take a break from the whirlwind of ideas he had stirred up, as well as from the muggy summer heat draping Atlanta. He boarded a jet for a couple of weeks of work and play in Colorado.
The Castle Pines Golf Club is twenty-five miles south of Denver and, to golf enthusiasts like Johnson, just this side of heaven. It is a beautiful setting for a golf course, a natural valley framed by Castle Rock, Pike’s Peak, and the snowcapped Rockies. Its fairways twist through verdant mountain meadows crowned with ponderosa pine.
Ranked one of the country’s thirty top courses, Castle Pines was designed by Jack Nicklaus, and the Golden Bear made the ninth hole among his toughest: a 458-yard par four, a tough driving hole with water on the right, trouble left, and a blind uphill second shot to a mean green. Back in the pines off the left side of the fairway is a cluster of three-story villas. RJR Nabisco owned one as a corporate retreat, and it was there, on the weekend of August 21, that Johnson threw one of the most memorable parties of his career.
That weekend Castle Pines played host to a professional golf tournament, the International, and Johnson had invited a pack of his best pals to help him enjoy it. Peter Ueberroth and Roger Penske were there, as was Roone Arledge, up from the Republican convention in New Orleans. Jack Meyers, the retired publisher of Time magazine, showed up, as well as Johnson’s three Buffaloes, including Floyd Hall, president of the Grand Union supermarket chain. Charlie Hugel and Ira Harris also arrived, as did Martin Emmett.
It was the kind of weekend Johnson lived for. He could play golf in the morning, watch the pros in the afternoon, and enjoy world-class schmoozing at night. The RJR Air Force stood by if needed, whisking Harris off to a Chicago wedding at one point. Saturday night a pair of Team Nabisco pros, Fuzzy Zoeller and Raymond Floyd, joined the group for dinner, as did Ben Crenshaw, who was in the thick of contention in the International.
That evening Johnson had an after-dinner surprise for his guests at the villa. Had they heard about Reynolds’s new smokeless cigarette? he asked. Most had. Ed Horrigan rolled out a videotape that showed how Premier worked. After an hour of explaining its science, Johnson broke out packs of Premier and passed them around. Tell us what you think of everything, Johnson invited: the taste, the packs, the marketing, the pitfalls.
He had kept the affair casual, but Johnson was eager to hear what his VIP friends had to say about Premier. He and Horrigan watched intently as Ueberroth and the others began inspecting the cigarettes closely, eyeing the little holes in its carbon tip, feeling how its hard casing compared with that of a normal cigarette. Slowly they began lighting up. The odor was unmistakable and unpleasant.
“Smells like burning lettuce,” someone cracked.
“Boy, this is hard to draw on,” said someone else.
They take some getting used to, Johnson conceded. “We’re saying in the ads to try them for a week,” he said.
“I don’t know if I could get through a pack,” someone said.
Looking for something positive to say, Penske praised the technology. Arledge wondered who the spokesperson would be on television news shows; Premier was bound to create a splash when introduced. Johnson admitted he hadn’t given the matter much thought. You’d better, Ueberroth interjected. The media is going to be very interested in this and will be asking tough questions. Like: “If this is a safer cigarette, aren’t you admitting that your others are unsafe?”
“That’s a problem,” Johnson admitted. “It is a safer cigarette, but you can’t really say it.”
As the session stretched on, Johnson could tell Premier had bigger problems than he had feared. No one liked the taste—Johnson at least expected them to enjoy the menthol brand—and they puckered like prunes trying to inhale its smoke. He and Horrigan had remained optimistic through all the poor test results. If only 5 percent of smokers found Premier palatable, Johnson figured, it would still be a big hit. He simply couldn’t believe it wouldn’t do great things.
But as he listened to Ueberroth, Arledge, and the others, Johnson realized that his own staff’s conservative projections were accurate: Premier would need years, rather than months, before it could be considered a success. Any chance of an overnight hit evaporated in the pithy comments of his high-profile friends—and with it Johnson’s last, best hope for revving up his stock.
The International ended the next day, and the RJR Air Force spirited Johnson’s friends to all points of the compass. Johnson stayed on to play golf, but scheduled a meeting of senior aides the following Monday to discuss the Premier situation. Horrigan, Henderson, and Martin all came, as did a bevy of tobacco strategists and outsiders, including Stanley Katz, head of a Reynolds ad agency, FCB Leber/Katz, and Herb Schmertz, Mobil Oil’s ex-public relations chief.
Rather than address the key problems of taste and smell, the group tackled the issue of how to package Premier for the press. Who, for instance, would be their primary spokesman? Horrigan favored Johnson. Others demurred. He may have been chief executive of America’s second largest cigarette company, but Johnson was no cigarette expert, and he was apt to say whatever popped into his head. “Christ,” he liked to say, “you get more carbon monoxide from a New York bus going by you than from a cigarette.” The consensus selection was Dick Kampe, who was heading the Premier development team. Horrigan and Martin got into an argument about the best way to prep Kampe for his appearance on “Nightline.”
The meeting ended by midafternoon, and all but Horrigan and Henderson left. The next morning Johnson and Horrigan sprawled in easy chairs in one of the villa’s living rooms. Their tee time was at ten o’clock; Henderson was already out taking practice swings.
“Ed, I’ve got to tell you what I think,” Johnson said, returning to the problem of Premier. “We may have the p.r. squared away now, but I think this is going to be one long haul. We’re going to stay with it. We’re going to hold its hand. But I have a feeling those test markets are going to give us trouble.”
What really bothered him, Johnson went on, wasn’t Premier’s progress so much as its inability to move the stock. “Here we are,” said Johnson, “sitting with food assets that are right through the bloody roof—Del Monte worth eighteen times earnings, Nabisco another twenty-two to twenty-five times, and it doesn’t make a bit of difference. We’re still going to trade at nine times. We’re still a tobacco company. Now it looks like Premier isn’t going to have any effect. If anything, it’s
going to be negative in the short run.” Life as a tobacco company, they agreed, was unfair. No matter what they did, Wall Street gave them no credit. The stock stayed down. “Where the hell do we go?” Johnson asked.
In the middle of Johnson’s soliloquy, Henderson walked in from the practice tee. “Ross, the market is never going to give it its due,” said Henderson, picking up his old theme. “This should be a private company.”
“Well,” Johnson said, “what are the mechanics from a legal standpoint? How would you go about exploring an LBO?”
Henderson outlined the basics, as best he could. After management proposed a buyout, a special committee of board members was formed to consider it. At some point, they would have to make the offer public. And when they did, other companies, even Wall Street raiders, would be free to top it. Therein lay the risk.
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