Food Fights on Wall Street

By Barbara Rudolph

When the U.S. stock market crashed a year ago, few investors were more shell- shocked than speculators who had bet on potential takeover stocks. Even by the sobering standards of Black Monday, their losses were devastating, and soon after the market collapse, as the takeover stage lay nearly deserted, investors began wondering whether the curtain had fallen on the best show in town.

They need not have worried: the deals are back -- and bigger and bolder than ever. Last week top executives at RJR Nabisco stunned Wall Street by proposing what would be the biggest takeover in U.S. history: a $17.6 billion leveraged buyout by management of the tobacco and food conglomerate. (Among its top brands: Winston cigarettes, Oreo cookies, Ritz crackers and Life Savers candy.) The RJR executives, with the help of the Shearson Lehman Hutton investment firm, hope to borrow close to $16 billion to finance the deal. If the transaction is completed, it would eclipse Chevron's $13.3 billion acquisition of Gulf Oil in 1984 as the largest takeover ever.

The RJR Nabisco bombshell broke three days after Philip Morris offered $11.5 billion to buy Kraft. That merger, if consummated, would create the world's largest consumer-goods company: Philip Morris' Marlboro cigarettes, Maxwell House coffee and Miller beer would move into the same corporate basket as Kraft's Velveeta cheese, Parkay margarine and Breyers ice cream.

The two megabids were the most startling manifestations of a fresh outbreak of merger mania. So far this year, 4,813 mergers and acquisitions, worth $366 billion, have been launched or completed. That compares with 4,082 transactions, valued at $249 billion, during the same period last year. As daily stock-trading volumes languish at a fraction of their bull-market highs, and small investors seem a vanishing breed, mergers and acquisitions provide the only excitement around.

Led by F. Ross Johnson, the firm's chief executive, and Edward Horrigan, its vice chairman, an RJR Nabisco bid would take the firm private. The two men, who hold hefty chunks of RJR Nabisco stock, stand to make nearly $18 million each on the deal. While they will probably invest most of their profits in the new firm, that will do little to ease a projected $25 billion debt burden. To pay off the IOUs, RJR Nabisco will probably sell some of its divisions. The proposed deal must still be approved by a group of the firm's directors, but even if the panel rejects the plan, RJR Nabisco is now "in play," as Wall Streeters put it. Translation: some takeover or restructuring will probably take place.

Philip Morris hopes that its play for Kraft will prove to be pre-emptive -- so attractive that Kraft management will be unable to turn it down. The tobacco and food giant is proposing to buy Kraft for $90 a share in cash, a 50% premium over the $60 price of Kraft stock before the offer. To get a friendly match and outbid other possible suitors, Philip Morris may have to raise its bid to more than $100, according to Wall Street analysts. Says Hamish Maxwell, the Philip Morris chairman: "We're prepared to negotiate this deal."

Philip Morris needs to lessen its dependence on the shrinking tobacco business, which now accounts for 52% of revenues; the Kraft acquisition would bring that level down to 39%. Moreover, Kraft has products like Miracle Whip and Philadelphia Brand cream cheese that have taken up permanent residence in * American refrigerators. Since Kraft products do not compete with those made by Philip Morris' General Foods subsidiary, Philip Morris argues that the merger would pose no antitrust problems.

Kraft also offers Philip Morris a strong presence in the international markets that provide about a quarter of the food company's revenues. While Philip Morris' cigarettes are widely available throughout the world, its General Foods grocery products are not. Finally, Kraft has a $1.2 billion cash hoard, tempting bait for any raider.

Philip Morris hopes Kraft will not be as resistant to a takeover as Pillsbury, which is fighting a $5.2 billion offer from Grand Metropolitan, a British liquor conglomerate (J&B Scotch and Smirnoff vodka). Last week the company took out full-page newspaper ads that showed the normally cherubic Pillsbury Doughboy with a grim expression and wearing boxing gloves. Warned the ad: "We're not going to sit idly by while an opportunistic British liquor and gambling company tries to buy respectability."

Very few firms these days are big enough to be safe from takeovers. This year alone, such familiar institutions as Kroger, Polaroid and Bloomingdale's (Federated Department Stores) have come under attack. One reason for the buyout binge is the amount of money available for acquisitions. Private investors have guaranteed more than $30 billion in capital to large takeover funds, providing would-be raiders with the capital to mount their attacks. Kohlberg, Kravis, Roberts, an investment firm with $5.6 billion for use in takeovers, is a leader in the field. Since the takeover funds can borrow against their capital, they have the potential to raise as much as $300 billion. In a practice known as merchant banking, Wall Street firms, including KKR, Shearson Lehman Hutton and Morgan Stanley, are buying stakes for themselves in the companies they help investors take over.

Foreign enterprises are fueling much of the U.S. takeover activity, mainly because the weak dollar makes U.S. assets bargains. So far this year, foreign firms have acquired U.S. companies valued at $17.5 billion. Some of the richest bidders are Japanese: Sony paid $2 billion for CBS/Records Group, and the Bridgestone tire company bought Firestone for $2.6 billion.

The merit of domestic mergers is a matter of debate. Friendly unions of two firms may help the combined company compete against foreign rivals. Philip Morris, for example, hopes its purchase of Kraft will create a more formidable ) opponent to the West European consumer goods giants Nestle and Unilever. And because most industries now operate in a global marketplace, there is decreasing danger that mergers will stifle U.S. competition and raise consumer prices.

Risks arise, though, when takeovers force a company to assume excessive debt. The proposed buyout of RJR Nabisco, for example, could load the company with enough debt to make it vulnerable to rising interest rates and a recession. Since Philip Morris will borrow about $9 billion to buy Kraft, its obligations too could become uncomfortable. The tobacco conglomerate is confident, however, that its cigarette business will generate enough cash to pay off its debts.

If they take effect, the Philip Morris and RJR Nabisco deals may prove to be textbook cases of smart corporate strategies. They could also turn out to be flops -- or so U.S. business history would suggest. In the 1960s some of America's most celebrated executives, including Harold Geneen at ITT and Charles Thornton at Litton Industries, acquired scores of companies and built huge conglomerates. Like many empires, they eventually declined. A similar fate may await some of today's dealmakers.

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CAPTION: And other top bids in 1988...

DESCRIPTION: Large takeover offers.

With reporting by Lee Griggs/Chicago and Thomas McCarroll/New York