Tide May Begin to Turn Against LBO Madness

Accentuate the positive. The political reaction that may spell the end of the leveraged buyout madness began last week, and there was also a hint of investor common sense in the behavior of Procter & Gamble stock last Monday. When it became known that the maker of Crest toothpaste would bid for the cookie business of RJR Nabisco, P&G;’s stock fell $2.50 a share to $82.12.

In clipping the stock for 3% of its value, the market was saying that P&G; would have to pay too high a price in the auction of RJR that proceeds until Friday--and expressing disappointment as well. That P&G;, which is already in the cookie business, would buy a competitor rather than developing its own new products marks an unhealthy change in the company’s character, the market said.

It was a clue to what investors really want from a business, a small bit of evidence that the market is impressed less by speculative schemes than by a company showing imagination and drive.

To be sure it was a lonely sign of good sense as the leveraged buyout craze continued, driven by the pursuit of high returns by pension fund investors, and the greed of investment bankers and corporate managers. The top managers of RJR have seen to it that they can make $52 million if their bid for the company fails, and $2 billion if it succeeds. “It is the culmination of the age of greed,” observed one Washington official.

It could also be the final straw. The size of the RJR buyout--in which the tobacco and cookie company will sell for at least $20 billion--has frightened other firms and sparked political reaction. “I talked to the chairmen of four of the top 100 companies, and they’re angry and frightened,” says Steven Robert, chairman of the investment firm Oppenheimer & Co. “And those fellows have the muscle to get action in Congress.”

Congressional Hearings

As if on cue Senate Minority Leader Bob Dole, (R.-Kans.) called on Wednesday for removing tax advantages from LBOs, and Rep. Edward J. Markey, (D.-Mass.) was planning hearings by his House finance subcommittee.

More important, the comptroller of the currency told bank examiners to look hard at the risks in LBO loans, an action that may well stop the flow of deal money.

Clearly the tide was turning against buyouts and takeovers; the claim that they enhance efficiency by circulating money to its best use was being questioned. The claim is that RJR shareholders who will reap big gains in the buyout will reinvest in ventures that will further U.S. competitiveness.

It’s a claim that would be easier to accept if companies in Japan, where mergers and acquisitions are frowned upon, had not beaten U.S. companies in almost every competition of recent years. Japanese firms prefer to build rather than buy key products.

Which brings us back to P&G;, the $19.3-billion (in sales) creator of Tide, Crest, Pampers, Charmin and many other brands.

P&G; tried for big gains in cookies by challenging Nabisco years ago with a new kind of chocolate-chip cookie. But Nabisco--then an independent, pre-RJR merger company--responded quickly, bringing out the successful Almost Home line, and P&G; has been an also-ran in the cookie and cracker aisle ever since. So now it wants to buy the competitor that it could not beat.

Investors don’t like the idea. The stock market traditionally gives P&G; a premium price because of its ability to develop new products. In the 1940s, P&G; developed the first chemical detergent, Tide. In the 1950s, it took years developing and testing the floride toothpaste Crest. In the 1970s came the breakthrough disposable diaper Pampers, and Charmin, the toilet tissue made softer by a P&G; process that reduced wood fiber--and cost.

That such an innovative company last week proposed to buy rather than build more than disappointed investors. It raised suspicions that P&G;’s better days may be behind it and that the Cincinnati firm now would join the many U.S. companies that rely on cash more than their traditional abilities.

That investors retain the good sense to regret such a thing gives grounds for hope, as does the political reaction that may stop the LBO madness.