CHAPTER 4

Good, bad, or indifferent, you’re always thinking, you’re
doing, you’re extending yourself. If you don’t do that, the
place becomes a bore. You’ve got to create some excitement.
—ROSS JOHNSON
On October 19, 1987, the stock market crashed. Like the rest of the financial world, Johnson tuned in his Quotron and slipped into a state of
shock. RJR Nabisco, which had been trading in the mid-sixties the week
before, plunged into the low forties by midday. In the crash’s wake, the
stock languished there for weeks.
It was the beginning of Johnson’s road to ruin, for the low stock price
would haunt him for months to come. In December the company posted
a 25 percent profit increase, and the Street ignored it. Even when food
stocks rose that winter, RJR Nabisco remained in the dumps. No matter
what Johnson did, buyers treated his stock like a tobacco stock, even
though 60 percent of its sales came from Nabisco and Del Monte.
In Atlanta, Johnson simmered. Like many chief executives, he considered his stock price something of a report card. As he watched other
food stocks soar, Johnson felt like a wallflower at the orgy. If the business he knew best was hot, Johnson was determined to be a player. He
began pondering the possibility of linking up with a food company.
His first thought was Pillsbury. It was an unstable situation, his favorite kind, with takeover speculation swirling around a chief executive just come out of retirement. Buying the company, though, ran against
Johnson’s grain. He was a seller, not a buyer. He considered a joint
venture. Why not combine Pillsbury and Nabisco, sell its stock to the
public, and thereby highlight the remaining food assets inside RJR
Nabisco?
Johnson tossed the idea to Sage and Benevento, who were hugely
unimpressed. Pillsbury was a dog, they said, its core businesses anemic.
“Why would you want to own part of a so-so food business rather than
one hundred percent of a great one?” asked Benevento. As Sage typed
what they called a “stick-it-in-your-ear” memo to Johnson, Benevento
looked over his shoulder. A thought struck him. General Motors, faced
with a similar problem, had created separate classes of stock for the
parent company and its Hughes Aircraft and Electronic Data Systems
units. If Johnson was worried that tobacco was dragging down the price
of his food stock, why not make them trade as separate securities? If
GM could have an H stock for Hughes, why couldn’t RJR have an F
stock for food? They tacked it on the end of the memo. When Johnson
saw it he shrugged, then gave Benevento the go-ahead to look at the
dual-stock plan. It was just another idea.
Johnson wasn’t the only one who noticed RJR Nabisco’s low stock
price. In January the syndicated columnist Dan Dorfman mentioned
the company as a takeover candidate. Johnson pooh-poohed the notion,
although some of his aides, including Ed Robinson, grew worried. Then,
as February’s board meeting broke up, Paul Sticht approached Johnson.
The two hadn’t talked much since Sticht’s ouster six months earlier.
“Ross, are you going to be down in Florida this weekend?” Sticht asked.
“Yeah,” Johnson replied, “I’ve got to go down and do my dad’s taxes.”
“Are you going to have any spare time?”
“Really, I’m not,” Johnson said, eager to avoid any invitation from
Sticht. “I’m up to my tail.”
“Well, there’s a very important shareholder, and you should get to
know him,” Sticht said. “He’s got some ideas, and he’s going to be down
in Lost Tree. His name is Spangler.” Johnson reluctantly agreed to meet
Sticht and his friend Spangler the following Saturday in Jupiter.
Clemmie Dixon Spangler, Jr., was the president of the University of
North Carolina. Before taking its helm in 1986, “Dickie” Spangler had
been a bona fide big wheel in North Carolina business circles: president
of C. D. Spangler Construction Co. of Charlotte, and chairman of the
Bank of North Carolina, which, when it was sold to giant NCNB Corp.
in 1982, made him a rich man. His family was also one of RJR Nabisco’s
largest shareholders.
Spangler had been incensed when Johnson pulled the headquarters
out of Winston-Salem. He had called an old Harvard Business School
classmate, Richard H. Jenrette, chairman of The Equitable Life Insurance
Society, one of the nation’s largest insurance companies. Dick Jenrette
was a native North Carolinian and knew the Spangler family well.
Spangler wanted to know if The Equitable, among the nation’s most
powerful institutional investors, would be interested in backing some
sort of shareholder vote in an attempt to reverse the move to Atlanta.
“You think we could get enough votes to stop that from happening?”
Spangler asked.
Frankly, Jenrette replied, “No.”
Jenrette put the call out of his mind. Then, several months later
Spangler called again. “Dick,” he said, “what would you think about
forming a group to do a leveraged buyout of Reynolds? I think it can
be done.” Spangler mentioned that he planned to approach Paul Sticht
and also hoped to interest Jim Robinson of American Express, with
whom he had prepped at Woodberry Forest in Virginia.
Jenrette mulled the offer for several days before deciding it would
appear unseemly for a major insurance company—one that doled out
millions each year to cancer victims—to invest in a cigarette maker.
“I’ve got to back off on it,” he told Spangler.
Spangler stewed as RJR Nabisco stock plummeted during the crash.
He blamed his losses—and North Carolina’s—squarely on Ross Johnson.
He approached Sticht through a mutual friend, John Medlin of
Wachovia. “If I could get the funds to take control of the company,
would you be interested in helping me put things back the way they
were?” Spangler asked.
Sticht played coy. “Gee,” he said, “I don’t think that’s possible or
practical.” But when Spangler invited him to an exploratory meeting
in New York, Sticht accepted. The meeting turned out to be with a group
of Citibank executives. Spangler had interested the mammoth bank in
financing an LBO of RJR Nabisco.
Sticht was impressed. He was also practical. LBOs weren’t a hostile
device. If Spangler’s group wanted to buy RJR Nabisco, they would
have to involve Johnson. “Can you arrange for me to meet with him?”
Spangler asked.
And so Johnson found himself on a Saturday morning in late February
unlocking the Team Nabisco office in Jupiter. Seeing Sticht was keeping
him from his golf game, and he hoped they could wrap it up quickly.
When he was introduced to Spangler, Johnson’s first thought was that
he and Sticht made a splendid pair. Dickie Spangler’s slicked-back hair
and clear-framed glasses were straight out of the fifties.
“I really don’t have anything to do with this,” Sticht began. “Dick
has come to me. He has some ideas. And I think he should talk to you.”
RJR Nabisco was a great company, Spangler began. It had great
prospects, though it remained undervalued.
Blinding glimpse of the obvious, Johnson thought.
Spangler prattled on about how he felt silly he hadn’t sold his stock
at seventy and how he felt bad that it now languished at fifty. His
family was peeved with him for not selling.
“I can’t tell you when it’s going back to seventy,” Johnson said, “all
I can do is run the company.” He was dying to get on the fairway.
Spangler proceeded to his idea: an LBO, at $70 dollars a share or so.
He and Sticht had already met with Citibank about it, Spangler said,
and the bank was enthusiastic.
Johnson was stunned. He and Sticht had what?
“Now my role is strictly advisory,” Sticht interjected.
Johnson looked at Sticht and thought: Your role is strictly ambushing,
you old dinosaur. But Johnson wasn’t built for confrontation, and fighting
with these two wasn’t going to get him anywhere, so he smiled. “Seventy dollars is okay by me, Paul.” It was a vintage performance.
Johnson would be the key, Spangler continued. He would own 15
percent of the company, with other managers owning another 10 percent. “Ross, I know a lot of wealthy people,” Spangler said. “You could
be a billionaire.”
Johnson left the meeting “in a state of goddamn shock”: What did
Sticht think he was doing? He might be an old fool, Johnson told himself,
but as a former chairman, he was a dangerous old fool. His presence
lent credibility to even a crazy proposal like Spangler’s. Didn’t Sticht
know Citibank’s chairman, John Reed, was a director of Philip Morris?
If this got out, it could be dynamite in a competitor’s hands.
Johnson dashed back to his condo and put out a flurry of calls. “Holy
smokes,” he told Andy Sage, who was in Jackson Hole. “I’ve been
blindsided. Spangler wants to buy the company!” He called Jim
Robinson. “All I know is he’s got a lot of money and he’s very close with Dick Jenrette,”
Robinson told him. Johnson grew alarmed; he knew what kind of firepower The Equitable had. “Get the goddamn executive committee together,” he told Harold Henderson later that day. Johnson was due at
an International Advisory Board meeting in Palm Springs Monday.
“I’ve got to talk with them as soon as I get back,” he said.
Johnson and his directors caucused Tuesday. They agreed that a
conversation with Citibank was called for, if only to see how far Spangler
had progressed. Johnson called John Reed and arranged a meeting.
Reed confirmed that the matter had come up, and suggested the bank
was willing to pursue it further. “The bank is here to serve,” he told
Johnson.
The following week Johnson picked up Spangler in North Carolina
and flew to New York. En route, Spangler showed him a computer
printout of various financial projections. It assumed that the company
could be held intact, that the necessary savings could come from
slashing capital expenditures. Johnson wasn’t impressed: Amateur hour,he thought.
For Johnson, the meeting at Citibank proved to be a huge relief. The
bank thought an LBO could be done at $65 a share, with Johnson taking
a 10 percent cut. It was clear they hadn’t done much work. Johnson was
openly cool toward the idea. On the flight back, Spangler was apologetic.
The matter, it was clear, would be dropped.
Johnson returned to Atlanta, dashed off “thanks-but-no-thanks” letters
to Citibank and Spangler, and sat down with Henderson to figure out
what to do about Sticht. He simply couldn’t be allowed to keep meddling in RJR Nabisco affairs. The next day Henderson flew to WinstonSalem and read Sticht the riot act. There were only two board meetings
before he was scheduled to retire in May. Sticht attended neither, much
to Johnson’s satisfaction. “We shipped him his silver tray, wrote all the
right things, and that was that,” recalled Johnson, certain he had seen
the last of Paul Sticht.
After the Spangler affair Johnson redoubled his efforts to boost his
sagging stock price. At the March board meeting, he gave directors two
options: buy Hunt Wesson, which would further emphasize the company’s tilt toward food, or buy back more stock. Having fewer shares
outstanding should buoy the price of the stock. The directors, none of
whom shared Johnson’s growing concern about the stock price, chose the latter.
Johnson had the buyback supervised by Ira Harris’s firm, Lazard Freres.