Henry Kravis: How the Corporate Titan Rocked Wall Street

his name is synonymous with corporate Titan he's Nana vated he's an icon he's in the same category as the JP Morgan's the Rockefellers a pioneer who was instrumental in creating a two and a half trillion dollar industry Henry Kravis has constantly pushed the envelope he's helped define the private equity industry Henry was ahead of everybody when it came to raising money he sort of invented the business Henry Kravis led a fierce battle that sent shockwaves through Wall Street Henry's decision enter the deal as he did he was not just big guns coming in it was Godzilla waiting in from the ocean and stomping out Wall Street he's a fighter and competitive fun he not only changed the game he made it better Henry was at the forefront of the 80s you look at Henry today it's the same story Henry's right at the top there was no doubt in my mind that once he said he was gonna win that deal he was gonna well he's making the big decisions calling the shots he's been the one instrumental in taking risks over the years and pushing them into into new areas Henry Kravis opened up a brand new frontier to investors amassing a war chest greater than the gross domestic product of many small countries to this day he is rarely talked about his work or his life publicly and declined to participate in this program Kravis was born in 1944 in the oil patch of Tulsa Oklahoma black gold was everywhere his father was a petroleum engineer who made his family a fortune Allen ace greenberg former chairman of Bear Stearns has known Kravitz for over 40 years there was a major institution in this country that would make a loan against gas or oil reserves without speaking the head to his father first Bryan Burrough is co-author of the landmark financial drama of modern business the book barbarians at the gate from an early age he clearly as a man who had a very successful father wanted to show that he was every bit as successful as his father was Travis's road to success took him from prep school in the Northeast to Southern California in 1963 he majored in economics at Claremont McKenna College in a recent commencement address to his alma mater he shared how growing up in the 1960s helped shape the course of his life it was a decade of tumultuous social political economic and cultural change I understood that these rapid and disruptive changes could help me look at who I was and who I should become Kravis returned to the heart of the business world New York after an internship picking stocks at a money management firm his father urged him to go back to school in 1967 he enrolled in Columbia's MBA program but his focus was elsewhere he wanted to do deals he wanted to make big buck didn't want to stay at Columbia once he got there it was only when his former boss allowed him to kind of keep his hand in the business in his spare time that Henry said okay I'll get the cotton pickin degree after college he jumped on an opportunity presented by his first cousin George Roberts was an analyst at the trading shop Bear Stearns but he wanted to move to San Francisco Henry got his job Luis Eisenberg is one of their oldest friends Henry and George are more than close they can finish each other sentences most of the time I've heard them disagree but they end up coming to virtually the same conclusions and they both share the same brilliance for his business though over 3,000 miles away the cousins would work on the same team with their boss a financial visionary Jerry Colburn Henry crafts his timing was amazing in that he lucked into a job with his Farage fellow Jerry Kohlberg who is doing these strange little deals no one had heard of called bootstrap deals later to be known much better as leveraged buyouts Kohlberg saw opportunity where other investment bankers didn't leverage buy it is very simple it's where a company buys itself you strip them down of a lot of the excess you make them lean in me you borrow a lot of money against the company's assets to pay back that money you generally sell off the assets he came up with the idea of going after family businesses people who want to retire didn't necessarily want to sell out their competition people who are very concerned about the people that work for them their idea started paying off their acquisition of industrial parts company income international for nearly ninety two million dollars brought in the largest fee Kravis set Bear Stearns had ever seen nine hundred and fifty thousand dollars within three years Kravis ran his own deals and became a bear stearns partner at 30 years old to make an LBO work you can't have a trace of sentimentality you have to be able to slash and burn I would say Henry's skill set was ideally suited for LBOs he has a very accomplished and cold analytical eye Henry doesn't think anything of chopping down a CEO who doesn't deliver his numbers dawn but in LBOs returns took years a lifetime in the quick profit culture of Bear Stearns to say they had no patience with Jerry's deals is like saying that it tends to get hot in Texas and summer it was a matter of time before things got ugly Bear Stearns management rejected Kohlberg's demands to start a separate LVL department the three men quickly decided at their time at the legendary investment bank was over I felt very bad about it I've often said I don't think we worked hard enough to keep them all on I must say I regret regretted ever since I think was difficult as those kind of moves are but Henry asked a lot of questions and he asks himself a lot of questions but there's very little self-doubt moves he makes you in 1976 henry kravis his cousin George Roberts and their mentor Jerry Kohlberg took a huge gamble in a bitter party they left the Wall Street powerhouse Bear Stearns we're gonna start this our own firm and we're going to just focus on something that never been done before it's a the time we call the bootstrap acquisition I really want to do it I want to do it with George we're gonna go give it a try armed only with their novel idea to make money and $400,000 from backers for overhead costs on May 1st Wall Street's newest private equity firm KKR investments opened its doors Kravis had to immediately convince potential investors and LVO targets that he could post big returns Richard Beatty has been an advisor to Kravis since the early 1970s most people would say what you want to put how much debt on this company how can you do that pointing to a success at Bear Stearns he convinced investors to give him money Jim Robinson former chairman of American Express has been friends with Kravis for over 30 years I made this bright young fellow really was a very smart investment banker who was going into a new direction that was exciting a new way of using Wall Street mobilizing capital to go into companies to help build the companies into even stronger better companies everything from the pension world to others who are interested in being limited partners Henry and his cousin George hunted for companies with predictable cash flow and potential for growth their approach was to try to work with existing management Kravis wanted them on board for a smooth transition John Mack is chairman of the board of Morgan Stanley and has known Henry Kravis for almost 20 years he's a superb in delivering that speech that talked that vision that story to a board he comes across as knowing what he's talking about streaming professional he'll know the facts and they'll have a vision that he will lay out in front of the board and what he's thinking why he's thinking and what the outcome will be he can be a force to be reckoned with in a deal and you can see his emotion in it in 1979 KKR made its first major buy auto parts maker who died industries at the time it was the first buy out of a major publicly held company in Wall Street history but it would be only the first of many for Kravis Kohlberg and Robert's 81 82 83 were terrific years gave them credibility in the marketplace gave him credibility with the banks with insurance companies by 1983 KKR 20% stake in each deal made Kravis a multimillionaire that same year KKR was raising a record-setting investment fund 1 billion dollars the innovative fund would come to intimidate their competitors it was an arrow later summed up in one famously simple line in the movie Wall Street greed for lack of a better word is good and it was just getting started in 1984 credit was easier to come by high risk low rated junk bonds became the vital engine for their LBOs junk bonds you could get a like that the importance was the speed it allowed Henry and George to move on a dime overnight to come up with a financing to make a deal work as new deals poured in so did invitations to glamorous New York events crevices second marriage to aspiring fashion designer Caroline Rome catapulted them onto the society pages the couple often attended black-tie events with their good friend Donald Trump Henry was a very glamorous figure in those early days he was a very very basic guy with a brilliant mind but he always seemed to be surrounded in glamorous settings Kravis was now a deep pocketed pillar of the New York social elite Henry had no idea of what the partnering would Caroline in the in the appearances in the social columns would would bring the world looked and saw a wealthy man they saw overreaching and these things became symbolic of the 80s and Henry became symbolic of the Ayden's he hated it hated it hated it you by 1985 KKR and Henry Kravis personified the Wall Street boom the private company was the most successful leveraged buyout firm in the world managing an investment fund worth 1 billion dollars with their success Kim imitators competition created an entirely new world for KKR they can no longer take the time to sit back and smoke a pipe with George the CEO up in White Plains suddenly deals had to be done faster somebody else would be doing them for the first time Henry and George pushed KKR into competitive deals unfriendly deals unfriendly deals like Beatrice foods the parent company of some of America's best-known brands in 1986 they took over the giant conglomerate for 6.2 billion dollars again setting records on Wall Street KKR wasted no time in dismantling Beatrice selling off division by division to pay down the debt Travis and his cousin did well they earned forty five million dollars in fees suddenly with rich fees and rewards came a split within KKR Kravis and his mentor Jerry Kohlberg were in a battle for the soul of their company on may 18th 1987 Jerry Kohlberg announced he was leaving KKR in the press he hinted at a decline of ethics at his former company telling the New York Times he would stick with deals where reason still prevails Jerry's departure was very painful for all three for everyone it was a very sad thing when Jerry was basically shunted aside from the business that he'd found it however when that did happen it left Henry and George in clearer control Kravis and Roberts were exactly where they wanted to be in clear control but they swiftly hit a wall of trouble with Beatrice foods after stripping most of its assets to pay down the debt KKR was still saddled with the company's bloated food division Kravis hungered for a new blockbuster in 1987 he found the perfect takeover candidate RJR nabisco the cookie and tobacco company the u.s. is 19th largest public corporation had a stock price trading in the $40 range and would soon prove to be undervalued RJR owned two giant businesses a buyer could sell Nabisco to pay off debt and keep our Jr's hugely profitable cigarette brands Winston and camel they have addicted customers for Christ's sake they make tons of cash everybody wanted to do that deal and it had a CEO who would listen to just about anything Ross Johnson was very very generous to people he loved to provide an airplane for somebody to go to a golf tournament sometimes maybe he did too many things with RJR nabisco his assets but he meant well F Ross Johnson needed to boost his company's stagnant stock price after the Black Monday market crash of 1987 and problems with the company's new product then there was the smokeless cigarette by RJ Reynolds years in the making it hit the market with an enormous thud nothing nothing going private with an LBO was his chance to revive the company not to mention make a personal fortune the stage was set Henry Kravis wanted in Kravis had approached Johnson with this very idea a year before but there was a problem you'd have a hard time finding two corporate executives much different than Henry Kravis and Ross Johnson henry is tightly control and serious and ross comes across as anything but in terms of personal style he wears a little necklace and you know he's like Dean Martin they were destined to come into conflict Johnson and his management team decided to strike out on their own and partner with Shearson Lehman an investment bank without kk r's experience in LBO on October 20th 1988 they made a proposal a seventeen billion dollar leveraged buyout of RJR n olds they were offering $75 a share a nearly $20 increase over the stock price Henry Kravis was outraged the war had begun he was the king of that business at that point and there is no time that he was personally offended that a group of little upstart nobodies to the lbo business could think that they could come into his turf and take the single biggest deal ever proposed Johnson's group tried to make peace with Kravis but talks went nowhere just four days later Kravis and KKR shocked the financial world with their own bid twenty billion dollars raising the price to $90 a share Henry's decision enter the deal as he did he was not just big guns coming in it was Godzilla waiting in from the ocean and stomping down Wall Street he wanted to scare off potential buyers Jim Robinson was head of American Express the parent company of Shearson Lehman at the time I was on the other side of the fence Henry and George when they get personally involved in the deals you know that you're dealing with it there capable adversary but the RJR board declined kk r's offer while johnson and his team were blindsided by henry kravis 'as aggressive move they didn't back down they countered with another offer of $92 a share almost 21 billion dollars everything on Wall Street stopped he was like two gun fighters out in the street everybody wanted to watch or everybody wanted to grab a gun the media they loved a battle they loved a war they loved a winner they loved a loser the round-the-clock publicity at a scrutiny over the largest deal in history stunk Ravis nobody likes to see their deal negotiated in the press on a daily basis and be taken out of proportion when you play that game you're gonna get people taking shots at you you don't have people attack you you learned to have a thick skin the RJR Board also rejected Johnson's proposal though to move the deal forward they told all potential bidders that they had 10 days to come up with another offer the confrontation between the bidders escalated I think Henry might tell you today that part of what was driving him as it consciously was the desire to win the single most deadly sin that you can have in the acquisitions business six weeks after Johnson's initial offer for the giant company Kravis and Roberts were locked in a marathon last-minute bidding session their final bid was a staggering one hundred and nine dollars a share nearly double its initial price now it became a waiting game there's a lot of tension and everybody's tired I remember that was very late at night when the Ford finally made its decision oh it's all over right on November 29th 1988 a few minutes after 10:00 at night the board of RJR had made their decision Henry Kravis would win the day keh keh are the best in the business and they know what they're doing Johnson tried to engineer the biggest inside job in history he would have made at least 100 million dollars for his own personal bank account if the deal had worked but a Wall Street tycoon named Henry Kravis snatched the company away and that's it for mr. Johnson KKR made seventy five million dollars in fees clearly winning RJR took Henry to the pinnacle of his reputation on Wall Street but more than anything I know from talking with him at the time that mostly what they felt was fear fear that they were not going to be able to make this work ultimately those fears proved well-founded you KKR were the winners in the epic business battle for RJR nabisco but for Henry Kravis the spoils were short-lived they ultimately won that prize over the long run it did not turn out as well as one might have hoped the aftermath of the mega deal was catastrophic it had not worked out perfectly and there was a lot of pressure to get this thing right and make a return for their investors the firm is often congratulated on an acquiring making a large acquisition and he's always said save it congratulate me when we got out in 1991 while trying to take our jr. out of its tailspin Kravis faced a family tragedy Harrison his 19 year old son from a previous marriage was killed in a car crash his life hasn't been simple his personal life has had its strong sense of tragedy losing his son you can try and imagine but you can't really go there two years later Kravis was splashed all over the tabloids when he divorced his wife of seven years carolyn rome he remarried marie-josée drew an a prominent economist and philanthropist by 1995 cigarette price wars and tobacco litigation and crush are Jr's profits generating a dismal annual rate of return of less than 1% KKR decided it was no longer worth holding onto the corporate giant they unloaded their investment and one of Wall Street's most storied battles the RJR nabisco buyout came to a close you asked whether the RJR deal is Wall Street's finest I don't think anybody would call it its finest hour I think of anything someone argued that it was its worst out its lowest hour its most demeaning hour an hour when all the things all the stereotypes that mainstream America believes about Wall Street that that it's doing things for ego and greed seems so demonstrably true to the rest of the country after some rocky deals in the 90s Kravis and KKR struggled in 2001 one of their holdings Regal Cinemas went bankrupt costing them half a billion dollars bloodied but unbowed Kravis admitted they needed to change the way they did business and after years of rebuilding were once again making headlines in 2006 they bought the hospital chain HCA valued at thirty three billion dollars Jason Kelly is a private equity reporter at Bloomberg News take arrábida with the HCA deal in 2006 then KKR beat that record with the TXU DL in 2007 so they came back and they came back fierce in 2007 they began a three-year effort to list the company on the New York Stock Exchange finally going public with a disappointing debut in 2010 going public is an extraordinarily difficult decision for these guys to make what's uncomfortable for this firm that that he and George have built over the years is showing any part of the secret sauce to the public KKR s portfolio includes 58 companies and manages assets totaling over 55 billion dollars but even that doesn't quite capture the breadth of what they hold 218 billion dollars in revenue across the companies that they own from toy retailers to power producers in Texas to hospital chains look there are two types of guys on Wall Street those that retire to Florida and then those that don't clearly one of the things that's most important to him is his legacy I don't think there's ever the expectation that every balls gonna be hit out of the park but if there's a place that can hit every ball out of the park he's developing a team with a deep bench at KKR and they're gonna hit a lot of balls out of the park if you've got a hope and a belief and a dream followed no matter what hitter is an absolute pioneer he's an innovator he's an icon like Morgan like the Rockefellers Henry's a great guy with an unbelievable instinct for what's going to happen into the future he can look and just see it better than almost everybody and that's an awfully good trait when it comes to business

Channel: Bloomberg

Views: 335,741

Rating: 4.809145 out of 5

Keywords: Bloomberg, Bloomberg Game Changers, Henry Kravis, KKR & Co. L.P. (Organization), investing, private equity, nyse, nasdaq

Id: OtKizreanP0

Length: 25min 10sec (1510 seconds)

Published: Tue Jun 03 2014