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Members of the Kohlberg, Kravis, Roberts & Company team who did the bidding for R.J. Nabisco, pose in the firm's New York office Dec. 2, 1988. From left are: Richard I. Beattie, chief lawyer in the negotiations; George R. Roberts and Henry R. Kravitz, the firm's senior partners; and Paul E. Raether, a partner. Nabisco's prospective new owner says he doesn't plan to radically dissect the company to help pay off the huge debt its record $24.53 billion buyout will create. Photograph by AP

This article originally appeared in Fortune on July 4, 1988.

THE NAME is still Kohlberg Kravis Roberts & Co. and the game still leveraged buyouts. The evidence of success remains visible as well. The firm’s managing partners are fabulously rich, having for years fed on a feast of fat LBO fees and profits. They are sweepingly influential, controlling a string of companies, including Safeway, Beatrice, and Owens-Illinois, that taken together make KKR the second-largest U.S. conglomerate, just a touch behind General Electric in annual revenues. In Wall Street’s mergers and acquisitions departments the partners are kings, their firm known as the biggest customer bar none.

But stop there, because Kohlberg Kravis Roberts is otherwise radically changed. The cast of characters is different and the plot as well. The firm’s founder, 62-year-old Jerome Kohlberg Jr.—the spiritual father of the entire LBO industry—has been gone a year, a casualty of a tense management struggle over the firm’s future. Now in total command of KKR are the two younger men who left Bear Stearns with him 12 years ago to start this firm, his longtime friends, followers, and partners, Henry R. Kravis, 44, and George R. Roberts, 45.

The battle among the three was mostly about force: whether or not KKR should use it in trying to make buyouts. Traditionally, though not with complete consistency, KKR had sought to be friendly, playing no role more aggressive than white knight to a company in play. Kohlberg yearned to keep things that way, avoiding hostile deals at all costs. Kravis and Roberts, ambitious, driven, and young enough to have long careers ahead, contended that KKR and the deal market had outgrown such niceties. In the end they won.

This is not just one of those intramural Wall Street scraps, mildly interesting to read about, but of little relevance to the real world. This is KKR, powerful beyond most people’s understanding even before this quarrel, now prepared to haul out the artillery when necessary. At the firm’s disposal is a bankroll of unprecedented size: a $5.6 billion LBO fund that it lined up last summer from institutional investors—pension funds, banks, insurance companies. This money is slated to be equity, the base onto which at least $35 billion of bank and subordinated debt can be piled. It all adds up to a blockbuster total of $40 billion—enough to buy, say, all ten FORTUNE 500 companies headquartered in Minneapolis, including General Mills, Pillsbury, and Honeywell.

Buyout dean Kohlberg deplored where the firm was heading.Photograph by Max Aguilera-Hellweg

Or the $40 billion war chest could buy two Texacos, a notion less fanciful. In March, KKR announced that it had amassed a 4.9% position in Texaco and might move up to 15%. The stake is the first hard evidence of what the partners were fighting about. It is what KKR calls a “toehold” position, a raiderlike grip that Kravis and Roberts wished to take selectively and Kohlberg did not. In the sales literature that KKR used last year to raise its new fund, the firm said toeholds would be secured to speed the progress and lower the cost of “potential management buyouts.” In other words, KKR has designs on all, or at least part, of Texaco.

This quest may fail. Carl Icahn, holder of a 14.8% Texaco stake, wants the company for himself, and Texaco wants devoutly to stay free of both. But if it isn’t Texaco that KKR buys, it will ultimately be one or more somebodies of size, and when that happens statistical fireworks could light up the sky. KKR is an empire cloaked in disguise, one commonly identified only in terms of its pieces—all those companies it has taken private through leveraged buyouts and that it controls. Ask people to guess the combined revenues of all the companies in KKR’s grip, and even the sophisticated will almost surely underestimate. The total in 1987: about $38 billion. A billion above is GE, sixth-biggest company on the 500 list.


AS IT GOES about its everyday affairs, KKR acts and is treated like a huge company. The accounting firm of Deloitte Haskins & Sells, for example, handles this conglomerate-in-disguise like any large corporation, assigning a lead partner to oversee an array of KKR companies. Just as any giant might, KKR has time after time used a favorite executive recruiter to rustle up managers for its businesses. And in the executive suites, Kravis and Roberts have all the power of, say, Jack Welch, CEO of GE. Like Welch, Kravis and Roberts can hire and fire the operating executives below them, change the strategic direction of any unit they control, and buy and sell the businesses that constitute their holdings.

KKR rolls Safeway trucks out of Landover, Maryland, but serves fewer stores after closing 20 because the unions balked at work rules.Photograph by Kay Chernush

It is the buying and selling, in fact, that makes KKR so extraordinary. GE unloads a division now and then (Utah International, for example) and picks up others (RCA). But it does not preside over its operations with the intention of getting rid of them in time. KKR does. Nothing that KKR controls is regarded as a permanent holding; everything is an investment, in due course to be sold, privately or publicly. It is the firm’s modus operandi to hold on to a company for only a few years, long enough to shape up its operations (see box) and, in all probability, shed some assets. In the U.S., there are about 15 companies—Amstar and Wometco, for instance—that used to be KKR properties and are not anymore. This is a conglomerate always in flux.

A conglomerate ever growing as well. KKR’s dynamics call to mind a troop of hoofers like the Rockettes, in circular march. On one side of the circle, imagine, a Rockette peels off and disappears into the wings, followed seriatim by others. On the other side, new Rockettes join, one by one, preserving the circle and in fact gradually enlarging it, until the stage seems almost to fill. The character of the dancers changes too. The Rockettes coming on are each taller, leggier, more statuesque, and more glamorous than those peeling off. My God, will the next be an Amazon?

So it might be—that big, strapping rangerette named Texaco. Add Texaco to all that KKR controls now, and its revenues would exceed $70 billion, whip it past IBM in size, virtually tie it with Ford, and leave it trailing only General Motors and Exxon.

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The men now in charge of this powerhouse, Henry Kravis and George Roberts, permitted FORTUNE to take the photograph on the cover, but declined to be interviewed. Jerry Kohlberg likewise declined. There is no shortage, however, of people who have known the three men as clients, dealmakers, and friends, and who are willing to discuss them, sometimes for quotation, sometimes not. Among these people are a few who know the reasons why the three are no longer working together, a story never before told publicly.

Kravis and Roberts are cousins, the sons of a sister and brother. To a degree, they have led remarkably parallel lives. They both grew up in the Oil Patch—Kravis in Tulsa, Roberts in Houston—and both went on to Claremont Men’s College in California, where they majored in economics. Kravis captained the Claremont golf team as a junior; Roberts was a soccer star. Some summers they worked at Bear Stearns, whose senior partner then, Salim “Cy” Lewis, was a friend of Kravis’s father, the owner of a well-known geologic survey firm.

After graduation, the lives of the cousins diverged a bit: Roberts got a law degree from the University of California at San Francisco, Kravis a Columbia MBA. But by 1969 they were both working at Bear Stearns, though in a bicoastal way that has remained their wont: Kravis in New York, Roberts in San Francisco.


PHYSICALLY, the two men are almost identical: short, slight, athletically trim. Some people see a facial resemblance. But Roberts is definitely quieter and less outgoing; he has a softer, steadier look about him. Married soon after college and the father of three children, Roberts is a suburban family man who keeps a low profile in San Francisco and essentially no profile in New York, which he dislikes.

Business friends call Roberts creative, conceptual, and a whiz at assessing the values in a deal. Richard Arnold, executive vice president of Charles Schwab & Co., got to see these skills when Roberts helped his friend Chuck Schwab buy Schwab’s brokerage company back from BankAmerica. Says Arnold: “George doesn’t talk a lot. But when he does say something, it cuts right to the core of the issue. He’s sensible, practical, knowledgeable, deliberate.” Plus, says John Canning of First Chicago Venture Capital, a longtime KKR investor, “outstandingly smart.”

No one thinks Kravis got slighted in intelligence either. He is more kinetic than Roberts and harder edged, showing some steel in his eyes. He can charm as well. A New Yorker who once waited in KKR’s elegant New York offices to see Jerry Kohlberg remembers getting his first glimpse of Kravis: “Suddenly this man swept into the reception room, perfectly attired in a Savile Row suit, and said to this gangly Texan who’d been waiting there too, ‘Hello, I’m Henry Kravis.’ He was urbane, he was brisk, he was just right.”

To merit KKR's price, Duracell needs to keep its fast growth going. To merit KKR’s price, Duracell needs to keep its fast growth going.Photograph by Will McIntyre

Kravis is divorced from his first wife, but is close to their three teenage children. He is married now to Carolyne Roehm, the dress designer. They are flashily prominent in New York society: Her publicist appears to work overtime keeping them in the columns, which is believed to suit Kravis just fine. A recent tidbit from Vogue: Guests at their Connecticut pre-Revolutionary house wake up to the smell of brewing coffee and baking croissants that has been piped into their rooms. Later in the day, the vents advertise brownies.

The Kravises are conspicuous spenders—a matter that seems to have bugged Jerry Kohlberg no end—and conspicuous givers also. With his art collection, composed of Monets, Renoirs, Sargents, and much more, Kravis seems to have a display-space problem. Some of his paintings have gone to decorate KKR’s antique-filled, mahogany-paneled offices, which overlook Central Park and may be, says one New York businesswoman, “the nicest spread in the city.” According to still another Vogue item, Kravis is eyeing space on the floor above his $5.5 million Park Avenue apartment for a private museum to house the rest of the overflow. At the real museum nearby, the Metropolitan, work is under way on a new Henry R. Kravis wing, partially underwritten by HRK’s $10 million gift. New York’s Mount Sinai Medical Center received $10 million from him recently as well. In politics, Kravis’s favorite cause is George Bush, whom he has backed enthusiastically.

It could be, a business friend speculated recently, that Kravis is interested in a Washington job. But nothing about what Kravis says, nor Roberts, nor their friends, suggests that this pair is anything but fascinated by what they do. Says a close friend: “These are Type A people. The fact that they’ve made a lot of money doesn’t matter. Each deal is a new challenge. Each time they go to meet with the management of a company, it’s a challenge to convince them KKR should do the transaction. This kind of thing is what drives all Type A’s. These are just very active, driven people.”

One thing is sure: They are not working for the love of restructuring corporate America. Chuck Schwab once spoke admiringly to Roberts of all KKR had done, as Schwab saw it, to improve U.S. business, taking companies out of the hands of uncaring boards and putting them in the hands of entrepreneurial owner-managers. Roberts looked at Schwab sideways and said, “That’s not why we do it, Chuck.”

In confidence and ability, Kravis and Roberts are obviously eons away from the days when they first began working with Jerry Kohlberg at Bear Stearns. Kohlberg, then co-head of corporate finance there, was athletically trim himself (he is a tennis nut), more reserved than Roberts ever thought of being, but well known and respected on Wall Street. He was also successfully, if in a limited way, using Bear Stearns’s capital to do what were then called bootstrap, or management, acquisitions. The deals, however, always had the look, and later got the name, of leveraged buyouts: Acquire a company or a division with a package of money containing a sliver of equity—say 10% or less of the price—and a slab of debt; shape up the company with the help of managers whose hearts and minds you’ve captured by giving them a share of the ownership; sell it off later.

Soft-drink bottles are inspected at Owens-Illinois's plant in Hapeville, Georgia. Soft-drink bottles are inspected at Owens-Illinois’s plant in Hapeville, Georgia.Photograph by Bob Nelson — Picture Group

Most important, coin money. The potential for doing that—or not doing it—was in the leverage. The debt had to be repaid and serviced out of the company’s cash flow and there was always the possibility it couldn’t be, which might mean a wipeout of the equity. But if things went well, any profits and any value added belonged to the gang putting up the sliver, turning it into silver—or gold.

Kohlberg played this game expertly for years at Bear Stearns, but grew restless because its appetite for such deals was less than his. So in 1976, pulling Kravis and Roberts from the ranks and collecting some seed capital from a few friendly investors, he set up KKR in what was clearly a gutsy move. KKR went on to a series of triumphs: the first LBO of a major New York Stock Exchange firm (Houdaille, in 1979); the first $1 billion buyout (Wometco, in 1984); the first large buyout done by a public tender offer instead of through a drawn-out merger process (Malone & Hyde, in 1984); the largest buyout in history (Beatrice, for $8.2 billion, in 1986).


IN ITS FRONTIER DAYS, KKR often had to struggle to raise the debt financing it needed. At first the firm was dependent on insurance companies, which wanted a share of the equity for putting their money on the line. Later the banks signed on, forgoing the equity; today KKR is particularly close to Bankers Trust. Still later junk bond financing, often scads of it, became essential to KKR’s deals. Though it spreads its merger and acquisition fees around the Street with finesse, KKR has leaned on the junk bond juggernaut of Drexel Burnham’s Michael Milken repeatedly.

Recalling KKR’s history of foraging for money, a man who in the 1970s made investment decisions for a large Eastern insurance company remembers seeing Kravis often, Kohlberg only now and then. Once, he says, Kravis came to him and practically begged for funds. “I always thought,” says that man, “that Henry got the doggiest jobs and got powerful doing them.”

Perhaps, but for years the locus of power in the firm was totally clear: “We’ll have to check this with Jerry,” Kravis and Roberts would say as they did the legwork. “He was an absolute father figure to those two guys,” says one man who dealt with KKR then. He was also the man who applied the brakes to some of the younger partners’ more ambitious plans for adding staff and stepping up the pace of acquisitions. The KKR partnership structure called for unanimous agreement to do a deal, and around the firm, Kohlberg got the nickname “Dr. No.”

Then, in early 1984, Kohlberg became ill. He was found to have a brain tumor. While it turned out not to be malignant, the surgery he underwent was severe, leaving him with intense headaches for several months and reducing his working hours for a time. During this period, naturally, Kravis and Roberts ran the firm. “And they liked it,” says a man then a friend of all three. Kravis and Roberts, he says, began to have thoughts of holding on to more authority after Kohlberg returned. The friend believes that under most circumstances Kohlberg would have readily acceded to that change, accepting the chance to free up some time for his outside interests, among them his alma mater, Swarthmore; Columbia University, where he got a law degree; and tennis. But Kohlberg, the friend says, did not want to reduce his role when there were disagreements about policy, which there certainly were beginning to be.

The LBO business had changed dramatically. Kohlberg’s original negotiating style, says still another friend, had been “to sit down and get to know management, to schmooze with them, to spend six months or longer talking in what was a very friendly sort of joint process.” But by the mid-1980s the competition for deals was feverish and the time for schmoozing had disappeared. A whole industry of LBO firms was crawling around the woodwork of corporate America, looking for deals and trying to replicate KKR’s success. Bidding wars began to erupt, typically because a raider had initiated hostilities and paved the way for firms like KKR to step in as white knights. KKR played that role again and again, but the problems of staying gentlemanly—as Kravis and Roberts were forever reminding Kohlberg and as he did not want to hear—were intensifying. The pressures got more insistent in late 1985, when KKR loaded up its acquisition guns by raising its fifth LBO fund, a $1.8 billion giant.

Ever energetic, Kravis works the Manhattan late shift with wife Carolyne Roehm, center.Photograph by Dana Fineman — Sygma

It was at this point that the friendliness of KKR’s deals first dropped a notch. In the Beatrice acquisition, negotiated in the fall of that year and completed the next spring, there was no raider on whose heels KKR, as white knight, moved in. KKR moved in, period. It was accompanied by Donald P. Kelly, a man with an iconoclastic image, who took over as chairman of Beatrice and has been busy ever since busting it up (see following story).

Beatrice had grown vulnerable because of management troubles: The board had forced out one chief executive, James L. Dutt, and replaced him with a retired executive, William W. Granger Jr., who didn’t look like a permanent solution. You can argue that the management upheaval put Beatrice in play and guaranteed that somebody was going to take the company over—so why not KKR? Among those making this case at the time were Kravis and Roberts, who, as Beatrice’s board stalled over what to do, went so far as to propose to Kohlberg that KKR launch a hostile tender offer. But Kohlberg was camped at the opposite pole, wanting to call off the pursuit entirely. In the end, by way of a compromise, KKR just kept pressuring Beatrice’s board, urging offers upon it, until it capitulated and accepted a deal. In the takeover community, the episode was called a “bear hug,” meaning on the border of hostile.

The internal debate at KKR went on from there, through endless discussions. Late in 1986, KKR did a large white knight deal, rescuing Safeway from the Hafts, Herbert and Robert. Then the KKR bear went rambling again, this time in the Owens-Illinois acquisition, signed in early 1987. Here, there were rumors of a raider, but one never emerged. KKR meanwhile came around to talk and found O-I’s management ready to do a buyout. In opposition, though, were some of O-I’s outside directors, who wanted to see the company remain independent and who fought KKR bitterly. In the end KKR raised its bid by about 10%, made it all cash, and prevailed.

Six weeks after this deal was completed, Jerry Kohlberg gave up his role as a general partner of KKR and left. Says an insider in the situation: “It sort of evolved to the point where Jerry was saying, ‘Well, look, maybe it’s better if I leave. Maybe this isn’t the right place for me.’ And George and Henry were saying, ‘Yeah, maybe it’s better that you do.’ “But it wasn’t as simple as that makes it sound. Continues the insider: “It was an incredibly emotional experience. Very difficult for everybody. It was painful.”

To the public, the partners revealed little. Kohlberg announced that he would start his own LBO firm, Kohlberg & Co., and spoke vaguely of “philosophical differences” within KKR, providing no details. Said Kohlberg, as reported in the New York Times: “I guess you could say I’m too old to not do things my way.” Roberts indicated that Kohlberg may have felt KKR’s deals were getting too big. Kohlberg’s comment about his new firm: “I won’t restrict myself to small transactions, but I’ll stick with deals where reason prevails.”

A big question remaining in this tale is whether Kohlberg also disputed with his younger partners the fees KKR was commanding. In Kohlberg’s eyes, were they so much as to be unfair to other participants in the deals? Answering the question requires an understanding of the various ways in which an LBO firm makes money. Sometimes it seems as if these add up to 57 varieties of compensation, but the three that count most are the management fee, transaction fees, and “the carry.” Basically, the management fee rewards an LBO sponsor—a KKR, say—for figuring out how to invest its fund; the transaction fees for actually doing the buying; and the carry for doing it well. Call these the triple-dip.


FOR KKR, the management fee is essentially 1.5% annually on the fund most recently raised, which right now is that $5.6 billion lined up last summer. These billions are not in KKR’s hands; the firm’s investors have simply promised to deliver the money as it is needed for deals. The management fee, however, becomes payable immediately. Seasoned investors with KKR get a partial break on this fee for a couple of years. But as of next summer the grace period will end, and the firm will start earning the fee on the full amount. The take will be a glorious $84 million a year, a charge continuing through 1992 or until the fund is fully invested, whichever comes first.

Next come the transaction fees, paid not only to KKR but also to commercial bankers, investment bankers, and lawyers for their work in making a deal happen. Technically, these fees are borne by the company being taken over. But since KKR’s investors end up being the principal owners of that company, it is they who pay the freight. We are talking big money here: In the three megadeals that were sewn up in the year before Kohlberg pulled out of the partnership—Beatrice, Safeway, and Owens-Illinois—KKR’s fees were $45 million, $60 million, and $60 million again. In retrospect the Beatrice fee looks almost small, since it was only 0.73% of the $6.2 billion purchase price (not including the $2 billion of debt assumed). On the Owens-Illinois acquisition, the fee was up to 1.36%.

Finally, consider the carry, which is 20% of all profits from an LBO deal. Take, as an example, KKR’s acquisition of sugar refiner Amstar in 1984, done with funds that KKR had lined up from investors in 1982. In this case, as always, KKR formed a special limited partnership to make the acquisition. The money needed was $52 million of equity to finance a $465 million purchase. KKR, as general partner, put up about 1.6%, or $830,000. Its institutional investors put up the remainder: $51.2 million.

Things moved fast and well after that. KKR sold Amstar off in less than three years (to a Merrill Lynch LBO partnership), at a profit of $232 million, producing a compounded annual rate of return on the equity of 81.5%. Of the profit, the institutional investors who were limited partners (including, for example, the state retirement funds of Oregon, Washington, and Michigan) got 80%. The remaining 20%, or more than $46 million, went to KKR. That is to say it mainly went to the four men then general partners of that firm, Jerry Kohlberg, Henry Kravis, George Roberts, and Robert MacDonnell, Roberts’s brother-in-law.


AS KKR TRANSACTIONS go, Amstar was a standout, producing much better returns, faster, than has been generally the case for the firm’s deals. Even so, the KKR record has so far been good enough to keep the customers coming. Most of the firm’s completed deals have their roots in the period from 1976 to 1982, when KKR raised three different funds and, by its figuring, put $543 million of equity into 20 different deals. In the selling literature that KKR used last summer, the firm stated that compounded annual returns on these three funds over their life—after the carry—were 31%, 32%, and 44%. These returns translate into realized profits of just over $1.5 billion, of which KKR’s share would have been $300 million.

The 1976-82 period also included a deal that was backed by only some of KKR’s investors, was not part of a fund, and therefore is not mentioned in KKR’s literature: the $425 million acquisition, in 1981, of American Forest Products, a division of Bendix. This transaction was a bummer. KKR’s equity investors apparently not only lost the entire $93 million they put up, but also were required to contribute some additional funds to pay the subordinated lenders. The firm tends to speak of this deal as “tax-oriented,” implying it is different from others. “That’s a bunch of horse manure,” says one man who was lending KKR money when this transaction was done. “They’re just trying to make their record look better. It’s only in hindsight that they have treated this deal as different.”

KKR’s performance on transactions done with its fourth fund, raised in 1984, and its fifth, raised as 1985 was ending and 1986 beginning, has not yet been determined: Many of the Rockettes financed with those funds are still doing their stuff on KKR’s stage. Last summer, though, KKR was estimating—conservatively, it said—that the rate of return on the 1984 fund, which led to $1 billion in equity investments and includes such uncompleted deals as Union Texas Petroleum and Motel 6, would be 36%.

THE 1986 FUND financed four biggies: Beatrice, Safeway, Owens-Illinois, and Jim Walter Corp. These deals were negotiated before the crash, when the market was all but throwing money at LBOs. Consequently, they required very little equity: only about $900 million for transactions in which the prices paid and the debt assumed totaled $22 billion.

Of these deals, Beatrice, which accounted for $8.2 billion of that total, is a sure winner, though how much of one remains uncertain. KKR’s investors got most of their $402 million in equity back when the company spun off E-II Holdings last year and took it public. Having sold off much of the rest of Beatrice, Chairman Don Kelly is now sitting with about $3 billion in debt, most of it junk bond variety; $2 billion in cash; a big food business, including Hunt-Wesson, Swift-Eckrich, and a cheese processor; and a major question as to how to make this investment liquid.

Once, says KKR investor Canning, of First Chicago, Beatrice looked like “a triple grand slam.” But the food business has proved harder to sell than Kelly and KKR expected. Now, Canning is forecasting a single grand slam, which he defines as perhaps four times your money. Canning, who talks to Henry Kravis a lot and considers him a close friend, has some thoughts about KKR’s other big deals as well. Safeway: “Working out very well. They’ve done a super job.” Owens-Illinois: “Too early to tell, but the signs are positive.” Jim Walter: “Too early” also, “but I think it’s going okay.”

The outcomes on these deals will matter not only to KKR and its investors, but also to Jerry Kohlberg, who as part of his financial settlement with Kravis and Roberts stayed a limited partner in the firm. But how, in the meantime, did he feel about the richness of KKR’s diet, the triple-dip? His friends say he worried that the rewards were out of proportion: too much for KKR, too little for the investors. Kohlberg argued within the firm, so the friends say, for a structure that would allow the investors, since they had put up the money, to share in the transaction fees and any other special fees. Ridiculous, responds a close friend of Kravis and Roberts, arguing that the dispute just didn’t happen. Says he: “Jerry never had any complaints about the fees. Not when they were going to him.”

The evidence on this conflict is conflicting itself. Jerry Kohlberg went along with the fees set while he was at KKR and took his share of them home. On the other hand, when Kohlberg & Co. went out to raise a fund from investors, it proffered a whole new arrangement: This fund, said Kohlberg’s selling literature, “will share all transaction fees with its investors.” The split is to be 50-50, vs. 100-0 at KKR.

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To that, the Kravis-Roberts camp also has an answer: It claims that the new fee structure was forced on Kohlberg, and on other recently formed funds as well, by a market grown angry about fees and determined to break the KKR pattern. Certainly Kohlberg’s fund cannot be said even then to have been a hot seller—to have whistled out the window, as they say on the Street. Planning originally to raise $500 million, Kohlberg ran into a difficulty called October 19, and settled instead for a smaller amount. Reports say he got $280 million; a friend of his says “more than that.”

In any case, Kohlberg definitely stirred up the air as he went about selling his fund. When he was pressed for explanations of the “philosophical differences” that had caused him to leave KKR, he apparently said little. But his selling literature spoke volumes, promising investors not only a share of the fees but also the friendliest of styles: no toeholds, no hostiles. By implication, the spiritual leader of the industry was saying, “This is the right way to behave. KKR’s is the wrong way.” When this news reached KKR, says a friend of Kohlberg’s, Henry and George were not pleased.

Kohlberg’s fund is now up and running out of twin offices in Manhattan and suburban Mt. Kisco, near his home. His organization of seven other professionals includes his older son, James, 30, who formerly worked for KKR, and George Peck, 56, long a principal in a small LBO fund and also a former Canny Bowen executive recruiter who for many years helped KKR with the people issues that arose in its businesses. In June, Kohlberg & Co. announced its first deal: a $330 million buyout of Alco Health Services of Valley Forge, Pennsylvania. The deal, said a Kohlberg spokesman pointedly, is “totally friendly.”

Among Kohlberg’s investors are a couple who reportedly refused to sign up for KKR’s 1987 fund because they regarded the idea of toehold investments as getting unpalatably close to hostile deals. It is also possible to find institutions that once invested with KKR and have stopped doing so because they grew to hate the fact that fees were not shared. “I had bitter discussions about this with them a couple of years ago,” says one investor who jumped ship.


BUT NO CASE could possibly be made that KKR’s investors are broadly dissatisfied. You can’t get $5.6 billion from a bunch of malcontents. In truth, many KKR backers leap to give testimonials. First Chicago’s Canning, for example, committed $300 million to KKR’s 1987 fund and exudes enthusiasm for the firm. Never mind, he says, that some other LBO funds produce better returns than KKR: As he sees it, KKR’s strength is that it is performing admirably with extremely large amounts of money. “They’re in a league by themselves,” he says. The Texaco toehold reinforces the point; smaller LBO funds couldn’t even consider going after the oil giant.

The biggest KKR fan club is located in Oregon, whose state retirement fund hooked on to KKR in 1981. James George, the state’s investment manager, says he can’t really quantify the profits made since, but knows it’s been “a tremendous success.” George committed $600 million to KKR’s 1987 pool, a walloping amount considering that the retirement fund has assets at market value of only $8.3 billion. George calls KKR’s toehold investments “an evolution” to be watched: “We’ll see how it works out.” Some Wall Streeters wonder what would happen if KKR opened up fire on a company located in Oregon or some other state whose pension money it handles. That could also be something to watch.

One of KKR’s more pressing concerns right now would seem to be the possibility of a recession, which could cause some of the firm’s debt-laden lovelies to languish. At the least, a recession might impede KKR’s plans to take a number of its companies public, among these Safeway. At the most, one or more KKR operations might go really sour. But there would be no domino effect here. Because each deal is set up solo, it lives or dies on its own.

Long range, the problem for KKR and every other buyout firm is returns. Recent changes in the tax law have hurt the economics of bust-up deals and put LBO funds—”financial buyers,” as the term goes—at something of a disadvantage in competing with corporate buyers who simply want to run what they buy. Nonetheless, the financial buyers are everywhere, carting money that they are burning to use. KKR’s $5 billion is matched in the market by at least $10 billion that has been entrusted to other LBO funds. When a possible acquisition surfaces, everybody jumps.

For example, all manner of buyers scrambled for Kraft’s battery division, Duracell, when it went on the block recently. The winner: KKR, which probably hopes to take Duracell public one day. Some dealmakers were stunned by the price KKR agreed to: $1.8 billion for a company that last year had pretax profits of only $135 million. “Crazy,” said one bidder who dropped out more than a half-billion below. An alternative thought: So far only a pittance of the $5.6 billion raised in the 1987 fund has been committed to deals, leaving a full $5 billion still to be spent. Another loser in the bidding contest regards the $1.8 billion price as irrefutable evidence that KKR is feeling tremendous pressure to get that $5 billion to work.

More evidence of that may lie in the fact that KKR has been looking recently at buyout prospects overseas, certainly in Britain and maybe elsewhere. It’s a whole different, more difficult world beyond the big water. The market isn’t used to the leverage that Americans employ, nor well set up to provide the quantities of subordinated debt that a KKR would require. Still, the firm is not leaving this stone unturned.

IN THE END, KKR’s investment of its $5.6 billion, or whatever chunk of that it can actually find a place for, should produce an eye-popping realignment of giant companies, and perhaps a reworking of corporate power. If hostilities occur, they will heighten the drama; if KKR manages a peaceful occupation instead, broad stretches of business countryside will still be overridden. Generals Kravis and Roberts, in any case, should do nicely: Over the next few years, KKR seems likely to take in close to $1 billion in fees as it works the money it has now into place. The term for that might be conspicuous consumption.