Boesky begin to acquire the stock of a certain company so as to signal to the market that it was in
play, setting off a stampede of buyers when this suited Milken's strategy.
The Beatrice LBO illustrates how necessary Milken's role was to the overall strategy of Bush
backer Kravis. Beatrice was the biggest LBO up to the time it was completed in January-February
1986, with a price tag of $8.2 billion. As part of this deal, Kravis gave Milken warrants for five
million shares of stock in the new Beatrice corporation. These warrants could be used in the futureto buy Beatrice shares at a small fraction of the market price. One result of this would be a dilution (^)
of the equity of the other investors. Milken kept the warrants for his own account, rather than offer
them to his junk bond buyers in order to get a better price for the Beatrice junk bonds. Later in the
same year, KKR bought out Safeway grocery stores for $4.1 billion, of which a large part came
from Milken.
After 1986, Kravis and Roberts were gripped by financial megalomania. Between 1987 and 1989,
they acquired 8 additional companies with an aggregate price tag of $43.9 billion. These new
victims included Owens-Illinois glass, Duracell, which may not keep on running as long as many
think, Stop and Shop food mRJR Nabisco was the product of a number of earlier mergers: National Bisucuit Company hadarkets, and, in the landmark transaction of the 1980's, RJR Nabisco.
merged with Standard Brands to form Nabisco Brands, and this in turn merged with R.J. Reynolds
Tobacco to create RJR Nabisco. It is important to recall that R.J. Reynolds was the concern
traditionally controlled by the famnily of Bush's personal White House lawyer, C. Boyden "Boy"
Gray.
The battle for control of RJR Nabisco was lost by RJR Nabisco chairman Ross Johnson, Peter
Cohen of Sherason Lehman Hutton and the notorious John Gutfruend of Salomon Brothers. KKR
opposed this group, and a third offer for RJR came from First Boston. The Johnson offer and the
KKR were about the same, but a cover story in the Luce-Skull and BoneDecember, 1988 targetted Johnson as the greedy party. The attraction of RJs Time Magazine in earlyR Nabisco, one of the
twenty largest US corporations, was an immense cash flow supplied especially by its cigarette sales,
where profit margins were enormous. The crucial phases of the fight corresponded with the
presidential election of 1988: Bush won the White House, so it was no surprise that Kravis won
RJR with a bid of about $109 pecompany was put into play, giving the prebuyout shareholders a capital gain of more than $13.3r share compared to a stock price of about $55 per share before the
billion. How much of that went to Boy Gray of the Bush White House?
The RJR Nabisco swindle generated senior bank debt of about $15 billion. The came $5 billion of
subordinate debt, with the largest offering of junk bondsmore junior debt with payment in securities and junk bonds ever made. Then came an echelon of even that payed interest not in cash, but in
other junk bonds. But even with all the wizardry of KKR, there could have been no deal without
Milken and his junk bonds. The banks could not muster the cash required to complete the financing;
KKR required bridge loans. Merrill Lynch and Drexel were in the running to provide an extra $5
billion of brinotes with an interest rate that would increase the longer the owner refrained from cashing in thedge financing. Drexel got Milken's monsters and many others to buy short-term junk
note. Drexel's "increasing rate notes" easily brought in the entire $5 billion required.
In November of 1986, Ivan Boesky pleaded guilty to one felony count of manipulating securities,
and his testimony led to the indictment of Milken in March, 1989, sNabisco deal had been sewn up. In order to protect more important financial players, Milken wasome months after the RJR (^)
allowed to plead guilty in April 1990 a five counts of insider trading, for which he agreed to pay a
fine of $600 million. On February 13, 1990, Drexel Burnham Lambert had declared itself bankrupt
and gone into liquidation, much to the distress of junk bond holders everywhere who saw the firm
as a junk bond buyer of last resort.