Imagine that. Kravis, whose overweening lust for fees astounds even Wall Street, duking it out with Buffett, a man famous for pinching pennies so tightly that Abe Lincoln screams. What made the spectacle especially intriguing was that Buffett and Kravis were fighting over (to them) a mere pittance: $12 million. The results of this battle of financial titans: Normal Greed (Buffett) was KO’d by Kravis, a.k.a. Mega Greed.
Here’s the blow-by-blow:
Kravis wanted $20 million for his firm’s role in negotiating the $8 billion sale of Duracell to Gillette Co. Buffett, a member of Gillette’s board, apparently wanted to pay Kravis only $8 million. That’s what Gillette is paying each of its two investment banks, which did more work than Kravis. But Kravis threw a fit. As a director of Duracell, he has a legal obligation to put the shareholders’ interests ahead of his own. Despite Gillette’s fat offer, Kravis apparent- ly threatened to block the deal unless his firm got its whole $20 million. He hung tight, Gillette blinked, he won.
This all happened in July but became public last week via a filing at the Securities and Exchange Commission. It showed that despite his objection to Kravis’s fees, Buffett’s Berkshire Hathaway conglomerate will vote its big Gillette stake in favor of buying Duracell. As a protest, though, Buffett himself abstained from the final vote on the purchase. That had no practical effect. But for financial voyeurs like me, Buffett’s refusal to bless the transaction was a stunner–like finding an Energizer Bunny on a Duracell Coppertop battery, say, or getting a straight razor in a package of Gillette Sensor blades.
Some caveats before I elaborate. Buffett and Kravis declined to comment for this story, as did the Gillette and Duracell directors NEWSWEEK contacted. So I’m drawing conclusions based on public disclosures and some background information. You should also know that I own 100 shares of Gillette, and that Buffett sits on the board of NEWSWEEK’S owner, The Washington Post Company.
Back to our tale of greed. Leveraged-buyout guys don’t work cheap, but the fees Kravis extracts from the companies he controls are way beyond the pale. Unlike other firms, Kohlberg Kravis Roberts & Co., also known as KKR, doesn’t share these fees with the investors, whose capital makes the deals possible. It takes the standard fee of 20 percent of a deal’s profits, but doesn’t share the losses of unsuccessful deals. KKR takes a fee when it buys a company. It takes annual advisory fees, and it stuffs its companies’ boards with KKR employees who pull down directors’ fees. It even charges fees when it sells companies, although you’d think this would be covered by the advisory fees or by KKR directors’ obligation to enhance value for investors. (KKR is currently forming a new fund that requires it to share losses and to give its investors 80 percent of its fees. But that’s another story.)
Duracell has been an especially big success. KKR’s investors bought $350 million of Duracell stock to finance the purchase in 1988. They have already pocketed about $1.3 billion from stock sales and cash dividends and stand to pick up an additional $2.7 billion from Gillette by the year-end. KKR’s share of those profits and the $24 million fee it charged for buying Duracell total more than $750 million. Now Kravis threatens to walk over $12 million?
I can’t imagine his actually doing it. He’d have been sued up the wazoo by angry Duracell shareholders, for starters. Buffett wasn’t willing to chance breaking up a good deal for Gillette, however offended he might have been by Kravis’s gouging. Even so, he deserves some credit for a principled stand. Yet another example of how Buffett has become a $14 billion folk hero–and why Kravis is dissed as just another rich Wall Street troll.
