In the second of a three-part series, FT reporters James Politi and Francesco Guerrera examine the modus operandi pioneered by the buy-out titan.
In March 2005, Kohlberg Kravis Roberts, together with fellow private equity group Bain Capital and Vornado Realty Trust, a property group, put an end to Toys “R” Us’s two tumultuous decades as a listed company by clinching a $6.6bn buy-out. The tough love administered to Toys “R” Us by its new owners was a classic example of the modus operandi pioneered by KKR and adopted by many of its peers. It also offers a glimpse of what another retailer - Britain’s Alliance Boots, the country’s largest drugstore chain - can expect following its recent £11.1bn ($22bn) takeover by KKR.
KKR typically lays out an aggressive “100-day” plan to address the most pressing issues. KKR declined to comment, but people familiar with its inner workings say the plan is a form of corporate shock therapy: a way to identify quickly and close the most glaring gaps in the company’s strategies and finances.
These radical restructurings are usually enforced by a taskforce of KKR operatives, overseen by senior partners at 9 West 57th St, its imposing Central Park-facing headquarters. Management consultants from Capstone, the in-house advisory firm KKR revamped in 1999 are also seconded to companies during the 100-day plan to help the KKR executives with the early “heavy lifting”.
Each company’s performance is evaluated on a monthly basis by KKR’s powerful portfolio committee. Chaired by Mr Kravis and/or his partner George Roberts, the committee divides KKR-owned companies into three baskets: the good performers, those on the watch list and ones in need of immediate attention. Currently, no more than two or three of KKR’s 30-plus companies are believed to be in the dreaded third category. To keep it that way, the overlords of West 57th St pay painstaking attention to one metric above all else: cash generation.
At KKR, the various iterations of the firm’s internal structure are referred to as “versions”: a term that evokes the see-sawing dynamics of the technology industry.
In the firm’s parlance, Version One, in 2000, was the move to divide the staff along 16 industry groups, a departure from the generalistic approach of the past that seemed necessary after a few high-profile investments, including Regal Cinemas, turned sour.
Four years later came Version Two: the number of industry groups was narrowed from 16 to nine to make sure a slow period in one sector would not leave too many KKR executives idle.
The current version, which coincided with the boom in deal-making of the past two years, is described internally as “the creativity phase”: a search for new sectors and new techniques to invest the huge cash pile at KKR’s disposal.
And yet, KKR’s innovative approach to its stewardship of companies is anything but plain sailing. Toys “R” Us, for example, lost $384m in the year to January 2006, mostly as a result of costs related to the buy-out. It swung back into an $85m profit in the year to February 2007 but in a recent regulatory filing said it had been forced to delay its annual report due to a “material weakness in its internal controls”.
KKR’s challenge is to prove that it can use its financial might and managerial savvy to ensure that another difficult case does not join the small number of KKR failures.
