Jack Koach

Jack Koach

Background

• Born 11/27/47 Newcastle PA.
• At Age 5 moved to Binghamton, NY.
• Seventh Grade moved to Glen Cove LI.
• College – Fairfield University, CT
• Law School – UNC-Chapel Hill Graduated December 1972 (was in Army reserve for five months)

Work History

• Worked for Department of Commerce – Trademark Examiner.
• Went to Georgetown for one year and a day, and then joined Penny, Edmonds  law firm for a year.
• Hired by a client, Liggett & Myers as a trademark attorney and moved to Raleigh.

He became International General Counsel of L&M by accident. – The company was closing a Brazil factory and firing 880 people.  His predecessor quit over a pay dispute.  Jack was their only lawyer with a passport, so he was selected to go to Brazil.

Jack became business development attorney for L&M.  He worked as a suitcase carrier for the legendary Joe Flom at Skadden, Arps.  Jack learned much from Flom in just a six month association.

Coming to RJR

Jack stayed until early 1978 when L&M decided to exit its international business.  He shopped around for a job at RJR, Philip Morris, and Brown &Williamson.  At RJR, he met with Dale Sisel, Sam Witt, Max Crohn, and Ed Horrigan.  Ed had recently joined from Tetley Tea.

Sam Witt called to hire Jack for international legal work.  Liggett decided to move to northern New Jersey.  Jack and his wife Jennifer decided to stay in North Carolina.  He became Assistant General Counsel to Sam Witt in the international area.  Jack Roemer was General Counsel of RJR Industries, the parent. Jack was in charge of Far East and Middle East.  He worked on the Arab boycott.

Tobacco International had a succession of CEOs while Jack was there:

• Tylee Wilson
• Ed Horrigan
• E. G. Vimond
• Lester Pullen
• Anthony Butterworth
• Dale Sisel
• Pierre de Lebouchere
• Tom McCo

Philip Morris won the bidding for L&M international, and Jack met with them in New York to close.  At the closing, Jack was to remain at L&M. RJR took bad legal advice; the RJR attorneys feared antitrust.  Philip Morris took the chance.  Horrigan was disappointed; the legal department was in disfavor. Only when Lester Pullen arrived did RJR really go international.

Ross Johnson Arrives and Shuffles People Off to London

Then Ty bought Nabisco. In 1986 and Ross Johnson became CEO. Ross moved TI to London in June 1987.  (Jack had already been going to London for various tasks.) Johnson’s position, “I think it’s dumb as hell for an international tobacco company to be in Winston-Salem.” – Philip Morris was in New York.  Either be in New York City or Europe where the bulk of our business was – Germany, Spain, Italy, Middle East.

London was an odd choice.  TI sold almost nothing in England.  Of the two type cigarettes, American style and Virginia style (no flavorings), England was a Virginia style market, and RJR brands were American.  And we didn’t even have the right to the Winston name there – our most popular brand.  RJR did not own the Winston name in the U.K.  RJR had an opportunity to buy it from Gallaher for “nothing.” Tobacco would not do it.  Later RJR tried to buy the name for $100 million and Gallaher would not sell.  Japan Tobacco International  finally got the name when they bought Gallaher.

As an international headquarters, would Geneva have made more sense?  TI had a significant presence there already, running Europe, Middle East, and Africa.  It would have been the logical place to go.  But there were other reasons. Pullen was English; Johnson liked England.

Of the ninety people in Winston-Salem, only twenty-one moved to the U.K.  Peter Van Every came from Del Monte to take Sam Witt’s place.  Koach  and Van Every were the two attorneys who went to London.  Winston-Salem handled all shipping for export sales out of Winston-Salem (about 27% of volume) and sales were in dollars, so it stayed in the U.S.  All staff functions moved to London.  Jack was Deputy Chief Legal Counsel for TI.

The office was behind the Ritz Hotel.  From there, it was a five-minute walk down Queen’s Walk by Green Park and toward Buckingham Palace.  Stornoway House was the former Home of Lord Beaverbrook.  (Edward VIII talked to Lord Beaverbrook just before his abdication.   Beaverbrook was a journalist and told everyone that there would be no abdication, having gotten that impression from Edward.) The building was Crown property, and TI leased from the Crown.  It was an odd building for an office.  In the West End of London, it was right at Buckingham Palace.

Jack only met Ross about five times.  Jack delivered papers to his suite at the Ritz.  Johnson was cordial.  When Ross was attended, meetings were well rehearsed, getting numbers together.  At these presentations Ed Horrigan would stay, but Ross would excuse himself to “make a call” and he would leave.  He never asked any probing questions.  He might have been more interested in Domestic and the Premier Cigarette.  He looked at TI as an opportunity to world travel.  Money wasted …..     He didn’t care about the TI business, took no opportunity to know any of the staff.

They wanted a public affairs office in Washington.  Champ Mitchell, with Womble, Carlyle, was hired.  He moved to DC to be chief legal counsel there.  The office was next to the Willard Hotel.  It was unbelievably lavish – artwork, Ming vases.  “How the hell do we bring government people into these offices and then poor-mouth on excise taxes? The management didn’t give a damn.”

Did Ross and Ed have ulterior motives in the move?  Jack did not know.  He only learned of the LBO bid when it was announced.  There was immediate speculation that that they might sell many divisions.  Several  studies showed that the company was valued so that Domestic Tobacco was getting no value in the stock price at $75 – a free cash cow.  But the stock finally went for $109.

TI bought Jack’s Winston-Salem home for appraised value. He expected to be in London permanently, so he bought a home, one that he could not afford.  TI would guarantee the loan up to 100%.  They had to use Manufacturers Hanover, with office in the Channel Islands.  It gave a very low interest rate with a mortgage equal to home value.  Jack was there 1987-December 1989.  Jack bought a house for £450 thousand.  He paid mostly interest on his mortgage.  In 1989, Jack’s London home was worth £830 thousand, and the pound moved from $1.40 to $1.60.  (84.4% increase on home; 14.3% exchange rate so total of 111% gain).  The policy was – if he was there for more than five years, the company would pick up any tax on the capital gain.  This was reimbursed after his five years was up.  His hypothetical tax due was carried forward.  He paid no tax on perks, cars, schooling, etc.  However, Jack would have been liable for the loss on the home and was at some risk.  Some people lost on their house; it just depended on the deal.

The LBO is a Shock

KKR won the LBO. Lester Pullen resigned.  Lou Gerstner came in as RJR Nabisco CEO and chose Dale Sisel to head TI.  Gerstner told them there will be no London office.  Net, net – they broke the lease and scattered the people.  Jack was handling the Far East – he could choose Hong Kong or Winston-Salem. He asked Jennifer.  She said, “There are no pros or cons.  We are going to Hong Kong.”   After nine years in Winston-Salem, Hong Kong looked great.  Van Every had to retire or go to Winston-Salem. .  Head people were all going back to Winston-Salem.  Some of the business guys stayed  in London with a very small office.   A couple people went to Geneva.  Many people retired, including Charlie Jennings, the head of Human Resources (HR).  Alan Kirby became its head back in Winston-Salem. .

Jack disagreed with HR about his Hong Kong contract.  They argued over hypothetical NC income tax.  Jack was not subject to this, and it was a source of friction.

Jack moved on to Geneva, where one of his duties was head of the pension fund until they realized he was not a Swiss lawyer and wasn’t licensed to practice in Switzerland and had to give up the job.

• My very first trip abroad was in May, 1981.  I went to Geneva to discuss the management of the Swiss pension fund.  It was actually a “profit sharing plan” that was run by a staff member, a Swiss lawyer. I expected that to be perhaps my only trip outside the U.S. Little did I dream that I would return to that city many times over the next thirty years.  GAH

Martin Bourbonnais became head of Human Resources (HR).  Van Every came over as Chief Legal Counsel.  Meantime, Jack was contacted by British American Tobacco who was looking for a chief legal counsel.  Jack met with them in London.  The HR guy at BAT checked with an HR guy in Geneva and said that they are hiring Jack.  This message got back to Jim Johnston, the RJR Tobacco CEO in Winston-Salem, and he told Jack to be patient for a short while.

De Lebouchere chose Jack as chief legal counsel.  This was about 1996-97.  Van Every was left with public affairs, but later and Jack took over that role too.  Jack was also in charge of business development.  He had 50+ people reporting to him, and he had to abandon his “open door policy.”  Paul Bourassa became Chief Legal Counsel – Jack had a title that covered several departments.

In the U.S., Gerstner was RJR Nabisco CEO, and Jim Johnston ran all tobacco.  The Atlanta headquarters group moved to New York or back to Winston-Salem.

Cash Demands on TI Operations

Jack says it is basically true that the operating companies had to give their cash to RJR Nabisco.  Gerstner had inherited some loan covenants that could be disastrous if breached, that would have dire consequences.  He said that he came within $50,000 of breaching one of those.  It would have meant an interest rate increase, or loan call, or something else very bad.

On the operations side, from 1992-96, JTI did make great progress in the Soviet Union – bought a big factory is St. Petersburg, two in Ukraine, another in Russia, one in the Czech Republic, one in Hungary, built one in Poland.  JTI was making progress but was not paying top dollar for facilities. Compared to the cleanliness of Tobaccoville where you could eat off the floor, these plants were filthy – used equipment pushed aside, oil stains on floor.  But they did provide a lot of production.  At that time, units out of Russia were a third of the JTI total.  Certainly not all Winstons and Salems.

RJRN wanted every nickel.  JTI’s CFO did something like changing a projection and almost breeched a covenant. Bonuses were determined by whether you made your budget. D&T auditors asked about the amazing uptick in shipments in the last two weeks of each quarter.  Not unlike the “loading” in the U.S.  It was like a Ponzi scheme that would eventually fail.  These sales came at a price to JTI.  Distributors expected a price break or discounted terms.  But RJRN had all this debt to be repaid, and they may never have had a discussion from an international viewpoint about what was doable. They just wanted the money.

Goldstone Shuffles the RJRN Deck

Then, Steve Goldstone took over.  He was with RJR’s outside counsel, Davis, Polk. Wardwell. Late ’98, Goldstone and some Morgan Stanley staff, his investment banker, came to Geneva and London.  They decided to announce that they were going to do an auction and sell TI.  It was odd.  No one at headquarters in New York knew anything about international tobacco.  The Geneva people basically had the unenviable job of selling themselves.  They would put on a “dog and pony show,” prepare offering documents, etc.  There were lots of bidders – Japan Tobacco (JT), Philip Morris (MO), British American (BAT), Reemtsma, Imperial.  Also, a private equity group took a look.

The operating committee plus the four strategic business unit (SBU) heads were there for presentations Some questions about smoking and health arose, but mostly about smuggling.  Buyers had concerns on that.  The EU had an issue plus there was litigation in Canada.

The choice came down to Philip Morris (MO) and Japan Tobacco (JT). The head of Philip Morris told Goldstone he would give $8 Billion, but, “You stop bidding now AND we will get a prepaid option for 15 years to buy Canada.  If we don’t take Canada, you get to keep the option money.”  Under this deal, RJR Nabisco (RJRN) had to keep Canada.  Goldstone wanted a clean break, with no Canada stub left.  There had been an indictment in Canada of some RJR people.  The RJRN people told Jack to come to New York and talk to MO, but that he could not tell de Lebouchere.  Jack sat with lawyers in New York and MO’s law firm from Richmond.  Jack was there for a week.  He was in meetings 7 to 7 and only ate “law firm” food.  (“Although he maybe did visit a bar or two.”)

Meantime, there was a back channel going to Japan through David Guilfoile (who speaks fluent Japanese and has a Japanese wife) JT was the TI distributor in Japan.  Jack, Guilfoile, and de Lebouchere realized that if MO won, “We are all gone.”  Philip Morris International (PMI) was in nearby Lausanne and would take over TI in Geneva.”   The three of them told Japan what they must do to win the bidding. MO was saying to Goldstone, “YOU handle the smuggling in Canada,” and the Japanese wanted Jack’s assessment of how Canada would play out.  The Japanese agreed to $7.8 billion.  They would accept Canada as part of the deal and were willing to allow TI production to continue at Tobaccoville, for 4-5 years or so (MO would not).

Japan Tobacco Becomes the New Owner of TI

Jack was in New York when Goldstone announced that JT had won.  JT’s New York attorney did not know anything about international tobacco.  They were putting crazy things in the purchase agreement to JT’s detriment.  Jack knew he would be working for them and was tempted to “jump to the other side” and tell them for example –“be careful about buying leaf tobacco – not all of it is good.”  Jack was in an ethical dilemma.  He had already “walked the line” once with Japan vs. MO, and he couldn’t do that again, because RJR Nabisco was still his employer.

People in Geneva were concerned.  Jack never knew what Goldstone was going to finally do.  The Geneva people were just the messengers of what Japan was offering.  A sale announcement was made during the business week.  De Lebouchere flew back to Geneva, but Jack remained in New York. All Geneva personnel met at the parking deck at the Chemin Rieu headquarters.  It was the only space large enough to accommodate everyone.  They had to clear out all the cars, but Jack’s car had been left there when he went to New York.  So they had to call Jennifer for car keys, but she didn’t know where they were. So they just left Jack’s car in the parking garage.

Goldstone made it clear that they wanted EVERYBODY to stay on after the sale to Japan Tobacco (JT).  JT sent to Geneva what they called “Mirrors” to shadow the CEO, marketing, finance.  But Japan Tobacco International (JTI) was run as an autonomous operating unit of JT.  The only business JT lost was Japan.  JTI took over JT’s business in Taiwan and China.

Jack focused on Article 9 to equalize everybody’s compensation including stock and options.  People had stock in RJR Nabisco, but they could not get JT stock (got shadow stock instead).  Under Japan SEC rules they could not own stock.  They used the Black Scholes model to value this transfer.

JT worked out fine as the owner.  Jack had lots of Japanese friends in Geneva.  Jack and de Lebouchere were on the board of JT, so they had to go to Tokyo a number of times.

Cultural Divide on Smoking and Health Issues

There were cultural differences. Japan had a different view than TI on smoking and health in 1999.  By this time, all US companies agreed that smoking had health consequences and there were negotiations with attorneys general.  Japan was different.  The warning on Japanese cigarettes as late as 2001 was, “Please be courteous when you smoke.”  It was not a health warning – just don’t be obnoxious when you smoke.

Jack made a presentation to the Japanese on the health issue throughout the world.   At this point there were more than 100,000 epidemiology studies associating smoking with health – lung, heart, etc.  Only thirteen studies drew no connection, but the Japanese wanted to push these thirteen.  Jack presented to Japan Tobacco’s  Legal, PR, and CEO.  Jack told them that they had to realize the smoking world had changed. (All thirty Japanese wore black suits, white shirts, and blue ties. Jack said it resembled a school group in uniform.)

The definition of addiction had been changed. The  Surgeon General report about 1968 changed meaning of addiction from “something you can’t live without” such as cocaine, to include smoking cigarettes which is a habit.  By this time, Time magazine had on the cover “Is TV Addictive?”  The definition was changed from “You can’t live without” to “You would be displeased it you lived without it.”  A much lower standard.  If you are addicted, that removes your free will, and then the warning labels don’t mean anything because you had no free will anyway.  That is why people started winning court cases.  The Rose Cippolone case was the first victory.  That was the legal argument.  The tobacco opposition was very shrew; they had to get past the warning notice and that is how they did it – tobacco was addictive.  Jack had to educate the Japanese that the bus had already left the terminal on the health issue.

Cultural Divide on Smuggling

JT also had a different philosophy on smuggling.  TI had moved from a “I don’t care who you are as long as you buy the cigarettes” to a “know your customer phase” – most companies had all previously ignored the smuggling but that had changed.  The Japanese were different.  For example, it was illegal to sell their Mild Seven in Taiwan.  But they had billboards everywhere anyway.  Why are you advertising a product that you have no license to sell in Taiwan?

Cultural Divide on Competitive Information

Reemtsma, the German cigarette company, was putting itself up for sale.  They had an offering document that would be useful to any tobacco company.  Jack urged the JT executive, Mr. Kimura the head of business development, to get a copy. All the other cigarette companies sought the offering document. Kimura said, “We have no intention of buying Reemtsma.” Jack replied, “Most of these companies have no intention of buying Reemtsma, but if we can get some commercial intelligence, why not do it?” Kimura then told Jack about the Samurai Code of Bushido.  The code says it is wrong to say you are going to do something when you have no intention of doing it.

Jack, somewhat cynically, says, “It took every bit of me not to remind him of Pearl Harbor.…Did this ‘Bushido’ take a day off on December 7, 1941?  Did it not apply then?  Was there a later amendment or something?”  But JTI did not get a copy of the offering document.

After the deal went through to sell to JT, the Japanese came to Geneva.  Kimura would be head of business development.  Did Jack mind the newcomer?  Not at all.  Article 9 at JTI said that if your job changed it would trigger your buyout terms – two years’ salary paid over three years.  Mr. Kimura’s arrival technically triggered Jack’s buyout.  Jack figured this was gravy if he ever wanted to leave.  Jack agreed to stay while preserving his right to payment if he left.  He stayed five more years.  By then all his children were in the states.  Jack had worked for tobacco companies for 30+ years.

Leaving RJR

So, in 2005 he left.  Paul Bourassa took the legal job.  Jack had a wonderful retirement party at Neptune Hotel, black tie.  He was a consultant for a year.  Then worked for Heard, O’Toole in New York, a law firm that represented JTI on Canada.  Jack was there 5 years, and then it was bought by big Canadian law firm.  Bourassa settled the Macdonald case in Canada, and Jack’s only client was gone.

Jack got a great letter from the managing partner of the Canadian law firm telling how great it was to have him (and the 14 other people) join the 600-person firm.  The last paragraph said your final paycheck will be sent next month. So, he was part of the merger and then immediately fired.

I first met Jack Koach when I visited JTI people in Geneva in the early 1990s, even though he had lived in North Carolina and had worked for RJR. We did have a connection, however.  20 years earlier, as an RJR employee, I had worked on a volunteer basis to reconfigure the retirement fund at a local hospital, Forsyth Memorial.  Jack’s father, Harold Koach, was the head of hospital administration with whom I worked on the project. Jack and I have been connected since those Geneva days.  He enjoys his retirement at Kiawah, SC.

In the book, Jack gave useful anecdotes and details that are far more interesting than financial data, and I am indebted to him for his perspective and humor in describing dealing with Ross while in London, the London office’s reaction to the LBO, and Jack’s work from the Tobacco International side in selling that company to Japan Tobacco.  GAH.