California Analysts Meeting

I remember well a major analyst meeting in California in 1981. RJR pulled out all the stops for a conference with analysts nationwide. California represented RJR’s largest investment in any state except North Carolina, and we were showcasing our businesses in the Golden State. They included Del Monte, the Sea-Land terminals at Oakland and Long Beach, Aminoil’s Huntington Beach oilfield, offshore drilling Platform Emmy, and the Geysers geothermal field in the mountains north of Santa Rosa. CEO Paul Sticht started the conference with a welcome speech on the deck of the Queen Mary at Long Beach. The speech set the tone for the conference, and the analysts’ immediate reaction revealed their feelings. During the speech, I was standing with a group of security analysts whose good opinion we wanted. Mr. Sticht began with, “We are a worldwide marketer of consumer goods, with strategic interests in shipping and oil.”

The analysts’ reaction and response did not surprise me. All went well with the comment about consumer goods. Everybody could understand that. But with the follow on about “strategic interests in shipping and oil,” they turned to each other with puzzled looks and mumbled something like “What the hell is he talking about?“  Gerry Gunzenhauser an RJR financial executive said that he heard the same phrase at other conferences where it drew similar responses.

That incident, in a nutshell, defined our problem with the investment community. Security analysts specialize in one industry and understand it in depth. If an analyst specialized in RJR yet had to spend time researching three or four different industries just so he or she could give an accurate outlook on the company, his work would be much more difficult and time-consuming. They take great pride in knowing the details of any company they follow. Their reputation, to say nothing of their income, depends on having insights about those companies. They are not shy and were signaling that they expected detailed information. Analysts had to be forward-looking, anticipating the company’s future. And this meant wanting to know what diversification move the company was going to make next.

RJR had a special problem because, as one of the most profitable companies in the world, tobacco generated far more cash than could be reinvested in the domestic cigarette business. But again and again, analysts watched RJR invest money in businesses that we knew little about, and they didn’t have confidence that we could run those businesses well. Even if we could, they knew that the profitability was not likely to be as high as tobacco. They asked “Why should we trust RJR to reinvest those dollars in new businesses when we have access to hundreds of other businesses. RJR could dividend that excess cash to us, and we could make our own investment decisions, leaving Reynolds to focus on what it knows best – tobacco.”

In 1977, I left the merger and acquisition group for pension fund management. We allocated our fund to more than fifteen advisors. They had far more than a passing interest in RJR; most of them held it in their portfolios. They were interested in what company RJR might buy next.

I treated this as a guessing game, not taking it seriously, although I did have my favorite candidates. – I thought a merger with Nestlé, the Swiss chocolate maker would have been a good deal for us.

However, one of my former associates, Rex Baker who was active in the merger group, gave me a warning.  He said, “It is fine for you to guess until the day you are right.” That had never occurred to me. If I had actually picked an acquisition that we soon made, and someone I talked with had bought the stock, that could have caused real trouble. The Securities Exchange Commission (SEC) would not have believed that I really did not know about the acquisition.

I ended my little guessing game immediately.