Ashes to Ashes (118 page)

What followed was a dramatization of the moral ambivalence of the antismoking
movement toward any serious effort by the tobacco industry to produce an authentically—or at least plausibly—less dangerous cigarette. Citing Davis’s account of the HHS meeting, Daynard accused the company of towering hypocrisy for denying in public what it conceded in private about the severe hazards of smoking. Hutt and the company rushed out a reply that Davis had misquoted the lawyer, who, it was claimed, had referred only to the
alleged
risks of smoking and yielded nothing to the charges against the product. Once again the industry was bowing to its lawyers’ directives and sacrificing its credibility out of dread of the legal repercussions of telling the truth in plain English.

But even the truth might not advance its cause, RJR found out when it tried to meet with American Cancer Society officers to explain how they hoped the new product might reduce the threat of disease. ACS realists like public-relations director Irving Rimer thought the door ought to be opened to RJR, whose invention might actually modify the dangers of smoking for the hopelessly hooked. The fear prevailed, however, within ACS councils as well as at other antismoking strongholds that if the product really accomplished what the manufacturer implied, it would serve primarily to allow smokers who should quit to continue the habit and also to encourage others, younger and more impressionable, to take it up as not so dangerous as previously charged. The ACS was not about to endorse the RJR “smokeless” cigarette.

While the company said it would keep working on the product to hasten its future marketing, criticism of the concept accumulated. Elizabeth Whelan of the American Council on Science and Health hit at the industry’s long record of denial by needling, “How can [Reynolds] claim they took out the harmful elements when [they also claim] we don’t know what causes the harm?” ASH’s John Banzhaf registered unhappiness with the smokeless nature of the new gadget—its chief virtue—by noting, “Now when someone lights up, you can see and avoid the smoke. With the new cigarette … it will be harder to avoid.” Gregory Connolly of the Massachusetts public-health department pointed out that the new product might reduce the tar yield, but with the nicotine and carbon monoxide left in, there was still plenty of toxicity to endanger its users. The American Heart Association’s Scott Ballin said that the undisclosed chemicals and additives used in the RJR product’s “flavor capsule” might add a fresh carcinogenic or other health peril. And Congress’s foremost smoking foe, Henry Waxman, put in, “It doesn’t sound like a great advance to have another product that causes heart problems.”

But others understood that this demonizing of Reynolds for putting forth a cigarette arguably less lethal than the industry standard was not constructive. The smokeless brand presented a dilemma to “Americans who dream of a smoke-free society,” a
New York Times
editorial noted, because with smoking in decline and the rights of nonsmokers finally being recognized, “a less dangerous
cigarette could slow, perhaps even reverse, these welcome, healthy trends.” But not to allow the sale of the Reynolds experimental brand “would condemn hard-core nicotine addicts and those who breathe their secondary smoke to the greater hazard of conventional cigarettes,” the
Times
added. “Moralistic opposition to anything labeled tobacco cannot substitute for reasoned debate on how best to reduce nicotine addiction.”

Reynolds, though, had never suggested that its new product would cut down on its addictiveness; indeed, there had been no concession that smoking was at all addictive. Michael Pertschuk’s Advocacy Institute picked up on this shortcoming when, in a March 1988 “action alert” to its smoking control network of public-health advocates, it advised that the company would soon test-market the experimental brand unless the FDA could be persuaded that the product was essentially a drug-delivery device masquerading as a cigarette. Pertschuk, uncrowned leader of the tobacco control movement, argued that because (1) the company’s patent application conceded that the presence of tobacco was optional in its mechanical operation, (2) the extracts used in the flavor capsule contained unknown and unexamined chemicals, and, most of all, (3) the manufacturer’s hope was to reduce the cancers caused by smoking, the FDA ought to classify the Reynolds smokeless cigarette as a drug and keep it off the market until its safety could be assured.

Here, truly, was a perfect opportunity for the FDA to exert its jurisdiction over cigarettes, long withheld on the grounds that they were neither a food nor a drug and that their makers neither intended nor claimed any therapeutic value for them. But what then? It was surely disingenuous to call for the FDA to ban the smokeless RJR cigarette until its safety was proven; it would take a generation of epidemiological surveys after its introduction to determine whether the product actually reduced the dangers of smoking. What the FDA could probably do, short of banning the Reynolds smokeless cigarette—or any other—was to place limits on tar, nicotine, and carbon monoxide yields. But this might appear to countenance as medically acceptable any brand meeting the prescribed lowered levels of toxicity when nobody knew whether even the lowest habitual intake of tobacco toxins was safe.

Pressure mounted on the FDA to act—somehow. The Coalition on Smoking or Health petitioned the agency to keep the RJR product off the market, the AMA joined in the request, and six top federal health officers, including Surgeon General Koop, added their voices. The FDA, though, temporized as RJR researchers addressed some of the criticisms aimed at its smokeless cigarette. In a 743-page book distributed to every congressman and many public-health officials, Reynolds dealt with the nicotine issue by stating that its level in the adjusted product, as measured in the urine of test subjects, was lower than that in 97 percent of cigarettes then on the market. Although such claims did not allay the most vociferous objections or win an FDA waiver, the company’s
drumbeat grew louder. Wall Street got interested, as Ross Johnson had intended; Kidder, Peabody’s analyst Roy Burry predicted that the soon-to-be-marketed RJR smokeless brand “could add three to seven percentage points to annual rates of tobacco earnings growth during the coming decade” and, if successful, “could alter the industry’s economics, worldwide consumption trends, and relative company positions.”

Named Premier instead of Spa, its old in-house code name, the Reynolds smokeless entry was test-marketed in early autumn of 1988 with whizbang electronic store displays and a two-packs-for-one offer. Such costly merchandising raised the price tag of the project, counting all the years of research, special manufacturing equipment, and promotional hoopla, to almost $300 million, making it a candidate for the most expensive U.S. consumer product introduction ever. But Premier still had a few problems, and a buying public used to instant gratification was not forgiving.

There was the taste, for one thing, and the smell, for another; both were bad if you failed to follow the instructions on a little leaflet inside the package. It said to light the cigarette with a pure butane flame; the impurities in a regular sulphur safety match or other kinds of lighters reacted badly with the carbon rod, the cigarette’s heating element, producing little black specks that gathered in the filter system and made it taste, as its first customers testified, “as if you’d lighted the wrong end.” One venturous buyer told inquiring reporters that his Premier smelled “like burning tennis sneakers,” while another suggested the experience was “as if you’d just opened a grave on a warm day.” Some complained that, assuming you could tolerate the taste and smell, it was hard to drag on, and one leading Wall Street analyst commented that a blowtorch, not a butane lighter, was required to get the thing going. This problem was traceable to the quarter-inch overwrap at the front end of the Premier, needed to sheath the carbon rod and allow it to be lit without the flame contacting the tobacco. As with the obligatory butane lighter, Horrigan would later concede, “You had to overexplain it.”

Mechanics aside, even as an intellectual concept, the Premier presented would-be consumers with problems. Smoking is a complex interplay of psychological and pharmacological factors, but at its core is—well, smoke. Without it, without the feel of its going down and the sight of its being expelled as a pungent miasma, you were just sucking tobacco-flavored warm air. And there was no ash to assure the smoker that he was in fact consuming anything—just a tiny receding red dot when viewed head-on. “I’ve been smoking the hell out of this,” one early customer reported in frustration, “and it won’t go away.” And at the end, assuming you knew when you had reached it, you couldn’t even stub out the Premier with ritualistic vigor; you had to break it apart, sometimes causing the little metal flavor capsule to clank into the ashtray like an unexpectedly discovered Soviet bugging device.

Why, with so many apparent drawbacks, had Reynolds even test-marketed the Premier? “We went to market at least a year before any of us wanted to,” Horrigan would later acknowledge. One explanation might have been to beat the competition, but RJR officials privately believed that they had a three-to-five-year lead over any rival version of a smokeless cigarette. A rationalized answer was Horrigan’s belief that consumers would be patient while the manufacturer responded to their objections and would understand that so radical an innovation would take some getting used to, just as decaffeinated coffee, sugar-free soda, and low-fat milk had tasted funny to buyers when they were introduced. But most of all, in the opinion of those closest to the disastrous marketing of Premier, the reason was Ross Johnson’s uncontainable desire to score a big hit and get his company’s stock price up.

Instead, the product became an overnight laughingstock, grist for stand-up comedians and talk show hosts. Few customers in the test cities were willing to try a second pack, and almost no stores reordered. Within weeks of its unveiling, Premier had taken its place alongside the Edsel in the pantheon of American marketing catastrophes.

VII

THWARTED
by smokers’ rejection of the Premier and the stock market’s persistent failure to value RJR Nabisco for what he thought it was worth, Ross Johnson turned to the fastest game of his action-packed career. Since the investment community had not properly rewarded him, he would demonstrate Wall Street’s obtuseness by taking his company private. His method, in vogue among plungers with a great deal of nerve and at least some cash at their disposal, was the leveraged buyout.

LBOs, as the business world termed the practice, were based on use of the target company’s own assets and earning power as the prime collateral for a loan of whatever size was required, at whatever rates were necessary, to buy out the stockholders and run the company in rugged entrepreneurial style. No need to placate Wall Street with glowing quarterly reports, no frittering of cash on dividend payments to unappreciative stockholders, no paternalistic concerns like retaining deadwood managers or plump fringe benefits to make employees happy and secure. Once privately held, the operation could slash payrolls, cut other costs to the bone, sell off weak-sister divisions, and direct all the resulting savings and revenue to paying down the often grotesquely swollen debt incurred in the buyout. A large piece of the debt was usually in the form of “junk” bonds, high-yielding subordinated instruments backed mostly by the earning power of the business, which became burdened now with incessant pressure to meet the heavy charges and was
chronically threatened with bankruptcy if revenues took an untimely dip. The upside of leveraged buyouts, of course, was that the takeover management, with a direct stake in its success, could run the show with maximum efficiency—and brutally if necessary—until it paid off most of the debt, and if it elected, could then take the leaner company back public and make a bundle on the transaction.

Some 500 companies had undergone the supposedly therapeutic process in the three years before Ross Johnson turned to Wall Street investment bankers and brokers for lessons in how to join in the biggest self-rewarding orgy since the nineteenth-century robber barons were rampant. What was wrong with LBOs—and generally a matter of indifference to their perpetrators—was that instead of building equity in corporate America and an efficient, globally competitive industrial plant, the greed machine was piling up huge debts from the bidding wars that the buyouts set in motion, grossly inflating values, making fortunes for a few key players in the takeover group—along with their bankers, brokers, and lawyers—and for investors intrepid enough to buy up the junk bonds that were usually at the heart of the deals. The results sometimes were that the targeted trophy was shorn of its patina, heads rolled, plants closed, whole communities went into shock and despair, and the surviving enterprise, groaning with debt, was starved for funds to make capital improvements and even to maintain the existing plant; new product development and technological progress suffered. Yet the U.S. Treasury helped to underwrite the game, losing out on corporate income taxes that were no longer being paid to it by buyout managements, who were able to deduct the full cost of their outsized interest payments on the loan with which they had captured their companies. Nor were there any dividends left to tax, though stockholders did have to pay up for whatever capital gains they realized from the buyout price. An LBO engineered by entrenched management was, moreover, a particularly suspect undertaking, thick with conflict-of-interest problems. For if the point of the deal was a leaning down of operations, why couldn’t the in-place management, authorized to make whatever economies and sell-offs were needed, have done the job without resorting to taking the company private? In the case of RJR Nabisco, the answer was that Ross Johnson had little stomach for cutting costs and tempering his high-living ways. His skill was not solving problems but getting rid of them; he was a dealmaker and a parlayer of assets, not a creator of wealth by developing and marketing goods and services. If Wall Street would not value RJR for what it was worth, then Johnson would walk off with the package himself and cash it in at full liquidation value, even if that meant risking dismemberment of the enterprise.