Wall St. Investor Defends Use of Leveraged Buyouts

Corporate leveraged buyouts (LBOs) permit greater efficiency and lead to competitiveness in international markets, a Wall Street entrepreneur told about 200 people at a Law School Forum yesterday.

Reginald F. Lewis '68, the chair and chief executive officer of TLC Beatrice Group, said LBOs are beneficial because they improve the efficiency of companies that are bought out. He added that such efficiency is essential to maintaining American competiveness.

"Levereged buyouts do make sense," Lewis said, adding later that "it may be disturbing to you, but America is no longer number one in the industrialized world."

Corporations without sufficient capital can use LBOs to purchase large corporations without using large amounts of cash. But because those companies must borrow money from other sources, they incur a substantial debt, which they usually pay off by breaking up the company and selling off parts at a large profit.

Lewis said American industry is now dominated by large conglomerates formed from small post-World War II businesses. He said LBOs break up these companies to form "more efficient" businesses that are more competitive internationally.

In addition, Lewis said LBOs help people starting careers in finance because they allow even small investors to obtain the capital necessary for investment.

"Change can't be effectively managed" unless smaller investors have a greater role in controlling the financial market, he said.

Lewis defended the legitimacy of investors--including universities like Harvard--who use LBOs, saying even educational institutions should be allowed to "use the free market." But he added that "South Africa is beyond pale" because of its policy of apartheid.

Harvard was a limited partner in the largest LBO ever--the Kravis, Kolberg and Roberts takeover of RJR-Nabisco--and Lewis said that buyout was "very well conceived."

Lewis completed his first LBO in 1984, acquiring McCall Pattern Co. and selling it three years later for a 9000 percent profit. One month later, he managed the largest internatinal LBO in history, putting up $985 million for Beatrice International.