Playing the growth game.

• Position: Interview with Steve Wilson, chief financial executive of RJR Nabisco Inc. - Mergers and Acquisitions - Interview

After struggling for four years to wipe out its debts, today RJR Nabisco is hungry to grow. The company is in the midst of an acquisition drive that would exhaust many firms. Read how the CFO is managing the pace.

WHEN STEVE Wilson became CFO of RJR Nabisco Inc. in May 1993, operating managers gave him two presents: a hockey stick and a sandbag. The hockey stick, with its curved shape, represented the delayed returns that planners often accept in order to justify an expensive investment. The sandbag represented the most effective way operating company heads believed they should package budget proposals and capital requests: by trying to "sandbag" the CFO into seeing things their way.

The hockey stick and sandbag today stand for an obsolete game plan. After four years of singular focus on debt reduction, RJR Nabisco is in a new game, the growth game. Wilson is right in the middle of the action. Formerly the director of the company's corporate development, he was tapped for his present post after Louis Gerstner left the company for IBM and new chairman Mike Harper arrived touting a dedication to cash earnings growth and shareholder returns.

The company set new financial objectives based on cash earnings that promise 20-percent returns and 15-percent earnings-per-share growth. Harper has set acquisitions as a critical method of hitting these targets.

FINANCIAL EXECUTIVE: What recent changes has RJR made in its financial strategy?

STEVE WILSON: They're not dramatic changes. They're evolutionary changes. Obviously, at the time of the LBO with all the debt we had, the focus had to be on paying down debt. We reached an important pivot point in November of 1991 when we became investment grade again. Suddenly, we had some freedom to

negotiate a new credit agreement with our banks. We looked to the future with a much higher level of flexibility than we had since the LBO. We could buy companies to grow by acquisition even though we still had a lot of debt and were more leveraged than many food companies.

Becoming investment grade caused a change in thinking at our company. We did our first acquisition in early 1992. We bought New York Style Bagel Chips and then began adding others. Then we had a change of management in 1993, when Louis Gerstner went to IBM and Mike Harper became CEO after all his years at ConAgra. Mike really picked up where Lou and the rest of the management team left off. They had begun to look at projects that allowed us to redeploy our free cash into acquisitions that accelerate profit growth.

The problem was a lot of these acquisitions have hockey stick-shaped economic models. In those first couple of years, we weren't even sure if an acquisition threw off enough cash to pay for the incremental interest to buy the company. We wanted to look at this a little bit more on the income side, rather than the classic long-term discounted cash flow and internal rate-of-return analysis.

Then Mike raised the hurdle bar by saying we don't want to just cover our interest in the first year or two. We want to cover our interest and have a lot left over for the shareholders. We want to look at these projects with no business end on the hockey stick. I've been doing acquisitions for a long time and I can't think of many that have 20-percent return on equity in the first year.

We started out skeptical. But now, in 1994, we have more opportunities in front of us than we have cash to spend against the opportunities. We've already made investments in partnerships totaling hundreds of millions of dollars.

Where do you find all of these opportunities?

One place to find them is Eastern Europe, where companies are being privatized. We tend to be an extremely attractive buyer because we're the largest biscuit company in the world and the second largest American blend tobacco company in the world. We're a preferred...