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If you like Henry Kravis's story, you might also like:
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Henry Kravis's recommended reading: Escape From Freedom

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Henry Kravis
 
Henry Kravis
Profile of Henry Kravis Biography of Henry Kravis Interview with Henry Kravis Henry Kravis Photo Gallery

Henry Kravis Interview

Financier and Investor

February 12, 1991
New York, New York

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  Henry Kravis

You went to Claremont McKenna college in California. How did you find it to begin with?

Henry Kravis: Through Time magazine. My dad was reading an article in Time magazine about the Oxford/Cambridge of the West Coast. It's part of a group of small colleges in Claremont, along with Pomona, Scripps, and Harvey Mudd. I wanted to go to the West Coast. I'm from Oklahoma originally, but I had been in an Eastern boarding school for five years and I said, "I want to see how the other half of the United States lives." I tell people I went there to play competitive golf. I liked it. I used to say the first year was like a prep school with ash trays. I really went there because it was very strong in economics and political science, and those were the two areas that I wanted to focus my future on.

Was this what you wanted to do? Was this where you wanted to be?

Henry Kravis: Business-wise? Yes. I took a circuitous route getting there, though.


I was an economics major in college, and every summer after school, I would drive my car from California, from Claremont men's college at the time, to New York. And I worked on Wall Street. I started out as a runner, which was a messenger. I went to the other runners' homes in Brooklyn and Queens, just to see how they lived, how they thought. They were totally different than I was. My next summer I worked in the research department of Goldman Sachs, and my last summer I was in institutional sales and corporate finance. I thought at the time that I wanted to go into institutional sales, which are selling stocks and bonds to institutions. In those days, which was the 1960s, the salesman was making about $100,000 a year. I thought that was just an enormous amount of money.



But the one thing that always stuck in the back of my mind was what happens if, for some reason, this institutional sales doesn't really work? I mean, if it's not all that it's supposed to be. I said I'm really trained to do nothing. I am trained to be maybe a shoe salesman. The second thing that bothered me: I said, when I am old (that meant 45 years of age), I want to have an office. I don't want to be at some desk yelling and screaming and people hearing what I'm saying on the phone all the time. And I said, that bothers me. These people don't have an office.


Henry Kravis Interview Photo
I then started looking into the corporate finance side, and became fascinated by that. But before I made up my mind what I wanted to do, I wanted to find out how an institution -- a fund that buys stocks and buys bonds -- makes its decisions? How did they make the decision to buy General Motors, or IBM, or whatever company it was. I wanted to find out how the other side worked, because I didn't understand how it was that one time an institutional salesman had a special on IBM, and the next day he'd got a special block of stock on some other company, and another day, another company. How could he know so much about these different companies, other than reading the one page that was given to him by the research department. I was going to find out how the decisions were really made from the other side, and then I'd make a decision about what I was going to do. I was fortunate.


After I graduated from college, that summer, I was given a job at the Madison Fund, which was a closed-end mutual fund here in New York. Ed Merkle ran it. What a terrific guy he was! After I was there for about three weeks, he said, "Kid," (they used to call me kid all the time), "I want you to go out and call on a company called Tri-State Motor Transit, in Joplin, Missouri. And I said, "That's interesting, but who is going to go with me?" He said, "What do you mean, who is going to go with you? You are going to go by yourself. You are going to go meet with the president of this company, you are going to be there by yourself." I said, "Well, I've never done this before." He said, "Well, no better way to learn than trying it." So, I put my questions together, and they reviewed them at the Madison Fund before I went out, and I arrive out there. A man in jeans and a t-shirt picks me up at the airport. Introduces himself and I said, this is the president of the company. I knew that he was worth many millions of dollars, because I knew how much stock he owned, and I said, I just learned a great lesson that you can't tell a book by its cover. I said, "What a good experience this is." I spent the day with him. He then took me to his house for dinner that night, and the next morning I spent some more time with him, and I called back to Ed Merkle at the Madison Fund. I said, "We should start buying this stock." What the company did was, they were in the transportation business, hauling explosives during the Vietnam War, so they were doing very well. I got lucky, and every share of stock we bought, the stock kept going higher and higher. And Merkle thought I was pretty smart.


Then he sent me out to call on a few other companies. I remember calling on Roy Disney, at Disney. That was just a great experience for me, never having met somebody like that. I had read everything that I could before I got out there and had all my questions laid out. I had really thought through what I wanted to ask and, as a result, it went very well.

I then finished that summer, and was going to go to business school at Columbia, to get my Master's. I told the Madison Fund people that I was going to do this, which they knew. They wanted me to stay, but I said, "No, I'm going to go ahead and get my Master's."


I started at Columbia and, after my first semester, I said, "I don't know if this is really for me." I remember being in a class, a marketing class, my first year, first semester. And the professor said, "How many of you want to work for Procter and Gamble?" And everybody's hands went up. And I said, "Oh, my gosh, this is not for me. I've got to get out of here. I'm in the wrong place." I called my dad, and I said, "I'm going to drop out, and I'm going to go back to work for the Madison Fund." He said, "No, you're making a mistake, son." He says, "I think you've gotten the worst over. The first semester is always the hardest at business school. Stick with it. It will always be good to have your Master's." And long story short, I did stick with it.

[ Key to Success ] Perseverance


I asked at the Madison Fund if I couldn't come back and work, though, for the next three semesters, while I was getting my Master's at the same time. They said fine, and I said, "I'll have to work around my course schedule, but I'll try to arrange my courses so that I can do more work with the Madison Fund and a little less work, maybe, at Columbia." I did that, and I was able to call on other companies.


Eventually, the Madison Fund had a company which they controlled. It was the old Missouri-Kansas-Texas Railroad in Denison, Texas. We set up a holding company to utilize the tax loss that was being generated by this railroad. They were abandoning track that went into cornfield, and so forth. Merkle came to me one day, and he said, "Henry, I'd like you to buy companies for Katy Industries. I said, "Well, that's fascinating, but I don't know how to buy a company. I've never bought a company in my life." And he said, "Look, kid, you know how to pick stocks. You buy a company the same way you buy stocks. If you don't like it you just sell it." And that's that. And I thought, well, it doesn't sound right to me, but this man has been pretty good in the stock market, he must know, and he's a lot older than I am. So, I said, "Fine, let's see if I can find some companies." I thought about areas where I could buy small companies, and really build a group. It was the oil service business I picked, because there were a lot of family companies down in Louisiana in particular. I spent a lot of time in New Orleans, and found a number of companies in the surrounding areas, like Houma, Louisiana, and Berwick, Louisiana and Lake Charles. I'd sit in these people's homes, in their kitchens sometimes, eating crayfish with them and shrimp. They'd say, "Where's the guy with gray hair?" They assumed somebody with gray hair was going to come down. "If my company is going to be sold, I'm not going to sell it to some kid here, I'm going to sell it to some guy with gray hair." And I said, "Well, unfortunately, it's me. I'm the only one you get to deal with." And so I bought a few companies. They worked out all right.



Eventually, I left the Madison Fund and Katy Industries. Then ended up at Bear Stearns, in their corporate finance department, where my cousin, George Roberts was working and also where Jerry Kohlberg was working. Jerry had bought a company. It was the first buyout that the firm had done in 1965. I started studying it, liked what I saw. George and I kept talking about it. In the late '60s we started buying a few companies, and in the early '70s. They were all very small companies. George, at that point, was in San Francisco with Bear Stearns, and I was in New York with Jerry. We bought probably seven or eight or nine different companies in the early '70s, culminating in the largest acquisition that Bear Stearns did, which was in 1975. That was a company called Incom International. It was the industrial components group of companies from Rockwell. We paid $92 million to buy this company, and Bear Stearns, I remember, got the biggest fee they'd ever gotten, which in 1975 was $950,000. We decided hortly after that, George, Jerry and I decided to leave the firm. We wanted to do something on our own. Really wanted to concentrate just on management buyouts, or leveraged buyouts, which are one and the same. We said, "OK, lets go off." On May 1, 1976, we formed this firm, and the rest is history.


We got lucky. I think we've had some principles that we've stuck to. Very disciplined investors and very disciplined people there. And that's what's given us the ability to say no. It's one of the most important things at the end of the day, being able to say no to an investment. Even if you've done a lot of work, work will never hurt you.


But once you buy a company, you are married. You are married to that company. It's not like Ed Merkle said, "If you don't like it, just sell it." You know, you've got it. It's a lot harder to sell a company than it is to buy a company. Since we formed the firm in 1976, we've bought some 38 different companies, and we spent about $65 billion, buying these different companies. People always call and congratulate us when we buy a company or when it's announced. I say, "Look, don't congratulate us when we buy a company, congratulate us when we sell it. I said any fool can overpay and buy a company, as long as money will last to buy it." I said, "Our job really begins the day we buy the company, and we start working with the management, we start working about where this company is headed."


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