B lo o m b e r g M a r ke t s
36
The
August 2007
KKR
Way By Richard Teitelbau m
The deals are just
the start. The original
‘barbarians at the
gate’ now command a
$107 billion global
empire. Here’s how the
buyout giant fires up its
companies with a
profit-or-perish creed.
C O V E R S T O RY
‚It’s a great time to be Henry Kravis, as he’s quick to remind people.
In April, the buyout mogul is standing in a ballroom of the Wal-
dorf-Astoria hotel in New York, telling AIDS researcher Dr. David
Ho, architect Maya Lin and Yahoo! Inc. co-founder Jerry Yang that
the private equity industry he helped invent is hotter than ever.
“We’re in, right now, the golden age,” Kravis, 63, tells a gathering of
prominent Chinese-Americans and Wall Street executives.
In May, Kravis is up in Halifax, Nova Scotia, saying, again, that
the takeover arena has never looked better. “The private equity
world is in its golden era right now,” Kravis tells a conference of
bankers and investors. “The stars are aligned.”
It’s certainly a gilded moment for Henry Roberts Kravis. Almost
two decades after his $31.4 billion takeover of RJR Nabisco Inc. re-
wrote the rules of leveraged buyouts, Kravis is buying companies at
a record clip.
Fueled by cheap money that’s now getting more expensive, pri-
vate equity has ripped through public companies and ushered in
what George David Smith, business historian at New York Univer-
sity’s Stern School of Business, calls a new era of capitalism. From
Jan. 1, 2006, to June 6, Kohlberg Kravis Roberts & Co., the buyout
firm Kravis co-founded in 1976 with his cousin George Roberts and
one-time mentor Jerome Kohlberg, has announced deals worth
$215 billion to acquire all or part of 30 companies, according to
data compiled by Bloomberg. In that time, KKR, with U.S. offices
in New York and Menlo Park, California, outspent rivals Blackstone
Group LP, Carlyle Group and TPG Inc.
 B lo o m b e r g M a r ke t s
37 August 2007
Behind all of the dealmaking, Kravis and Roberts, also
63, now lord over an industrial empire that dwarfs some of
the world’s mightiest public corporations. As of May 31, the
firm had a hand in 36 companies that together generated
about $107 billion of revenue in 2006, according to figures
KKR posted on its Web site. That’s more than Coca-Cola
Co., Microsoft Corp. and Walt Disney Co. put together.
These companies employed 560,000 people, more than
either Citigroup Inc. or General Electric Co. In fact, more
people work for KKR companies than live in Atlanta, Miami
or St. Louis.
After several of the firm’s acquisitions began to sour in the
late 1990s, Kravis and Roberts changed direction and tight-
ened their grip on the companies they buy. Nowadays, New
York–based Capstone Consulting LLC, a consulting firm that
works exclusively for KKR, measures company performance.
KKR demands its managers sink their own money into the
companies they run, works its contacts to find pros who can
help them, sets performance standards—and fires people
who fail.
“Any fool can buy a company,” Kravis said at a private eq-
uity conference in Frankfurt in February 2006. “The hard
and important part of our job was what we did with the com-
pany to create shareholder value once we acquired it.”
F
rom his aerie 42 floors above 57th Street in midtown
Manhattan, Kravis straddles the corporate and finan-
cial worlds. He’s played a role in a quarter of the $471.9
billion in buyouts announced this year through June 6. Dur-
ing that period, Kravis set records on both sides of the Atlan-
tic. After KKR and TPG agreed to buy Dallas-based electric
utility operator TXU Corp. in February in a record $45 bil-
lion LBO, Kravis and Italian billionaire Stefano Pessina in
April agreed to buy British drugstore chain Alliance Boots
Plc for 11.1 billion pounds ($22.1 billion) in the largest LBO
in Europe.
Today, Kravis’s reach extends from North Carolina,
where KKR controls mattress maker Sealy Corp.; to Turin,
Italy, where KKR owns FL Selenia SpA, which makes auto-
motive lubricants; to Rotterdam, where KKR owns AVR
Bedrijven NV, the largest waste management company in
the Netherlands. In Europe, KKR owns stakes in or con-
trols 15 companies.
At the center of this empire is an investment committee
that meets regularly in KKR’s New York headquarters high
above Central Park. The group includes Kravis, Roberts and
Capstone CEO Dean Nelson and vets proposed deals.
A second gathering, called the portfolio management
committee, also convenes to review KKR’s collection of com-
panies and reports from so-called deal teams that put buy-
outs together. Twenty-five partners, or members, and more
than 65 managing directors, directors, principals and associ-
ates, divided into nine industry groups, split their time be-
tween finding takeover targets, working on deals and making
sure KKR companies are being run well.
C O V E R S T O RY : K K R ’ S W AY
KKR usually assigns two or more of its executives to the
board of a company. It deploys Capstone consultants to find
ways to cut costs and boost sales. KKR’s 2006 annual review
lists 14 senior advisers, including former CEOs Edwin Artzt
of Procter & Gamble Co., Paul Hazen of Wells Fargo & Co.
and George Fisher of Eastman Kodak Co. and Motorola Inc.,
who counsel dealmakers and managers and sometimes serve
on boards and the portfolio committee. Former Agere Sys-
tems Inc. CEO Richard Clemmer joined in June.
“KKR is now the best private equity firm at buying com-
panies and then making them better,” says former partner
Scott Stuart, who now runs Sageview Capital LLC, based in
Greenwich, Connecticut, and Palo Alto, California, with Ned
Gilhuly, another KKR veteran.
It may surprise some people that KKR cares about run-
ning companies. Its ill-fated takeover of RJR Nabisco, me-
morialized in the best seller Barbarians at the Gate: The Fall
of RJR Nabisco (Harper Row, 1990) and a 1993 HBO movie
of the same name, made Kravis a poster boy for the “greed is
good” ’80s. The book recounts how Kravis threw a closing
dinner in the ballroom of New York’s Pierre hotel, where 400
investment bankers, lawyers and friends dined on lobster,
veal with morel sauce and a 3-foot-high (0.9-meter-high)
cake adorned with replicas of Nabisco products. The RJR
LBO turned out to be a flop, generating an internal rate of
return of less than 1 percent.
KKR raises money from investors, typically public and cor-
porate pension funds, and then leverages that cash with bor-
rowed money to make acquisitions and magnify returns. For
example, KKR may invest $1 of equity for every $9 it borrows.
Buying companies is the easy part. The harder part is im-
proving them so they pay down debt more quickly and cash-
ing out by selling them to someone else—usually the public,
in the form of an initial stock offering, or directly to another
company or group of investors—at a profit.
Hardly a day goes by without another marquee brand get-
ting gobbled up by private equity these days. From Jan. 1,
2006, to June 6, 21 companies in the Standard & Poor’s 500
Index announced their sale to private equity firms. Private
equity buyouts accounted for $1.2 trillion, or 20.3 percent,
of the record $5.8 trillion in mergers and acquisitions an-
nounced worldwide during that period.
Now, with interest rates climbing, life could get tougher
for the private equity crowd, which borrows heavily to fi-
nance acquisitions. Benchmark 10-year U.S. Treasury rates
climbed to 5.30 percent on June 12 from 4.54 percent in
mid-March. A sustained rise in rates or a decline in stock
prices would turn up the heat on KKR—and the managers
who run its companies.
KKR lines up top people and makes them scared to fail. Jo-
seph Welch, chief executive officer of electric utility company
ITC Holdings Corp., says KKR ensures its managers stay fo-
cused on the bottom line by making them invest in their own
companies. When KKR bought Novi, Michigan–based ITC in
2003, it offered Welch a chance to run it—provided he put
 B l o o m b e r g M a r ke t s
August 2007 38

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about $1.5 million into it. Welch ended up emptying his sav- marks to turn around the company during the 2001 U.S.
ings account, mortgaging his house and taking out a loan. recession. He fired 10 percent of Rockwood’s workforce.
“KKR didn’t want to have trouble sleeping at night,” Welch, “We are trying to make people rich—and rich people even
59, says. “They did that by making sure I had trouble sleep- richer,” Ghasemi says.
ing at night.” KKR has zero tolerance for money losers. Eckard Heid-
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KKR sets benchmarks for everything from the amount of loff, CEO of Paderborn, Germany–based Wincor Nixdorf AG,
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scrap produced to safety records and then holds managers which manufactures automated teller machines, discovered
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accountable. At Princeton, New Jersey–based Rockwood that when Gilhuly told him the firm was considering selling
Holdings Inc., which makes specialty chemicals and ad- a Wincor division that was in the red.
vanced ceramics, CEO Seifi Ghasemi, 62, used such bench- Kravis’s team makes sure managers understand that cus-
 B lo o m b e r g M a r ke t s
42 August 2007
tomers—not KKR—will pay down debt. Marc Tellier, CEO of
Montreal-based Yellow Pages Group, which distributes tele-
phone directories across Canada, says Capstone helped improve
a system that employs the Canadian consumer price index and
a half dozen other variables to better price ads and stoke sales.
Power grids, advanced ceramics, ATMs, Ottawa telephone
directories—it’s all a long way from the world of Henry Kra-
vis. He and his wife, economist Marie-Josée Kravis, form one
of New York’s ultimate power couples. A regular at black-tie
galas, Henry serves on the boards of the Metropolitan Muse-
um of Art, Mount Sinai Medical Center, Columbia Universi-
ty’s Graduate School of Business and Rockefeller University.
Marie-Josée, a senior fellow at the Washington-based Hud-
son Institute, is president of the Museum of Modern Art.
Roberts, whose wife of 35 years died in 2003, keeps a lower
profile than his cousin. Kohlberg, 82, left after a falling-out
in 1987.
The private equity boom that Kravis and Roberts are fuel-
ing has implications not just for Wall Street but increasingly
for every executive, investor and retiree. U.S. public and cor-
porate pension funds are looking to boost returns so they can
keep their promises to aging workers.
Kravis’s aim is to earn his investors fatter returns than
they could get in the stock market. The $244 billion Califor-
nia Public Employees’ Retirement System says on its Web
site that from its start in 2001, KKR European Fund LP gen-
erated a 30.7 percent internal rate of return through Decem-
ber 2006. KKR Millennium Fund, which was started in
2002, posted a 39 percent internal rate of return.
Back in the ’80s, private equity firms produced most of
their investment returns via the leverage they employed to ac-
quire companies. Now, they’re making more of their money by
overhauling business practices and improving productivity.
For their efforts, buyout firms collect fees in all shapes
and sizes. Firms such as KKR typically charge management
fees of 1–2 percent and collect 20 percent of any capital gains
when they sell a company. On top of that, KKR collects fees
from its companies for advice on mergers and acquisitions as
well as for management consulting and other services. When
KKR bought Sealy from a group led by Boston-based Bain
Capital LLC in 2004, for example, Kravis’s firm and Bain
shared $31.8 million of M&A advisory fees.
Do private equity firms earn their money? NYU’s Smith,
co-author of The New Financial Capitalists: Kohlberg, Kra-
vis Roberts and the Creation of Corporate Value (Cambridge
University Press, 1998), says well-run buyouts have helped
liberate companies from the rubber-stamp boards that have
long dominated much of corporate America. “Most boards at
public companies have been captives to the CEO,” he says.
M
ichael Chu, a former executive and limited partner
at KKR, says managers at public companies can
muddle along, even prosper, simply by not rocking
the boat. That doesn’t work at KKR companies. “You don’t
have the luxury of managing issues at the margin,” says Chu,
C O V E R S T O RY : K K R ’ S W AY
a founder of Buenos Aires–based Pegasus Venture Capital.
“If the market changes, you change the strategy. If the CEO
doesn’t work out a year into the deal, you never shy away
from the tough questions. You change the CEO.”
Measured by stock performance, LBOs have made many
companies better, according to a 2006 study by Jerry Cao, a
doctoral candidate at Boston College, and Josh Lerner, a pro-
fessor of investment banking at Harvard Business School.
The pair examined almost 500 companies that went private
in LBOs and subsequently went public again from 1980 to
2002. They found that these companies beat their IPO peers
in the stock market: Companies that had undergone LBOs
posted an average, cumulative three-year return of 57.9 per-
cent compared with 20.5 percent for conventional IPOs and
33.4 percent for the Standard & Poor’s 500 Index.
Lerner says the disciplining power of an LBO forces man-
agers to make tough decisions. “There is a process of refocus-
ing the company, disposing of divisions that aren’t central to
its mission,” he says.
Even so, when KKR pulls the levers, someone usually gets
ground up in the gears. By leveraging companies, KKR en-
courages managers to cut costs and, often, that means jobs.
KKR bought Evansville, Indiana–based Accuride Corp.,
which makes truck parts, in 1997 and sold the last of its
shares in early June. In April, the International Brotherhood
of Teamsters agreed to lay off 64 of about 350 workers at
Accuride’s Plant No. 1 in Elkhart, Indiana.
Matt Sandefur, a machine operator who works on brake
drums for big rigs at the plant, says managers have frozen his
pay for 2007, doubled health insurance deductibles and cut
coverage. He’s looking for a new job. “I say KKR hates
unions,” Sandefur, 41, says. “I used to feel secure in my job.”
Workers aren’t the only ones worrying these days. As pri-
vate equity deals get bigger and bigger, some investors see
trouble brewing. Wall Street, after all, tends to get carried
away. The LBO boom of the ’80s ended with an implosion in
the junk bond market and a wave of corporate bankruptcies.
“Everybody thinks private equity is the panacea,” says Jim
Leech, senior vice president of Teachers’ Private Capital, part
of the Ontario Teachers’ Pension Plan. “In our opinion, it’s
getting scary.”
Lately, acquisition prices have been rising along with
borrowing costs. Competition for deals pushed the average
price paid for companies in LBOs to 8.5 times cash flow in
the fourth quarter of 2006 from 6.4 times in 2001, accord-
ing to S&P.
“It’s a case of a lot of money chasing after deals,” Chu says.
Ultimately, private equity returns are likely to falter, he says.
“Maybe you don’t get 25 percent returns; you get 12 percent
or 10 percent,” he says.
Kravis and Roberts have been through rocky times. Starting
in the late ’90s, KKR stumbled as a string of its companies
began to fail, most notably Knoxville, Tennessee–based Regal
Cinemas Inc., which filed for Chapter 11 in 2001.
It was a costly mistake that changed the way Kravis and

Roberts operate. KKR had led a buyout of the movie theater
chain in 1998 for $1.58 billion, only to see its value plummet
amid a glut of multiplex theater construction.
“George Roberts and I sat down and said, ‘Look, we’ve got
to change the way we’re doing business,’” Kravis said in April
at the Waldorf-Astoria, where he was addressing the Commit-
tee of 100, a group of Chinese-American leaders that includes
cellist Yo-Yo Ma and architect I.M. Pei.
After the Regal Cinemas debacle, KKR created its invest-
ment and portfolio management committees, organized its
dealmakers into industry groups and formalized 100-day busi-
ness plans: playbooks that spell out what actions are supposed
be completed by specific dates in the early months of a buyout.
Kravis tapped Nelson, a senior vice president of Boston Con-
sulting Group Inc., to build Capstone in 2000.
To run its companies, KKR harnesses the forces that drive fi-
nancial markets: fear and greed. At ITC, all of the executives that
Welch hired also had to invest their own money in the company.
The son of a Kansas laborer, Welch joined Detroit-based
DTE Energy Co.’s predecessor, Detroit Edison, in 1971, fresh
out of the University of Kansas, where he earned a bachelor’s
degree in electrical engineering.
When he was put in charge of DTE’s power transmission
infrastructure in 1999, Welch discovered that it was delap-
idated. Transmission corridors were overgrown with vege-
tation, generators were leaking fuel and breakers were
rusted, he says. “The thing had been lost in the amorphous-
ness of the parent, and it had been run ad hoc,” Welch says
of ITC. Underinvestment in the power grid is a national dis-
grace, he adds.
Welch had a vision: A separate ITC would have the incen-
tives to invest in the grid, improve reliability—and help solve
America’s energy crisis by enabling renewable energy to be
transmitted efficiently. He urged DTE to establish ITC as a
separate unit. DTE did, and decided to sell it.
KKR, New York–based Trimaran Capital Partners, the
state of Michigan and ITC management teamed up to buy
ITC for $610 million. The $650 million financing package
consisted of 35 percent in cash and $425 million of term
bank loans.
Regulators wanted ITC to be untangled from its parent in
12 months. At first, Welch had a steel desk—and no chair or
corporate checking account. The local OfficeMax wouldn’t
even let him buy paper clips on credit.
Welch and KKR set to work. Their first task was to hire 17
executives. KKR required all of them to sink their own money
into ITC. Welch offered Edward Rahill, director of planning
and corporate development at DTE, a job as chief financial
officer—and gave him less than 24 hours to think it over. Ra-
hill, 54, says he ultimately joined for the opportunity to help
fix America’s crumbling power grid.
“It’s the greatest team-building exercise you can have,”
Welch says. “And that, fundamentally, in my mind, is why
KKR is so damned successful: They invest in and motivate
people—they align people.”
B l o o m b e r g M a r ke t s
August 2007 43
Stuart, the former KKR partner, was Kravis’s point man
on ITC. His job was to explain the company’s business plan
to state and federal regulators. “It was a great long-term
story,” Stuart says. “The grid in the U.S. needs a lot of invest-
ment to handle the demands.”
KKR put its contacts to work. Deloitte & Touche USA
LLP, KKR’s preferred accounting firm, helped ITC set up a
new accounting system within four months. London-based
Willis Group Holdings Ltd., a former KKR company,
arranged insurance for ITC transmission lines. Law firm
Simpson Thacher & Bartlett LLP, whose chairman, Richard
Beattie, worked with Kravis on the RJR Nabisco buyout, pro-
vided legal advice. “When you’re a KKR company, people
come in and put you at the top of their lists,” Welch says.
Rahill agrees. “You get the A teams, no if ’s, and’s or but’s
about it,” he says.
ITC went public at $23 a share in July 2005. According to
a May supplement to KKR’s 2006 annual review, the firm
initially invested $128.7 million. By the time KKR sold its
last shares in February for $316.7 million, it had generated
gross proceeds of $664.4 million, or five times its invested
capital. Through June 6, the stock had posted an annualized
return of 44.6 percent since the IPO. Welch’s stake, 1.7 per-
cent as of May 14, was worth more than $31 million as of
June 6.
Like Welch, Heidloff at Wincor Nixdorf, the ATM maker,
sees KKR as a liberator. Heidloff joined a precedessor of
Wincor Nixdorf in 1983, after graduating from the Universi-
ty of Paderborn with a degree in management and taxation.
During the ’90s, the company missed out on international
growth opportunities as part of Munich-based Siemens AG,
Heidloff says. While Wincor had 60 percent of the German
ATM market, its global share was 8 percent, he says.
Because Siemens, Europe’s biggest engineering company,
was organized by geography and along product lines, coun-
try managers could reject Wincor proposals to expand out-
side Germany. “I spent two days a week convincing
headquarters and country managers to get approval to grow
the business,” Heidloff, 50, says.
In 1999, Heidloff, then CFO, and Karl-Heinz Stiller, CEO
at the time, drafted a plan with Seimens’s management to set
Wincor free. Siemens put Wincor on the block.
KKR teamed up with Goldman Sachs Group Inc. to buy
Wincor Nixdorf for 736 million euros ($979 million) in late
1999. As a condition, KKR demanded Heidloff and Stiller
stay on. KKR bought 71.3 percent, Goldman Sachs bought
17.8 percent and more than 100 Wincor executives purchased
a total of 10.9 percent. “We didn’t want a situation where just
two or three people got rich,” says Heidloff, who became CEO
when Stiller retired this year.
In the beginning, KKR’s Gilhuly and Johannes Huth,
then a managing director, flew weekly to Frankfurt to check
on the progress. It was impressive from the start, with cash
flow rising 11.2 percent annually between fiscal 2000 and
fiscal 2003.
 B lo o m b e r g M a r ke t s
44 August 2007
When it became clear that Wincor’s retail computer unit
was losing money, Gilhuly, Huth and their counterparts at
Goldman Sachs told Heidloff it was time to consider a sale or
other options. “They really wanted to be in that business,”
Gilhuly says. “We turned up the heat.”
The Wincor unit sharpened its focus on high-margin soft-
ware components and emphasized consulting services. The
division, which had a ¤7.6 million loss on a cash flow basis in
2000, earned ¤12.8 million in 2002, Gilhuly says.
“They turned out to be an exceptional team,” he says.
Heidloff says it was a model LBO. “If you do a budget and
deliver every quarter, your life is very easy,” Heidloff says.
Wincor Nixdorf went public in a May 2004 IPO that val-
ued the company at about ¤1 billion. KKR reduced its stake
to 28.8 percent. Heidloff and other Wincor executives large-
ly held on to their stock, figuring KKR was selling too early.
They were right. Through June 6, Wincor stock had posted
an annualized return of 51.7 percent since its IPO.
Even in the post–Regal Cinemas era, KKR has run into
trouble. When acquisitions go sour, KKR steps in—fast.
After KKR bought Rockwood Holdings from Laporte Plc
in November 2000 for $1.18 billion, putting down $282 mil-
lion in cash and financing the rest with a mix of loans, a U.S.
recession sent prices of Rockwood’s chemicals sinking. By
late 2001, the company was losing money.
KKR tore up its business plans for Rockwood’s various
units and drew up new ones. It dispatched Capstone’s Eric
Daliere and Nelson to set new benchmarks and improve pro-
ductivity at scores of factories around the world.
KKR was running Rockwood with what it considered
interim management. Kravis wanted a new CEO and ze-
roed in on Ghasemi, who was a former executive director
at National Iranian Steel Industries, the country’s state-
run steel company under the late shah. Ghasemi fled Iran
after the 1979 Islamic Revolution and eventually went to
work for Redditch, U.K.–based GKN Plc, a maker of car
and airplane parts.
W
hen Ghasemi walked into Rockwood’s Princeton
headquarters in October 2001, a fellow executive
apologized for not having prepared an office for
him. “I don’t need an office,” Ghasemi recalls saying.
Then the executive told him that Rockwood hadn’t lined
up a secretary for its new CEO either. “I don’t need a secre-
tary—and neither do you,” Ghasemi said. Before long, the
executive, and his secretary, were gone.
Ghasemi, who has a master’s degree in mechanical engi-
neering from Stanford University, says he spent as many as
28 days a month on the road. He visited Rockwood plants
around the world to find ways to squeeze costs and boost ef-
ficiency. At a factory in Gonzalez, Texas, he went through
plant schematics and figured out that the company could
rearrange production lines to operate with fewer people. He
ultimately fired 400 people companywide, or 10 percent of
the workforce.
C O V E R S T O RY : K K R ’ S W AY
“I’m not too shy to say Rockwood exists to make money,”
says Ghasemi, who wears a lapel pin inscribed with Rock-
wood’s motto: “Cash, Customers, Commitment.”
Ghasemi knew how to fire up a sales force. He offered
them a 10 percent cut of any price increases they negotiat-
ed on Rockwood chemicals. Lo and behold, prices stopped
falling. The overall strategy was Darwinian. The company
would unload any division that wasn’t No. 1, No. 2 or No.
3 in its field.
Ghasemi freely tapped into KKR’s brain trust. KKR had ex-
plored acquiring Frankfurt-based engineering company MG
Technologies AG. Ghasemi and KKR used that knowledge
when deciding to buy MG Technologies’ Dynamit Nobel
chemicals unit in 2004 for $1.98 billion. Rockwood and KKR
then worked to unload part of that company in 2006.
With Capstone’s help, Ghasemi devised spreadsheets so
plant managers could keep track of which customers bought
what chemicals as well as customer complaints and product
returns. Each month, Ghasemi now thumbs through a thou-
sand-page printout comprising such stats from every plant
around the world. “That’s how you know what’s going on at a
company,” Ghasemi says.
In addition to the $282 million that KKR kicked in to buy
Rockwood, the firm has poured in $572.6 million in ex-
change for additional common and preferred stock, partly to
bankroll the purchase of Dynamit Nobel.
I
n Rockwood’s August 2005 IPO, KKR garnered $36.7
million of the proceeds from the redemption of con-
vertible preferred stock it held, plus sundry fees. It
also shared $131.9 million with Credit Suisse Group’s DLJ
merchant bank unit, which had invested $159.4 million in
the Dynamit Nobel purchase. The offering left KKR with 51
percent of the company, which was worth $1.24 billion on
June 6. As of that date, the stock had returned an annual-
ized 32 percent since the IPO.
KKR uses its clout to help its companies recruit execu-
tives in a hurry. After KKR and the Ontario Teachers’ Pen-
sion Plan bought 90 percent of Yellow Pages Group in
November 2002 for 3 billion Canadian dollars ($2.8 billion),
KKR’s Joseph Bae and Alexander Navab retained Marc Telli-
er as CEO.
KKR bought Yellow Pages from BCE Inc., Canada’s larg-
est telephone company, where Tellier had spent his entire
career. In June, BCE itself was holding acquisition talks
with three separate groups of investors, one of which in-
cluded KKR.
Tellier, 39, says he relied on Capstone and KKR to fix
Yellow Pages. “This was not a well-run business,” Tellier
says. One obvious sign: The Yellow Pages directories bore
blue covers because blue was BCE’s corporate color.
“The critical element was to get the management team
in place,” says Tellier, whose father, Paul, served as CEO of
Bombardier Inc. and Canadian National Railway Co.
Tellier needed a head of sales, a chief information officer,

a chief financial officer, a general counsel and a head of
human resources.
Bae and Navab, members of KKR’s communications team,
gave five executive search firms one week to come up with plans
to find the executives. Tellier and KKR reviewed the proposals
and hired Toronto-based Caldwell Partners International. Four
weeks later, Yellow Pages Group had its executives.
Tellier says Capstone’s Nelson and other consultants
helped the company zero in on its customers, set prices for
Yellow Pages advertisements and ramp up sales.
Nelson suggested Tellier use a range of variables, from the
Canadian CPI to the directories’ market penetration in a given
region, to help set ad prices. Capstone helped upgrade manage-
ment software so executives could track sales more effectively.
Today, Tellier can monitor weekly sales by province, sales
manager or salesperson. With a click of his computer mouse,
he can locate the person who can tell him why sales are up or
down in a particular area or category.
S
alespeople also began tracking how customers re-
sponded to pitches over time. Yellow Pages urged
sales reps to push larger ads, which cost $156 a
month, rather than smaller ones, which cost $24. Tellier
increased the proportion of salespeople who make face-to-
face pitches rather than phone calls. Reps who used to sell
six area directories sometimes had the number cut to, say,
three. That way they’d be less likely to let sales lag in any
one sales region.
Once a week, Tellier parks his GMC Yukon at a local
coffee shop and hits the road with one of his 500 salespeople.
B LO O M B E R G T O O L S
Tracking KKR’s Deals
You can use the Corporate Actions (CACS) function to follow
KKR’s acquisitions. Type 2202Z US <Equity> CACS <Go>, tab in
to the DATE TYPE field, enter A to list corporate actions by an-
nouncement date and press <Go>. This year through June 6,
KKR announced nine acquisitions and two divestitures. Click on
KKR’s Feb. 26 buyout of TXU Corp. for details of the $43 billion
acquisition with buyout firm TPG. For deal data such as Ebitda
or free-cash-flow multiples, click on the More Deal Info button
on the red tool bar and select Deal Analytics, as shown at right.
The buyout of the Dallas-based power producer was struck at a
total value of eight times Ebitda, or earnings before interest,
taxes, depreciation and amortization.
To see the advisers on the deal, press <Menu> to return to
the Acquisition Detail page. Click on the More Deal Info button
again and select Deal Advisers for a list of financial and legal ad-
visers to the target and acquirers. The page also shows the per-
centage of credit each firm gets for league table rankings.
For rankings of advisers on private equity deals, type MA
For news on leveraged buyouts and pr ivate eq u ity, type NI LBO <Go>.
B l o o m b e r g M a r ke t s
August 2007 45
“You’ve got to understand the psyche of a small-business
owner,” Tellier says. “One hundred percent of the dialogue is
helping the customer be more successful.”
Yellow Pages Group went public in July 2003, selling its
equity via Yellow Pages Income Fund, an income trust. The
structure is similar to that of a real estate investment trust
and enables companies to pass on earnings untaxed. The
deal took advantage of investors’ hunger for high-yield se-
curities at the time and valued Yellow Pages at C$4.7 bil-
lion. Through June 6, Yellow Pages units had returned an
annualized 15.2 percent since the IPO.
Kravis and Roberts, each man now in his seventh de-
cade, are more powerful than they’ve ever been. Stuart, the
KKR veteran, says his former bosses show no sign
of slowing down. “My sense is, they’re having a ball,”
he says.
No party lasts forever. Kravis captured the euphoria of
his golden age last November, before financing costs began
rising, when he addressed newly minted partners of Gold-
man Sachs.
At the Ritz-Carlton hotel in lower New York, Kravis
told the crowd that KKR and Goldman had worked
together and made money together for three decades.
Their lucrative partnership would endure, he said.
Kravis paused. “Just don’t do anything to screw it up,”
he added. The partners laughed. As the deals—and poten-
tial dangers—of the private equity boom keep multiplying,
Kravis might want to heed his own advice.„
RICHARD TEITELBAUM is a senior writer at Bloomberg News in New York.
rteitelbaum1@bloomberg.net
<Go> for the Bloomberg M&A Analysis function. To run an M&A
league table search, type 7 <Go>. For a ranking of financial ad-
visers on private equity deals, first type 25 <Go> for additional
standard league searches. Under Financial Advisers, click on Pri-
vate Equity Deals to see the ranking. As of June 6, Goldman
Sachs ranked first, having advised on 42 deals worth $198 bil-
lion. Click on a firm’s name to see a list of deals the firm advised
on. For a list of all private equity deals announced year to date,
type MA <Go> 1 <Go> 25 <Go> 45 <Go>.
BILL FLANGO