Ashes to Ashes (69 page)

But the public offering was only 65 percent subscribed, partly because Gallaher’s fortunes had ebbed. As recently as 1964, it had held 37 percent of the market, but in the interim it had paid for its slow entry into both filter and coupon brands, the latter becoming the promotional rage with the demise of cigarette ads on British TV in the early ’Sixties. To compensate, Gallaher had bought up a small British firm that specialized in coupon brands—Julius Wix & Son—from American Tobacco for just under 13 percent of Gallaher’s common shares. If American, which was not allowed to peddle its U.S. brands in Great Britain under the terms of the original BAT charter, had wanted to make a serious play for position in the international market, here was an opportune moment to gain virtual control of the second ranking British cigarette maker. But American Tobacco, apparently consumed by its travails in the U.S. market, did not enter the Gallaher picture—quite yet. Instead, Philip Morris now inspected the situation closely and liked what it saw.

True, Gallaher was in a marketing slump, but the company was well regarded as a quality manufacturer, and its leading seller, Benson & Hedges, had a name of great value to Philip Morris, off and running now with its own 100-millimeter version in the U.S. market; Gallaher’s lower-yielding Silk Cuts brand was also showing signs of life. Gallaher, moreover, would give Philip Morris a solid base for invading the Commonwealth and European markets with strong Virginia-leaf brands as well as a far more powerful marketing vehicle in Britain for Marlboro and its other U.S. brands. Gallaher profits ran to about $19 million in 1967, roughly one-third of the Philip Morris consolidated net, so the acquisition would represent a very large but not indigestible bite and one that, unlike most of its other foreign investments, would begin to earn back a goodly return from the first. In a late May 1968 memorandum from Philip Morris International in which Hugh Cullman, his legal counselor John Murphy, and his quick-witted young European ace Ronnie Thomson concurred, the company’s executive committee was urged to appropriate the funds necessary to buy up control of Gallaher—in the $100 to $125 million range—at a tender price of twenty-five shillings a share, 25 percent above what the unsuccessful Imperial offering price had been. For Philip Morris, the memo said, such an acquisition would represent “a major step to becoming a significant force in the world tobacco trade,” but the Gallaher management, of course, would have to be replaced with fresh blood invigorated by the new U.S. owners’ marketing flair.

There was one unsettling aspect, however, to any move Philip Morris would make now in London. Unless the company went in after first buying out American Tobacco’s 13 percent interest, Murphy pointed out, Philip Morris could find itself with a big minority position but no working control of Gallaher. On the other hand, to buy out American Tobacco at whatever price it took before tendering for the rest of Gallaher’s shares in London would have meant skirting or directly violating a recently enacted provision of the rules of The City, Britain’s financial community. More a club whose members agree voluntarily to abide by their own rules than an industry under government regulation like the U.S. securities business, The City had only a few months earlier issued a little green booklet containing its new “Code on Take-Overs and Mergers,” a key tenet of which frowned on tender offers for less than all the stock outstanding. To prevent loss of public confidence and any suspicion of manipulation by management insiders, “all shares of a class of an offeree company shall be treated equally”—meaning tendered for at the same price. Murphy’s strategy of negotiating first and separately with American Tobacco and then tendering in London at the twenty-five-shilling price, surely lower than American would be paid, would likely be perceived as conflicting with The City rule. But Murphy, his Hibernian soul awakened with a bit of up-the-English-establishment zeal, was prepared to play hardball. He scrawled on the
front of his copy of the green booklet, “What authority does this have? How is it enforced? What is the penalty for violation?”

Philip Morris’s chairman, though, was not eager to play Buck Duke reincarnated. Murphy was doubtless correct—it would have been far better to take American Tobacco out of the picture—but Philip Morris’s chief London financial advisors, the merchant banking house of S. G. Warburg & Company, told Joseph Cullman that The City would turn its back on Philip Morris if it offered a premium for the American Tobacco shares and less to Gallaher’s U.K. shareholders. Sir Siegmund Warburg had just been knighted and was not about to counsel underhandedness by a foreign investor, and most especially not by an American company. “Warburg was the establishment,” Murphy recounted, “and Joe Cullman felt we had to be guided by their strong advice.”

And so Philip Morris hewed to the line. Its management team, headed by the two Cullmans, arrived in Britain toward the end of June, dutifully apprised The City’s officials of the Company’s planned tender bid for Gallaher, and asked for a meeting with the British cigarette maker’s management to assure them that if the takeover bid succeeded, the New York company would work earnestly to expand their sales horizons and guarantee their tenures of employment and their pensions. But the Philip Morris delegation was welcomed icily. Gallaher’s officers sat up on a dais, and, as Murphy remembered the session, “their managing director, Mark Norman, looked down his nose at Joe.” The meeting did not last beyond half an hour; afterward, Gallaher announced that it would urge its shareholders not to accept the Philip Morris offer.

While the Cullmans and company contemplated their next move, American Tobacco roused itself. If taking over Gallaher was attractive to Philip Morris—which had swept past AT’s Pall Mall Gold 100s with its newly minted Benson & Hedges brand, was beating it badly in the women’s brands niche with Virginia Slims, and was posting global cigarette sales just a bit behind American Tobacco’s now—then it had to be good business for American Tobacco to get into the act, especially since it already had a goodly stake in the British company.

An American Tobacco team headed by hard-liner Robert Heimann, executive vice president and heir apparent to Barney Walker’s throne, arrived in London on a Sunday while Philip Morris’s tender was still on the table and The City was waiting to see if it would sweeten its offer. Heimann’s team met all that sabbath with the same financial team that had brokered Imperial’s initial offering of its Gallaher shares—Morgan, Grenfell, headed by Viscount Harcourt, an Eton and Oxford man, and Cazenove & Company, under senior partner Sir Anthony Hornby, of Winchester and the Grenadier Guards, the ultimate in City suzerainty. The Morgan, Grenfell-Cazenove team had lost a decade earlier to the house of Warburg in a battle for ownership of British Tube, the big aluminum outfit; they did not intend to lose again. They started
with one big advantage in that they knew precisely who the buyers had been of the Gallaher shares Imperial had offered a few months earlier—mostly institutions that liked the low price and the idea of holding a prudent speculation on a Gallaher turnaround. After Heimann had assured Gallaher management that it would be infinitely better off under American Tobacco, which would keep its hands off the British operation, than Philip Morris, it was no trick at all for the brokerage team to carry out a lightning strike the next morning, privately buying up 12 million shares within a few hours at an average price of thirty-five shillings, or 40 percent higher than the Philip Morris tender. The strike gave American some 28 percent of Gallaher’s shares; as Heimann announced, “We are here … to preserve, protect, and defend a fine investment,” and that his company was ready to buy at least half—not all, as requested by The City’s new code—of other holders’ shares at the same thirty-five-shilling price it had paid on average that morning, thereby obtaining outright control. It was a grievous breach of The City’s code on takeovers, but despite much clucking in the press and among London’s more ethical tycoons about the wickedness involved, the irregular deal was not undone.

“Philip Morris played by the rules—and it lost,” Ronnie Thomson said with some disgust. The eagerly sought prize would now be prohibitively expensive for Joe Cullman and his colleagues to pursue, and so instead they turned, in consolation, to London’s far smaller Godfrey Phillips company, which it won with a preemptive bid. The acquisition substantially bolstered the U.S. company’s position in Australia, where Phillips had a strong Virginia-leaf brand, and gave it a foothold in the tumultuous market in India. But its gentlemanly conduct in seeking Gallaher would prove costly. In time, Gallaher surpassed Imperial as the top cigarette seller in the nation; its Benson & Hedges and Silk Cuts would become the leading brands in their categories; and in Great Britain, whence Philip Morris had sprung, that company would not play a serious role in the cigarette business—true in few other industrialized nations by the closing years of the twentieth century.

Stroking the Sow’s Ear

FOR
twenty years medical science had been building the case against smoking by small, incremental steps, which in the aggregate formed a judgment beyond reasonable doubt to most disinterested investigators. But the tobacco industry, its survival at stake, fought tirelessly to minimize the charges and insisted that unless and until living creatures were shown to contract cancer of the lung by the inhalation of fresh whole smoke under laboratory conditions, the case against cigarettes remained unproven. Thus, it was front-page news when
The New York Times
, on February 6, 1970, reported an alleged breakthrough that panicked tobacco apologists: “12 Dogs Develop Lung Cancer in Group of 86 Taught to Smoke.”

It had been difficult to find an animal that could serve as an anatomically satisfactory stand-in for humans. The animals closest to man in their breathing apparatus were the horse, the pig, and the simian family, but given the un-wieldiness of handling any of these because of their size and cancer’s long incubation period, working with them for smoking experiments would have proven prohibitively time-consuming and expensive. Suitably small animals, like rodents and dogs, on the other hand, came with built-in differences that made their usefulness problematic. Chief among these were nasal passages far more intricately developed than those in humans; they were able, especially under stress, to trap and absorb a large portion of any inhaled life-threatening substances—like tobacco smoke. And when force-fed smoke, they often exhibited avoidance reactions: rabbits held their breath, hamsters treated in groups buried their snouts in one another’s fur, and rodents altered their
breathing to slower, smaller, and shallower intakes of smoke that tended to penetrate no deeper than their throats, so that only minute amounts ever reached their lungs. And if stronger doses of smoke were administered to overcome these reflexive safeguards, the animals’ far lower tolerance for carbon monoxide than the human system led to death from asphyxiation, bronchial infection, and other causes well before cancers had time to form.

Among the clinicians with firsthand knowledge of the ravaging effects of smoking was New York thoracic surgeon William G. Cahan at Memorial Sloan-Kettering, who had encouraged Ernst Wynder’s work on smoking while a resident researcher at the institute and was well aware of Oscar Auerbach’s studies of cell changes in the lungs of smokers observed at autopsy. As a sideline of his surgical practice, Cahan began to track the deterioration in the structure of cells taken from the lungs of living human smokers—definitive confirmation, he believed, of the progressively destructive process Auerbach had persuasively hypothesized. Instead of lung tissue itself, too fragile for repeated biopsy, Cahan used sputum taken from his subjects by catheter, but this proved time-consuming, costly, and painful. It would be more practical to try to train dogs to smoke, Cahan decided, and set to work with beagles, tractable by size and disposition and possessing a bronchial system close enough to man’s. His experiments, intended to bypass the dogs’ nasal filtering system, involved tracheostomy, incisions in the animals’ throats through which smoke could be pumped into their bronchi by a mechanical apparatus—a form of forced inhalation closely resembling human smoking. But developing the technique took far more time, space, and money than Dr. Cahan and the Sloan-Kettering administrators had bargained for, and so the surgeon turned to Auerbach, the bustling little pathologist at the VA hospital in nearby East Orange, whose decade-long study of lung cells had been perhaps the single most persuasive corroboration of the population studies on the health risk from smoking.

Auerbach—and his chief funding collaborator at the American Cancer Society, Cuyler Hammond—knew full well the graphic value of successfully inducing lung cancer in animals with smoking as the only variable factor: in the public’s mind, the case would be clinched against tobacco, its manufacturers’ bitter protests notwithstanding. Auerbach enlisted David Kirman, a mechanically gifted researcher on the VA staff and experienced at working with animals, and after obtaining a $97,000 grant from the Veterans Administration, then anxious to broaden its reputation for research capability at its hospitals, they began refining Cahan’s earlier efforts. Kirman developed a nylon-Teflon collar that fit over the surgically cut hole in the beagle’s neck and could not be chewed off. A small socket on the collar over the incision allowed a hose to be attached through which the smoke could be force-fed or, after the dog grew accustomed to the smoke, drawn in voluntarily by the animal. In a preliminary
fourteen-month study of twenty beagles, with half of them taught to smoke and the rest kept as unexposed controls, the animals displayed many of the symptoms of novice human smokers—nausea, vomiting, and apparent dizziness—until they became habituated, and then it was hard to keep them away from the stuff. Their tails would begin wagging as they were brought to the smoking apparatus, and some were inclined to bite a handler who distracted them during the process. Half of the smokers died prematurely in the course of the experiment, mostly from pulmonary embolisms, but autopsy of the whole smoking cohort disclosed early signs of excessive and abnormal cell growth in the bronchial system, a bursting or fibrous thickening of the tiny air sacs in the lungs of many of the animals, and a 50 percent enlargement of their hearts compared to those of the nonsmokers, who did not exhibit the other symptoms, either.