If you wait long enough, things that go out of style may end up coming back. Look at the Volkswagen Beetle, which recently charmed its way back into Americans’ hearts. Or look at leveraged buyouts. They had been all the rage in the 1980s but fell victim to hubris and bad judgment. By the early 1990s, LBOs seemed to be well and truly dead. Now, it appears, a new wave of LBOs may be upon us.

Their message: If companies can’t figure out how to get there from here in the world of e-commerce, they’d be more than happy to help.

CONTEXT: After the RJR debacle in the late 1980s, leveraged buyouts seemed to drop out of sight. Certainly, I can’t remember the last time I saw Henry Kravis on a magazine cover. But the LBO business is actually growing quite nicely, right?

DON GOGEL: For the past several years, $40 billion or more has been raised and added to the pool in private-equity funds. Investment levels have increased as the boundaries of the LBO have been expanded. Traditional LBOs, a management buyout of a division of a company, have remained a healthy business. But you’re also seeing LBO firms take minority stakes. For instance, Forstmann Little recently invested $1 billion in a telecommunications company, McLeodUSA.

JOE RICE: The LBO market is deeper and wider than in the past. We probably won’t be doing $25 billion transactions, but $2 billion to $3 billion transactions are commonplace. The average transaction price keeps increasing.

GOGEL: Information technology is also becoming a bigger factor in our investments.

CONTEXT: How?

JIM ROGERS: Every company is having to face the fact that the Internet is changing the world radically. That change can be a threat or an opportunity but, no matter what kind of company you’re in, you’re not going to be allowed to ignore the Internet. So, as we at CD&R try to transform our companies into much better ones, we’re having to deal with the influx of radical changes brought on by information technology.

RICE: Private-equity firms have generally shied away from putting technology in the mix of things they consider when buying companies or of tools they use to change them. But we believe that e-commerce is a huge event. We are doing everything we know how to do to drive the organizations we’re associated with up the technology curve to make sure they’re plunked right in the middle of the Internet.

CONTEXT: Presumably, you’re looking at technology from both sides—trying to use it to generate both efficiencies and new revenue opportunities.

ROGERS: Alliant Food Services is a good example. It’s a broad-line food distributor whose customers range from institutions, such as hotels and hospitals, to independents, such as owners of local restaurants. The food-distribution industry is very sleepy. There’s paper, there are faxes, there are lots of people, there are telephones, there are legacy information systems that don’t hook up to each other. The industry acts as though information technology hadn’t progressed much over the past decade. But the Internet gives us a chance to leapfrog the old technology and distribute information in ways that will provide enormous benefits in cost, quality, and speed.

We did see a potential threat. We worried that a start-up Internet company could come along and disintermediate us, by linking our suppliers directly to our customers. We decided we had to do something before someone else could.

We also asked ourselves: How can we use technology to grow faster? Even at $6 billion a year in revenue, Alliant accounts for only 3% of the distribution market, so there’s plenty of room for growth.

CONTEXT: The search for efficiencies eventually led Alliant to an Internet opportunity that you think has a lot of potential, right?

ROGERS: Alliant’s systems for taking orders used to be costly. It bought personal computers for customers, so they could order electronically. Alliant maintained the computers and paid the telecommunications costs. With the Internet we not only could cut out a lot of those costs but also found ways to enhance our interactions with our institutional customers. We’ve already seen the benefits of those enhancements. They helped us get a multiyear contract with our largest customer, totaling about $500 million a year, because we hooked into its Internet strategy. We are clearly at an advantage to anybody else in the food-distribution business.

Once we had a way of linking better with our institutional customers, we began to think about other links we could establish. We realized we could establish on-line communities. The first one we started on is TheSauce.com, which is designed to bring several solutions to the many business problems facing this community of 200,000 to 250,000 restaurant owners. The idea is that they can get together on-line and deal with common opportunities and problems. We’re also starting two other communities. The first is Fly in the Soup, which is for the employees in the restaurants. The other is Eating Out Loud, which is for the patrons.

Who knows what will come out of these? But if people in these communities find interesting things to say to each other, the sites will be attractive, and we’ll find ways to generate revenue.

This is all risk-free for Alliant. It already did all the work to link with its institutional customers. It’s just transferring that asset to TheSauce, which is being set up as a separate business. In return for the asset, Alliant will wind up with on the order of 20% of TheSauce.

I think the success of a good Internet company ultimately comes down to: Are you providing a solution to a real problem? We strongly believe that TheSauce will address the core issues of the average restaurant owner: how to stay in business and still have some kind of a life.

GOGEL: We think there are lots of opportunities to do similar deals: taking an existing business, pulling out some interesting assets, and building a new business around them.

ROGERS: I view this experiment with Alliant—and I call it an experiment only because it’s the first one out of the box—as another core, transformational competency for CD&R.

We already have great skills in using capital, each of the partners brings his experience as a user of best practices, we have excellent business acumen, and we have a wealth of contacts among senior executives and board members. We have a partnership with Diamond Technology Partners [the management-consulting firm that publishes this magazine], which brings expertise in devising digital strategies and which has great technical competence in terms of using the Internet. If CD&R and Diamond can link up with, say, a Fortune 1000 company that brings brand, brings customer-fulfillment capabilities, and brings industry know-how, we’ve got a winning combination.

CONTEXT: Where else might you apply these ideas?

ROGERS: We will clearly apply them in the North American/Allied merger. [North American Van Lines, a CD&R company, recently agreed to merge with Allied, creating a company with more than $2 billion in revenue.] Just as with Alliant, we’ll definitely use the Internet to improve costs, quality, and speed. We’ve also spotted a couple of killer apps that we believe will require a spinout.

CONTEXT: Why do you have to do a spinout? Why not develop the new business within the existing one?

ROGERS: First, the earnings hit is just too great. You have to invest a lot, and the earnings dilution is hard for a company that plans to go public to absorb. Second, you don’t have the skill set within those core businesses to develop an e-business fast enough. Third, you need to create compensation systems that are high-risk/high-reward, and those systems don’t exist in the core businesses.

So, at North American/Allied, we’ll spin out the new businesses. Alliant is going to spin them out. We’re looking at doing the same at Kinko’s. Basically, every piece of our portfolio will have some sort of an opportunity or major threat that will require us to deal with the issue.

RICE: I happened to be in the offices of a well-known venture-capital firm earlier this week. The partners there described to me a prospective Internet joint venture with a major off-line retailer that, notwithstanding a great deal of effort, had been abandoned. They feel that their prospective partner just wasn’t willing to bite the bullet and let the new business compete with the old one.

We believe that to make one of these new ventures really successful, the off-line company can’t control the on-line company. You have to create a completely different company. You have to have a compensation system that will permit the people who build the on-line business to have the kinds of incentives that exist in the market today. And you have to be prepared to accept that you may be cannibalizing your business.

GOGEL: Our investment thesis always rests on some type of business transformation. Before the Internet, there were plenty of opportunities based on what you’d consider normal improvements in business systems—changing product development or moving into a new geography.

The Internet doesn’t repeal the need for strategic thinking about each element of a business.

Our standard techniques for transformation are still robust. But the Internet accelerates change for two reasons. One is speed of execution. The question used to be: Are we going to change prices this quarter? Now, you may change your prices twice a day. You can do it every six seconds, if you want.

The second reason is that the Internet removes physical limitations. It used to be that you could think about breaking out of your business model but couldn’t actually do it, because of those limitations. Now, you can rethink your distribution channels, your alliances, your whole way of doing business.

Jim and I are looking at one huge business that everybody else thinks is dead in the water. Two years ago, we would have dismissed this idea. We wouldn’t have spent a minute on it. Now, we can’t wait for the management team to get back to us and invite us out to see what we can do.

In the absence of the Internet, this dinosaur would clearly become extinct. Now, it may become extinct anyway. But there may be a chance to do something that will bear no resemblance to the way the company is operated today.

CONTEXT: Can you say what industry it is in?

GOGEL: It’s another distribution business, with billions of dollars of assets. It’s struggling to become more efficient, but its core customers are themselves in decline. The company’s concept of itself is that it exists solely to serve this customer base, so it’s dying. We’re saying, Gee, maybe there are different customer bases out there, and you can get to them because the Web lets you reutilize, in a most exciting way, assets that would otherwise be written off.

I can’t tell you there’s an answer to this one. But that’s the process we now use to look at almost everything. Undoubtedly, the process will let us come up with better solutions.

ROGERS: An enormous advantage for private equity is that we can move fast. It took us just two or three months to decide as a partnership to go after a radical change in Alliant, to use the Internet, and to spin out a business. We’ll do the same thing with other businesses if a corporate CEO has a really dicey game in front of him as he thinks about cannibalizing his own business.

RICE: There’s your model. We did TheSauce in record time. Jim accepted the risk that he’d end up cannibalizing the existing distribution business. He never even blinked when someone said “cannibalization.” He said, If we don’t do it, someone else will.

CONTEXT: Do you think that a lot of the opportunities you see have developed because their executives have been too slow to see the opportunities or threats?

GOGEL: I think every executive recognizes that something is going on and that something must done. But it’s tough for existing companies to go ahead and cannibalize their businesses and spin out new ones, while hiring a bunch of guys who live in lofts and have more earrings than I have fingers. It breaks every rule. It’s very, very hard to do.

That’s why I think the companies with the best chance of success are being done outside existing businesses. Inside, there’s just too much inertia, too many problems, too much not-invented-here, too much fear of cannibalization, too much jealousy.

There’s more of a cultural barrier to change than an intellectual one. But even if executives understand they have to do something, unless they do it outside their walls, most are going to have the odds stacked against them.

CONTEXT: Do some executives at least play down the Internet as a force because they think the stock-market valuations of some of the start-ups are ridiculously high and will go away?

GOGEL: I certainly have heard executives say: These valuations can’t be sustained; eventually, these guys are going to have to make money; gravity is going to take over. All of which may be true. The capital markets probably can’t continue to act as they have, providing these lofty valuations. But that doesn’t mean you should assume that these start-ups and their new business models will be anything less than very successful.

CONTEXT: Would you ever consider doing the sort of hostile LBO that was so thoroughly in vogue in the 1980s?

RICE: The idea of doing an unfriendly, leveraged transaction is just a flawed concept. One thing you need to do when you buy a business is to get to understand the business. The only way you can do that is to have access to the incumbent management.

CONTEXT: As you’ve started using the Internet to transform your businesses, have there been any “ahas”—things that turned out to be easier or harder than you expected?

GOGEL: Everything is hard. Actually, raising money and getting quick valuations in an IPO are easy, but everything other than that is hard. Customer service is hard. Fulfillment is hard. Keeping customers is hard. All of that is as hard as it’s ever been and maybe even harder because it’s happening faster.

I think the big gestalt here is that much more is possible, so you can be more creative. You can think of new ideas. You can think big. But once you’ve thought of the idea, the execution is still a bitch. It’s an absolute bitch.

I think you’re going to see the difficulties play out for years. Great ideas will stumble and bumble along because the execution is so hard.

ROGERS: I guess the biggest “aha” to me is that no matter how fast you move you’re in slow motion relative to the change of the external environment. I pick up the paper every day, and I see another potential competitor for TheSauce. We may think we’re moving fast, but we’re not moving fast enough.

As a result, we need to understand the external landscape on a continuous basis and not march down a path on assumptions that are even 30 days old. They have to be refreshed all the time.

CONTEXT: How have you tried to educate yourselves about the Internet?

GOGEL: How about this as the right answer? We read Context.

CONTEXT: I like that answer.

GOGEL: We do. We read Context. We read Wired. We read a whole bunch of things that we never would have thought we would have to read before. We spend time talking to guys who are 23 years old. We used to just interview them for analyst positions here, but now we talk to them about their business ideas and try to learn from them. But it’s hard. You get old mighty fast in this business.

CONTEXT: As you look for opportunities, are there particular industries where you think executives should be looking over their shoulders? In other words, where do you look for companies that you might acquire, so you can pursue opportunities that they can’t seem to pursue on their own?

ROGERS: There are winners and laggards in every industry. I would say the most vulnerable would be those industries that have faced the fewest challenges because of the external environment, whether those challenges came from global overcapacity or the pace of technological change in the past. A lot of distribution and manufacturing businesses might fit in that category. The least vulnerable would be those businesses that have been living in a world where pace and competition have been much greater. For instance, high-tech companies. They’ve been dealing with fierce global competition for a long time.

GOGEL: It may be more useful to look at opportunities by function, rather than by industry. With certain functions, which are performed in a lot of different industries, it’s clear that unless you’re Internet-savvy you’re just not going to be competitive.

Take customer service. If you’re Alliant, you have to know what your restaurant-owner customer has ordered in the past. You have to be able to remind that person that a year ago on Mother’s Day, he served strawberry shortcake and sold out, making umpty-ump dollars. You have to be able to say, You forgot to order strawberries this year. If you’re not saying that kind of thing, based on historical patterns, your customer is going to go to someone who does.

Customer-service data are going to be absolutely key in any business in which customer intimacy matters, which is basically every business.

To put a sort of wrapper around this, I’d say I think that private-equity firms like us, particularly us, really should be the vanguard, pushing change over the next 10 years.

Why? What do we really apply to the problem here? First, we have a different source of capital. That is, we’re private. We don’t need quarterly returns. We don’t need to show earnings. We can make the decision to aggressively invest ahead of a company’s earning power and lose money for a while. We can take risks.

Second, we provide a different set of incentives for people. Now, what we’re doing is very different from what we did with LBOs—when we gave management 15% of the upside, had them invest with their own money, and gave them a bunch of options. But we’re doing what’s appropriate for the times, and we’ll be able to attract the best and brightest.

Third, we start with a clean sheet of paper. We’re not captives of the old way of doing business. When we see that the old way generated only 2% growth and not enough profitability, we know that we have to change.

With the Internet, we can accelerate the pace of change.