Barbarians at the Gate

by Bryan Burrough

  “What are the practical realities of operating under an LBO structure?” Johnson asked.

  Henderson posed his answers as questions. First, could you raise the kind of money it would take to buy RJR Nabisco? At a glance, it was clear it would be the largest LBO, the largest takeover, ever attempted. How many businesses would have to be sold to pay down debt? Could they keep the Atlanta headquarters, or would they be forced to move back to Winston-Salem to save money? Could they afford to bring out Premier?

  If they were at all interested in an LBO, Henderson went on, they would need help. He mentioned some Wall Street lawyers he knew. “Okay,” Johnson said, “maybe we’d better seriously see what Shearson’s got for us, too.”

  It’ll never happen, Horrigan thought as they headed for the links. He had seen too many of Johnson’s “ideas of the week” come and go to generate any real enthusiasm for an LBO. Henderson, too, doubted Johnson was serious. He thought an LBO demanded too much attention to detail for Johnson’s tastes.

  For his part, Johnson remained ambivalent. Life was good, as the past two weeks had reminded him. A company home on a great golf course. A raft of adoring VIP friends. A jet awaiting his next command. Yet the siren song of action beckoned. “Sure I could have taken the idea of the LBO, stuck it in my lower left-hand drawer, and gone on my merry way,” he would later say. “But I would have known it was there.” The itch was there, and Johnson couldn’t help but scratch it.

  A few days later Johnson called Andy Sage at his Wyoming ranch and asked him to stop by Castle Pines on his way east. As they strolled the fairway one afternoon, Johnson brought up his latest idea. “Everything we thought we’d try, nothing happened, nothing happened, nothing happened; the stock just sits there,” he said. “Andy, I’m trying to figure out an alternative structure that will serve everybody’s interests.”

  Sage wasn’t at all sure an LBO was the solution to RJR Nabisco’s problems, and as a general matter, he didn’t enjoy seeing America’s great companies replace good, old-fashioned shareholder equity with bank debt. One of American industry’s great strengths, Sage and men of his generation felt, was its capital base. At a time when the country faced stiff competition in world markets, he hated to watch that advantage being squandered. Business, he felt, should be creating jobs and new products, things it couldn’t do if it was focused on paying back debt. More to the point, he wasn’t at all certain Johnson’s free-spending style could be reconciled with the rigorous demands and cost cuts demanded by high levels of debt. Still, he kept his doubts to himself.

  Johnson told Sage to call Shearson and light a fire under Project Stretch. Hill’s team had already begun the arduous task of cataloging the values of RJR Nabisco’s businesses; Johnson wanted the homework done by mid-September so they could quickly begin looking at the possibility of an LBO. Sage called Benevento and directed him to pull out the old LBO studies again. Still, Sage, like Horrigan, tried not to dwell on their new tack. Johnson’s mind, like the New York weather, was susceptible to change at the slightest notice.

  Later that week, Johnson called Charlie Hugel, mentioning the Shearson study almost offhandedly. “Incidentally,” Johnson said, “we’re having them take a look at whether there’s any merit in an LBO. I don’t know how much an LBO is worth, but they’re doing it. What do you think?”

  Frankly, Hugel said, not much. At sixty, Hugel was three years older than Johnson, but a world apart in outlook. Hugel was old line, a man who had risen through the ranks at AT&T before leaving five years earlier to head Combustion Engineering. He was a believer in business fundamentals, and didn’t put much stead in faddish Wall Street inventions such as the LBO. At Combustion, Hugel was a hands-on executive working hard to open new markets abroad. Set down in Moscow’s notoriously spartan hotels, he mopped the floors himself. It amused him when Johnson, traveling to Moscow for trade ceremonies, tried to order a suite.

  “Ross, why do you want to do that?” he asked. “You haven’t really completed everything you’ve been working on. Why would you want to abandon that now?”

  “Well, I find it hard to be enthusiastic” about running the company, Johnson admitted. He reiterated everything he’d tried to improve the stock. Hugel himself had confronted far tougher problems than a low stock price, and to him, proposing an LBO was like shooting someone to rid them of a hangnail.

  “Ross,” he said, deciding to hit Johnson where he lived, “you might have to cut back on the jets, the headquarters, the whole way you live. Do you really want to do that?” They spoke a while longer, and by the time he hung up, Hugel thought he had talked Johnson out of pursuing an LBO.

  When Johnson returned to Atlanta after Labor Day, it was only for a day. The next morning he headed to London, where he and John Martin had a whirlwind schedule set up: a General Electric board meeting, a powwow with the international tobacco people, and a tête-à-tête with David Montagu of Rothmans International, a British tobacco company interested in buying pieces of international tobacco. On the flight over, Johnson mentioned the LBO idea to Martin. He wanted to get some sleep, he said, but they could talk about it in the morning.

  They never got the chance. As Johnson dozed over the North Atlantic a few minutes before two o’clock Wednesday morning, September 7, a policeman in suburban Westchester County, New York, pulled off the Saw Mill River Parkway. He had spotted a 1987 Nissan, crushed and overturned, about 300 feet from the road. The car had apparently hit a traffic sign before skidding out of control and flipping. Nearby, authorities found the bleeding body of Johnson’s twenty-six-year-old son, Bruce. Unconscious, he was rushed to a nearby hospital.

  Johnson had just checked into London’s Inn on the Park when Laurie called with the news. It wasn’t clear whether Bruce was dead or alive. Johnson and Martin hopped on the first Concorde back. On the flight, Johnson lit up a Premier in the No Smoking section. “It’ll be interesting to see if anyone notices,” he told Martin. By the time Johnson arrived at the Westchester County hospital, his son was in a coma. Doctors weren’t sure when, if ever, he would regain consciousness. The Johnsons stayed at Frank and Kathie Lee Gifford’s home in Connecticut. Gifford was a rock: his son Kyle had once suffered severe head injuries in an accident.

  On Thursday, Jim Robinson visited. The two friends took a long walk around the hospital grounds. “Rawss, all you can do is make sure you’re getting the best medical attention you can get,” Robinson said. “Other than that, and hoping, there’s not a lot of value you can add.”

  “I know you’ve been through a similar situation,” Johnson said.

  “You just have to keep your focus and perspective,” Robinson advised, “and go on about your life.”

  On Friday, Johnson stared at his open briefcase. Mail was piling up at the office. He knew he had to get himself together, get back on track. He decided to take Robinson’s advice and plunge back into work. Monday morning he visited Bruce’s hospital room, then drove to Manhattan, where he met with Sage and Benevento.

  Walking into his office, Johnson brought out a sharp pencil, a calculator, and an accounting spreadsheet, the kind he learned to use at General Electric thirty-five years before. All around him, on the floor and the furniture, he piled reports from his planning department, blue-book statements, studies from investment bankers, and computer printouts. He wanted to see for himself if an LBO made sense, for he no longer trusted investment bankers or computers to give him the answer. As Benevento looked on in wonder, Johnson hunched over the spreadsheet and went to work. “Nobody,” he said, “is better at this than me.”

  Benevento knew what Johnson must be going through; he had three sons of his own. For the first time, Johnson submerged himself in the possibilities and challenges of an LBO. For five hours he and Benevento waded through the numbers, dissecting cash flows, market shares, profit, and sales projections for every RJR Nabisco business. From time to time, Johnson stood and called Atlanta or Winston-Salem to get up-to-date figures.

  Johnso
n wanted to value each business, determine what it might sell for. That, plus tobacco’s future cash flows, would go a long way toward determining what price, if any, he could offer in an LBO. By Monday evening he had a feeling: Not only could he raise enough to try a buyout, but he was ready to give it a serious look. Walking to his apartment that evening, Johnson thanked God for giving him something to take his mind off his son.

  The next morning a Shearson contingent led by Peter Cohen and Tom Hill arrived at Nine West. The two Shearson executives handed Johnson some how-to materials to scan while thinking about a buyout, and Johnson asked them to study all aspects of an LBO. Johnson was well aware the project they were contemplating could lead to an LBO three times larger than any seen before.

  “Peter, is this something you think is doable and viable?” Johnson asked Cohen. “Because you’re talking about a pissload of money here. Just a pissload of money.”

  “Yeah,” Cohen said confidently. “We can do it.”

  The next day Johnson returned to his son’s hospital room. Earlier he had canceled a meeting of the executive committee scheduled for Thursday, citing Bruce’s accident. Besides, he told Hugel, there really wasn’t anything pressing to discuss.

  Jeff Beck was perplexed. He couldn’t reach Johnson.* Every time he tried, Jim Welch called back. The two men had a running joke. Welch, a courtly Nabisco veteran, had politely objected to Beck’s calling him “Jimmy,” saying he was too old for that. Beck, of course, ignored him. So Welch had taken to calling Beck “Jeffy.”

  The last time Welch returned one of his calls, Beck had subtly probed for signs of a shift in Johnson’s outlook.

  “You know, Jimmy, we have all the money you need if you want to do this deal.” Beck didn’t have to mention the word buyout; he had been pushing the idea so long Welch understood what he meant.

  “I know that, Jeffy.”

  “Well, you know, shit happens. And I find it peculiar that you’re answering all of Ross’s phone calls.”

  “We don’t know anything,” Welch said. “Nothing’s going on.”

  Something was going on; Beck could feel it. It crossed his mind that Johnson might be attempting an LBO, but he dismissed the notion. Drexel had gotten nowhere recommending that approach for two years now. Still, something had changed. Maybe they’re preparing some kind of restructuring, Beck thought.

  On September 12, he took his suspicions to a man he had courted just as fervently as Johnson: Henry Kravis. Beck had helped Kravis with a number of deals, including his largest, Beatrice. When he arrived at Kohlberg Kravis’s offices, ironically just six floors below RJR’s New York offices, Beck got right to the point.

  “I think it’s time to do something about RJR,” Beck said.

  “Why is that?” Kravis wondered.

  “For some reason Johnson’s stopped taking my calls. He’s having Jim Welch call me back. We ought to just have a meeting and make an offer.”

  “You’re probably right,” Kravis said. “Get me the numbers and set something up.”

  Beck agreed. “There’s a problem, though. You won’t give Ross what he wants.”

  “What’s that?”

  Beck had talked with Johnson’s people long enough to know their concerns about LBOs. Johnson simply wasn’t interested in working for someone else. “For one thing,” he told Kravis, “they’ll want control of the board.”

  “That’s true, we won’t give him that,” Kravis said. “That’s a problem.”

  The two men talked a while but came to no resolution. Nothing could be done, it was clear, without speaking to Johnson first. “Try to set something up,” Kravis said, “and we’ll discuss it at a meeting.”

  Later, Beck got back to Welch about setting up a conference between Johnson and Kravis. Welch was noncommittal, but suggested they might get together in the last week of October or the first week of November. The Mad Dog didn’t know it, of course, but by then his request would long be moot.

  Chapter

  5

  Outside the Metropolitan Museum that blustery September evening, there was all the anticipation of a Hollywood opening. Through a phalanx of photographers and reporters the cream of New York society hustled inside, the ladies clutching their hair against the wind, the men dapper in tuxedos, flashing invitations by one account “as stiff as Sheetrock.” In went the Saul Steinbergs, Carol and Punch Sulzberger of The New York Times, Jonathon and Laura Tisch, and a hundred others.

  Few even in this social stratum had the connections to throw a private party at the museum, but greeting their guests inside the wrought-iron gates of its Medieval Court was a couple who had muscled their way in with a $10 million donation: Henry Kravis and his stunning, fashion-designer wife, Carolyne Roehm. No more than five-foot-six, Kravis wore a tuxedo and a tan. He had a ready smile, rheumy blue eyes, and a voice that held the faint echo of his Oklahoma childhood. But it was Roehm, as always, who attracted attention. Three inches taller than her husband, agonizingly thin, her gleaming dark hair pulled back, she wore a strapless gown of emerald green satin Charmeuse, and a necklace of glistening cabochon emeralds. At social events, she clung to her husband’s arm.

  After champagne and cocktails the guests gathered around a small stage and, as the lights went down, were bathed in the dulcet strains of the teenage violinist Midori. Kravis and Roehm, who took seats in the front row at the far right, had invited the young Japanese to play after enjoying a private recital in their palatial Park Avenue apartment. Roehm sat rapt, her hands clasped to her chest, Kravis silent beside her.

  Afterward the Kravises guided their guests past foliage-crowned trellises into the specially decorated Blumenthal Patio, its stone balconies draped with giant tapestries, lush green vines twisting through its columns and balustrades. Atop the dining tables, which were covered with hunt tapestries trimmed with heavy bullion fringe, were centerpieces of miniature fruits in gilded baskets, each surrounded by gilt candlesticks with green shades. The wines, a Louis Latour Mersault 1985 and a Château Beychevelle 1979, accompanied a dinner most notable for the inclusion of rabbit pie, which some shunted aside with a round of nervous jokes. “Who maimed Roger Rabbit?” someone quipped. Dessert was a baba au rhum served with great silver bowls piled with a colorful display of miniature fruits and sorbets. The evening was topped off by a special showing of the museum’s new, 160-piece Degas exhibit, which the guests toured thoughtfully.

  “Oh, what is so rare as the perfect party?” wrote the society columnist Suzy days later. “The evening was superb from beginning to end, the one to be measured against by any host and hostess seeking to entertain with wondrous taste and big dollops of flair.”

  The affair was, in fact, an unofficial coronation of sorts for its hosts, Kravis and Roehm, the prince and princess of the newly moneyed set dubbed “Nouvelle Society.” Married just three years, they had rocketed to the fore of Manhattan society, capturing the imagination of social climbers everywhere. Their $5.5 million Park Avenue apartment, laden with Renoirs and French antiques, was practically legend on the charity circuit. Stories of Kravis’s lavish gifts to his wife were told and retold in hand-clapping, cheek-clasping awe.

  Yet for all the attention, Kravis himself remained something of an enigma. Friends inevitably described him as kind, gentle, and upbeat, a caring father and husband who wrote long, ardent love letters—qualities, of course, that never quite came across in his business dealings. Often characterized as even-tempered and controlled, he nevertheless had a mean streak, a tendency to dismiss a competitor like Ted Forstmann as “having an Avis complex,” or to remark cruelly about an overweight associate. There was a steely glint in his eyes that made one want to believe the stories of unbridled greed and ambition. And there was an air—maybe it was his cool, boarding-school reserve—that hinted at something tightly coiled beneath: a sense, however slight, of menace.

  His rise on Wall Street had been swift, even by the standards of the high-flying eighties. Practically unknown just five ye
ars before, Kravis and his secretive firm had ridden Wall Street’s leveraged buyout wave to prominence in the mid-eighties. Years later, the mystery of how Kravis had shunted aside his longtime mentor, Jerome Kohlberg, remained the stuff of drawing-room speculation. If it were ranked as an industrial company, the businesses Kohlberg Kravis controlled, from Duracell batteries to Safeway supermarkets, would place it among the top ten U.S. corporations. Now, with $45 billion in buying power, Kravis was the unquestioned king of Wall Street acquisitors, his war chest greater than the gross national products of Pakistan or Greece, his clout rivaling that of any in financial history.

  No one really knew what made Kravis run. The best guess was it had something to do with his diminutive stature or his father, who had made, lost, and regained a fortune by the time Kravis was born in 1944. Little in Kravis’s early years foretold greatness. He grew up rich in postwar Tulsa, remembers riding his bicycle a lot, loved golf, and wasn’t too keen on classes at Edison Junior High.

  His father, Raymond Kravis, was the son of an English tailor who emigrated to Atlantic City at the turn of the century. After working in a Pennsylvania coal mine, Ray Kravis moved to the Southwest, where he became wealthy in the roaring stock market of the 1920s. He lost everything in the crash of 1929, and, having borrowed heavily on margin, worked for years afterward to pay off his margin calls. After the war, he began a second career as a petroleum engineer, estimating oil reserves for Wall Street firms such as Goldman Sachs and managing to amass a second fortune.

  When Henry was thirteen Ray and Bessie Kravis sent him off to follow his older brother, George, to a boarding school named Eaglebrook in the hills of northwest Massachusetts. Moving on to the Loomis School in Connecticut, “Hank” Kravis was a popular student: vice president of the student council, scrappy captain of the wrestling team, dorm monitor. Teachers remember him as mature, purposeful, controlled.