Barbarians at the Gate

by Bryan Burrough

  By the time they assembled at Johnson’s house, it was past ten o’clock. As Laurie got the group Diet Cokes, Johnson sat at the desk in his study down the hall and dialed Peter Cohen in New York. While the phone rang, he gazed at the celebrity-studded pictures on the study wall.

  To his surprise, Jim Robinson answered the phone. The Robinsons had just slipped into bed at their Manhattan apartment. Johnson realized he had hit the wrong speed-dialing number. “Oh shit, Jimmy. I was trying to reach Peter.”

  What’s wrong, Robinson asked.

  Johnson’s voice was uncharacteristically angry. “These jackasses at Shearson,” he said, “they’re trying to screw us to the wall. They’re just being totally unreasonable. These items they’re changing on us just seem like birdshit to me, and I’m fed up with ’em.”

  Robinson, who hadn’t been following the group’s progress in detail, didn’t understand everything Johnson said. He extricated himself from Johnson and dialed Cohen at his Fifth Avenue apartment. “I don’t know what the hell is going on,” he told Cohen, “but apparently Jim Stern and Tom Hill have managed to piss off The Pope. Could you settle things down?”

  Cohen dreaded calling Johnson. He had hoped Hill and Stern could handle the management agreement themselves. Besides, he was scheduled to get up at the crack of dawn for an interview on “Good Morning America.” Reluctantly, he picked up the phone and reached Atlanta. Can’t we do this another time? Cohen wondered. It’s late.

  “No, this has got to be done now,” Johnson said. “Come on, let’s get this baby done, Peter. From my standpoint, you know, this thing is just ridiculous. It’s just a bunch of birdshit. Peter, either we get this goddamn thing solved tonight, or we pack up. If I have this kind of trouble with you now, what’ll it be like later?”

  Cohen backed off; Johnson sounded upset. We’ll work something out, he said. Cohen hung up and summoned his personal assistant, Andrea Farace, to his apartment. Farace lived just three blocks north and was at Cohen’s door within minutes. He also got Jack Nusbaum on the line. Soon all three men were on the phone with Gar Bason, who had taken a seat in Johnson’s study. “Love the chair,” he told Johnson.

  “If you get this deal,” Johnson said, “I’ll buy you one.”

  On the other end of the line, Cohen found himself in a difficult position. He remained uncomfortable with the sheer size of the cut Johnson was demanding. He knew how much Shearson was giving away, both in terms of control and money. But it was clear some accommodation had to be reached quickly if the deal was to be salvaged. Somehow Johnson had to be placated.

  It was over in less than two hours. Cohen capitulated to virtually every demand Bason put on the table. Typed up by Sage’s secretary that night, the management agreement gave Johnson’s seven-man group 8.5 percent of the equity, complete with a tax-compensated loan from Shearson. If Johnson hit all his “bogeys,” the group’s stake could easily march up to 18.5 percent. The package’s total value could go as high as $2.5 billion in the coming years. Johnson was free to divvy up his share of the pot as he chose; his personal 1 percent share—Horrigan also took 1 percent—could be worth as much as $100 million in five years, according to Steve Goldstone. Johnson also received a veto and control over the board. It was unlike any major LBO agreement ever signed.

  Cohen allowed himself to rest somewhat easy, having wrested from Johnson the understanding that the pact would be renegotiated if the price topped $75 a share, as it almost certainly would. For the moment, though, both sides got what they wanted. Johnson had history’s richest management agreement. Cohen kept the ball rolling and was able to tell his colleagues that nothing was final.

  When Jim Stern learned of Cohen’s compromise, he was incensed. “Fuck it!” he shouted, banging his fist violently onto his desktop. “I’ll do this at seventy-five, but not one penny more. At seventy-five-oh-one, it’s over!”

  At RJR Nabisco headquarters, workers began to notice changes in the air. One day Ed Robinson ordered $40 million immediately deposited into the golden-parachute “rabbi” trusts, prompting curious looks among the financial people. Johnson and the others seemed constantly distracted. Rumors began flying. A couple of secretaries even consulted psychics. “Your job does not look secure,” a seer told one. “I would recommend applying to something more stable, like the government or IBM.”

  The second woman’s psychic was even worse. “I don’t see this as the job for the rest of your life,” the psychic said.

  “What do you see?” she asked.

  The psychic closed her eyes and appeared to concentrate for a long moment. Then she said, “It just kind of goes…poof.”

  Johnson waited nervously Tuesday, checking the stock every hour. The next morning he invited Goldstone, who had returned from New York, to his house for breakfast. The lawyer, growing nervous, still didn’t know whether Johnson would recommend an LBO or simply discuss the possibility. Johnson ran through his speech, adding that he would indeed recommend the LBO. “Just lay it out for them,” Goldstone said. “It’s their choice.”

  After breakfast Johnson went to the office and again checked the stock. Still quiet. He made the final rounds of the inner circle, checking with each man to make sure he remained comfortable with the furies they were about to unleash. Sage, for all the Sturm und Drang of his negotiations with Tom Hill, remained ambivalent; he would support Johnson whatever happened. Ed Robinson was all for the project. “Go for it,” he told Johnson. John Martin was also on board. “Pay your money,” he said smiling, “and take your chances.”

  Horrigan, eager to enter battle, again reminded Johnson to be wary of the board. Just because Johnson kept a jar on Marty Davis’s desk brimming with Fig Newtons didn’t mean Paul Sticht’s old allies were going to hand him the company. “Guys like Bill Anderson are creatures of the establishment,” he warned. “They aren’t going to like LBOs. Albert Butler is as Old Guard as they come. Macomber is a whiner, a second-guesser.”

  Johnson had mentioned that Dillon Read, Reynolds’s longtime investment banker, and Lazard Freres would be excellent choices to serve as the board’s investment bankers. He thought it would be great to throw Ira Harris a piece of business. Horrigan couldn’t believe it. “In doing this with Shearson, you’re about to give Ira Harris the biggest screwing of his life,” he said. “His ego is going to get such a bruising. He’s not going to be your friend; he’s going to be your archenemy.” Johnson’s odd mixture of naïveté and Machiavellian wiles never ceased to amaze Horrigan.*

  Wednesday morning Hugel and Atkins flew to Atlanta aboard a Combustion Engineering jet. After checking into the Waverly, Hugel walked next door to caucus with Johnson, as he did before most board meetings. He found him in his usual jolly mood, maybe even a bit bouncier than normal. It was clear Johnson hadn’t changed his mind; the buyout was on. Hugel wanted to know how Johnson planned to approach the board that evening, and the two men walked through Johnson’s speech.

  Hugel mentioned that Peter Atkins planned to attend the board meeting. Johnson appeared surprised. He half-heartedly suggested that maybe public disclosure of the matter could be put off, but didn’t pursue it. Afterward Hugel walked back to Atkins’s hotel room and directed him to draw up a press release to be issued the following morning, if necessary.

  “Oh, God.”

  Goldstone groaned when he heard Hugel had brought along Atkins. Until that moment he had held out some hope the board wouldn’t disclose Johnson’s presentation that night, giving the management group a chance to finish its negotiations in secrecy. Now he knew an announcement was all but certain.

  The clincher was Atkins’s past. Just two months earlier, the Skadden Arps lawyer had had his knuckles rapped by a Delaware judge for his role in the buyout of Fort Howard, a Wisconsin paper company. The company’s management had used a textbook gun-to-the-head strategy to prod its board into a merger agreement. Atkins, representing the board, allowed talks with the buyout group to remain secret until the last minute, opti
ng for disclosure only when the company’s stock began rising.

  Atkins had been selected to advise Fort Howard by the company’s chief executive, the man making the bid, a fact that troubled the court and called into question Atkins’s actions in favor of secrecy. “It is obvious that no role is more critical with respect to protection of shareholder interests in these matters than that of the expert lawyers who guide sometimes inexperienced directors through the process,” the court said. “A suspicious mind is made uneasy contemplating the possibilities when the interested CEO is so active in choosing his adversary.” Atkins’s choice of secrecy, the judge noted, was “a source of concern to a suspicious mind.”

  The opinion all but accused Atkins of selling out his neutrality to a buyout group. Goldstone guessed he was still stinging from the rebuke. Jack Nusbaum concurred. “It was clear Atkins was going to be living down Fort Howard,” Nusbaum recalled. “We figured he was going to be holier than Caesar’s wife.”

  After Hugel left, Johnson welcomed John Greeniaus, the young Nabisco president, just down from New Jersey. Although few knew it, Greeniaus was to have been Johnson’s successor. Three months earlier, Johnson had sat with him and mapped out plans for his future in detail. Greeniaus would move to Atlanta from New York in early 1989 to become an executive vice president. He would be put on the board at the annual meeting in the spring. Then, at a mere forty-five years old, he would become chief executive on Johnson’s retirement in 1990.

  Greeniaus had done nothing but thrive under Johnson. Although never one of his inner circle, he had followed Johnson through his career, rising from liquor marketing manager at Standard Brands Canada to CEO of Nabisco in just ten years. Greeniaus was as serious and introverted as Johnson was devil-may-care. He wasn’t without a sense of humor: he kept an anvil in his office. But he always wore starkly conservative suits. He was wholly incapable of rousing his salesmen with stirring speeches. While Johnson was out carousing at night, Greeniaus would be planted in his office catching up on paperwork. He didn’t play golf. He wore lifts. But Greeniaus delivered results, and Johnson had brought him along rapidly. Envious rivals whispered it was because Greeniaus was Canadian.

  When he walked into Johnson’s office at four o’clock, Greeniaus was unaware of the cataclysm about to engulf RJR Nabisco. He hadn’t been made part of the buyout group for the simple reason that Nabisco, like Del Monte, would be sold to finance it. Greeniaus didn’t know it, but he was about to go from heir apparent to outcast.

  “Johnny,” Johnson said, greeting Greeniaus excitedly, “I’m going to do a leveraged buyout!”

  Greeniaus sunk into a chair and a state of shock. He absorbed phrases and, gradually, meanings. Johnson was working with Shearson and a group of executives. But not me, it dawned on Greeniaus, not me. He looked at Johnson as his one-time mentor prattled on about the incredible opportunities available to everyone in an LBO. He’s blowing up Nabisco. I’m out of a job. My people are screwed.

  He sat there, silent, numb. Finally, he ventured a question. “Why didn’t you have everybody part of the management team?”

  Johnson explained it was because Nabisco would be sold. But, he added, Greeniaus could help find the right buyers. Johnson kept saying what a great opportunity this was for him. “You’ve got a wonderful watershed in your life, Johnny. If you don’t like what the new situation is, somebody else will want you. You’re young, you’ve got a lot of opportunity. The world is your oyster.”

  And if for any reason he didn’t like Nabisco’s new parent, Johnson pointed out, he could resign and receive three years’ golden parachute pay. Together with his 50,000 shares of restricted stock, Greeniaus could walk away with more than $7 million.

  “Johnny,” Johnson announced, “I’m gonna make you rich!”

  Greeniaus walked out of Johnson’s office an hour later, destroyed. He walked to the Waverly, wondering if he was dreaming. He went to his room and sat for several minutes in silence. He would have to do something, he thought. Just have to.

  Afterward Johnson remained in his office, alone. Outside, the warm autumn afternoon was fading into darkness. In little more than two hours, he would make the biggest speech of his life. He sat at his desk jotting down notes on a yellow legal pad. He selected his words carefully. It was just like the practice tee, he thought; concentrate, make the necessary adjustments, and everything will work out fine.

  Chapter

  7

  Johnson rose early the next morning, the memory of Wednesday night’s board meeting still fresh in his mind. He was due at headquarters for the compensation committee meeting at eight o’clock, to be followed by a gathering of the full board. A press release announcing the LBO effort was due to go out at nine-thirty. As he read his morning papers, Johnson came down with an attack of the giggles. There, on the front page of the Atlanta Constitution’s business section, was a story headlined “Analysts say RJR isn’t likely to be involved in any merger.”

  The newspaper had concluded that RJR Nabisco would remain on the sidelines in the latest round of food-industry takeovers. In addition to Philip Morris’s run on Kraft, Grand Metropolitan had launched a hostile bid for Pillsbury. “Well,” Johnson told his wife, “they sure have us figured out again.”

  Before leaving the house, he took a congratulatory call from Ronnie Grierson, then a worried one from Hugel. Several of the directors had huddled after dinner last night, Hugel said, and some, including John Macomber and Vernon Jordan, were concerned about what the LBO might mean to their $50,000-a-year pensions; it might make for a difficult comp meeting. When Johnson arrived at headquarters, he found Hugel was right.

  That morning the committee was to have taken up the matter of lifetime pensions for board members, a sweetening of their current ten-year deals. Now, of course, any such move might look as if Johnson were attempting to influence the board. He urged that they table the matter, and they did, although Johnson got a distinct feeling of displeasure from several directors. Johnson also fielded questions about the board’s other perks, including cut-rate auto insurance. What would become of them? Irked, Johnson said they’d have to wait and see.

  Horrigan was in Atlanta that morning and raised a fuss about the release. As drafted, it said Johnson was leading the buyout group. Horrigan insisted his name be added, saying he feared his people in Winston-Salem would revolt if they thought Johnson was running off with the company. “We have to say it’s Johnson and Horrigan,” he told Harold Henderson. “There can’t be any doubt left that I’m in this with him.” Henderson, who could see red creeping into Horrigan’s face, gave in.

  All hell broke loose when the announcement crossed the Dow Jones News Service at 9:35. RJR’s public relations chief, Bill Liss, had risen that morning thinking the day’s big news would be the third-quarter earnings report and the board’s approval of a new Planters peanut factory. Moments after the release went out, the first of hundreds of calls began flooding the switchboard, from wire services and newspapers, radio and television stations. They came from Ames, Iowa, and Altoona, Pennsylvania, from overseas reporters and overwrought shareholders. The local television stations were soon set up outside, and a helicopter hovered overhead, its occupants peering through the upstairs windows. Liss hadn’t had a day like it since his years handling skyjacking crises at TWA. But to each of the callers, he and his four-person staff could only say the same thing. Beyond the press release, no comment.

  At noon, a reporter outside headquarters told his television audience he planned to question Johnson as he left the building to go home for lunch. At the house on Whitewater Creek Road, the Johnsons’ maid was watching. “Oh, Mrs. Johnson,” she called to Laurie. “Mr. Johnson is coming home for lunch.” Laurie called her husband, puzzled. “Are you coming home for lunch?” she asked.

  Johnson couldn’t have gone home if he wanted to. The building remained under media siege all day. Even local reporters knew a $17.6 billion LBO would be the largest corporate takeover in history. It
was the biggest story of the day, soon to be the biggest business story of the year. The trendy shopping center on Atlanta’s north side was suddenly the center of the business world.

  Thursday morning Jim Robinson was at his mother’s home in Atlanta, preparing for a board meeting at Coca-Cola, which he pronounced the Southern way: Co-Cola. Atlanta raised and Harvard trained, at fifty-two Jim Robinson had been called Corporate America’s secretary of state. The company he had headed for ten years, American Express, was one of the world’s true financial superpowers, overseeing $198 billion of other people’s money. Twenty-eight million members used its credit cards. When Jim Robinson spoke, heads of state listened; his plan to settle the Third World debt crisis had created widespread interest the year before. Robinson’s manner was formal, a cross between southern planter and establishment banker. His wife, Linda, a power in her own right, headed her own New York public relations firm.

  At seven o’clock Robinson took a call from Peter Cohen, who told him of the impending news release. Robinson was surprised. Although he hadn’t kept up on details, he hadn’t expected any announcement until at least the following week, if then.

  “How did this happen so quick?” Robinson asked.