Barbarians at the Gate

by Bryan Burrough

  “So what?”

  Millard reminded Cohen that Kravis had moved unilaterally in recent months against targets like Texaco and Kroger. “Just because they don’t have management, Peter, doesn’t mean they won’t bid for it. Why wouldn’t they bid for it?”

  “Well, because they won’t give Johnson the same deal we did,” he repeated.

  “But if they buy it,” Millard said, “Johnson will take whatever deal he’s given.” It was clear Cohen didn’t understand what Millard was driving at. The trader suggested Shearson might want to feel out Kravis to see where he stood. “You’d better go talk to them,” he said.

  Cohen didn’t seem to be listening.

  By Thursday afternoon the Johnson camp realized it might not be healthy to have an angry Drexel Burnham rattling about Wall Street looking for an entry into the deal. Jim Welch called Beck, who was still steaming.

  “This is crazy, Jim,” Beck said. “The price is crazy. I don’t understand what you guys think you’re doing.” Why, he argued, doesn’t Johnson team up with Kravis? “Why should we work at cross purposes?” he asked.

  Welch tried a half-hearted appeal for Beck to remain on the sidelines. “We want Drexel to applaud this deal, to be our friends,” he said.

  Beck was surprised by Welch’s naïveté. “Well, Jimmy, I can assure you that we will applaud this transaction. But not the way you’re thinking.”

  “Why?”

  “We’ve been trying to get you to do this deal for two and a half years! If you think we’re going to sit back now, not be a part of the biggest deal in history, I mean, you leave me speechless. I don’t know how to respond.”

  “Well, would you consider going in with us?”

  “Jim, we’ve got other obligations.”

  Welch called Beck twice more in attempts to snare Drexel, but Beck remained irate at Johnson’s snub. As a result, Drexel, the largest piece of financial artillery on the Wall Street battlefield, was free to be used by a competing bidder. Beck had no doubt who that would be.

  Thursday afternoon Kravis and Raether set aside their consternation and took in the Pillsbury presentation at Skadden Arps. Afterward Kravis pulled Beck into a conference room.

  “What’s going on with RJR?” he asked.

  “I don’t know. They’ve cut off communication at this point,” Beck said. “I don’t know what’s going on. But you know we’ve got to do this deal. Are we retained?”

  “Don’t worry about it,” Kravis said. “There’s going to be a role for you.”

  The assignment would ultimately be worth more than $50 million to Drexel. Money aside, Beck couldn’t help thinking how much fun it would be beating the pants off Ross Johnson.

  On the seventeenth floor of an anonymous-looking office building tucked near the Staten Island Ferry in lower Manhattan, a chubby investment banker named Bill Strong was on the phone. Strong sat in a cramped cubicle along a wall of identical small offices: the somewhat lowbrow setting, absent the mahogany and Oriental rugs of other merger departments, reflected the historical neglect of Strong’s employer, Salomon Brothers. For years Salomon had made its millions on the trading floor, not the boardroom.

  Half-listening to one of his major clients, Strong stared intently as details of Johnson’s curious proposal inched into the public domain. As the news sank in, Strong did what any good investment banker would do. “Would you be interested?” he asked the client on the phone.

  No, came the answer.

  Strong had to be audacious. Salomon was the sick man of investment banking. Despite all the dire predictions, only one major LBO, the Revco drugstore chain, had gone belly up, and it was a Salomon deal. When the market crashed a year earlier, only one major junk-bond offering, for Dallas-based Southland Corporation, had been repeatedly rejected as unsafe by institutional investors; Salomon was its cosponsor. Only one major bridge loan, to a Norfolk-based chain of television stations named TVX, had collapsed. Salomon again. For three years the firm had been struggling to enter merchant banking; the results had been a string of public humiliations. Strong and his colleagues had been scrambling to pick up the broken glass ever since.

  On Wall Street, Bill Strong was not a big name, having just made partner two years earlier. But he was hardworking and energetic, possessed of an earnest Midwestern work ethic. A former accountant, he was from Indiana and proud of it. Strong looked clients in the eye and said he prided himself on honesty and integrity, traits he didn’t believe were terribly widespread in investment banking. A lot of investment bankers had the same spiel. Only Strong actually seemed to mean it.

  Like every other banker on Wall Street, Strong was intrigued by the possibilities opened by Johnson’s proposal. By Thursday evening he had assembled a stack of RJR Nabisco annual reports and 10-K financial reports filed with the Securities and Exchange Commission. A cursory read convinced Strong that $75 was way too low. These guys were stealing the company.

  He got excited. Salomon had had more than its share of merchant banking disasters, but this deal, if done right, could erase a lot of bad memories. And Strong had the ideal partner in mind: Hanson Trust. An avid shopper of American companies, it had developed a U.S. arm that, were it independent, would be among the country’s largest corporations. Using Salomon’s financial firepower and Hanson’s marketing expertise, Strong thought, they would be an unbeatable team.

  Friday morning he pitched his idea to John Gutfreund, Salomon’s autocratic chairman. As Strong outlined it, RJR Nabisco was a unique deal. It had once-in-a-lifetime brand names up for grabs, he explained. Tobacco’s cash flow was a torrent so strong it could virtually pay for the entire deal. “This one,” Strong told Gutfreund, “has everything.”

  Gutfreund, often skeptical of his enthusiastic young deal makers, listened with interest. “Fine,” he said. “Make the call.”

  At ten Strong called his contact at Hanson. He explained the situation, running down a handwritten list of RJR Nabisco’s chief attractions. Tremendous cash flow from tobacco. Unmatched food brands. Undervalued stock.

  “You put in a billion five, we put in a billion five and jointly acquire it,” Strong said. And just one thing: “I need a quick response.”

  The call came back at two o’clock.

  “Done,” the Hanson aide said. “We’ll do it.”

  Strong was jubilant. A meeting to flesh out details was set for Monday morning. In the meantime Strong had plenty of work to do. He called Gutfreund and brought him up to date. The chairman sounded encouraging. Strong then assembled a team of ten bankers and analysts to pore over RJR Nabisco data that weekend. It was a smallish group for such a gigantic project. But Strong wanted to keep a low profile and avoid leaks. He wanted to be ready to move first thing Monday morning.

  By Thursday afternoon RJR Nabisco’s executive suite was swarming with people. The Shearson bankers—Tom Hill, looking cool in a blue suit, and Jim Stern, relaxed after a morning jog—stood around with little to do. Directors milled about, drinking in the excitement. Teams from Lazard Freres and Dillon Read, summoned by Hugel the night before, arrived around eleven o’clock. Felix Rohatyn of Lazard was there, his great salt-and-pepper eyebrows dancing as he spoke. With Rohatyn was Ira Harris, down from Chicago, and Luis Rinaldini, a hard-driving Argentinian. A pair of well-starched Dillon Read bankers, Franklin W. Hobbs IV, who everyone called Fritz, and John H. Mullin III, Tylee Wilson’s old banker, arrived with them.

  “Hi, Johnny!” Johnson cried when he spied Mullin. He came over to shake the bankers’ hands as if it were a backyard barbecue rather than an LBO. To the bankers, yet to grasp the enormity of the task before them, Johnson seemed without a care in the world.

  “Well, boys,” he crowed, “we’re off to the races! Whaddya think?”

  Quite frankly, they didn’t know what to think, especially when escorted into a conference room to meet with Hugel. As chairman of the special committee, Hugel briefed first the Lazard bankers, then the Dillon pair, on events to date. Both
banks agreed to represent the committee for a fee of $14 million apiece. Their job would be to analyze any bid from Johnson and advise the committee whether it was fair to shareholders. They would do the same in the unlikely event other bids cropped up.

  Several of the bankers’ antennae rose when Hugel insisted on bringing the process to a quick conclusion. He suggested their review could be wrapped up in ten days, a time period Rohatyn and Harris thought ridiculously short. Speed favored Johnson, and the two bankers immediately wondered whether Hugel was in Johnson’s pocket. For now, they kept their suspicions to themselves.

  The crowd on the twenty-first floor began to thin when the meetings broke up in midafternoon. Horrigan flew to Winston-Salem to explain the news to his tobacco troops. Johnson sat alone in his office, opening mail and tending to paperwork. For the moment, there was little else to do. “Gee,” he told Martin, “I feel like I brought my harp to the party and nobody asked me to play.”

  Goldstone and the other Wall Streeters were smuggled out an underground passage to avoid the reporters waiting outside. Along with Peter Atkins and a pair of directors, Marty Davis and John Macomber, he boarded an RJR Nabisco jet for the trip to New York. Atkins huddled with the directors for most of the flight. As they neared New York, Goldstone found himself crouching behind the cockpit entrance with Atkins.

  “Look at this,” one of the pilots said.

  The two attorneys peered through the windshield. Below, they could see past the Verrazano Narrows bridge up the length of New York Harbor to Wall Street. The setting sun bathed the harbor and much of lower Manhattan in a stunning display of blues and reds. Goldstone thought it was among the most beautiful things he had ever seen. For a moment his lawyerly demeanor dropped and he felt part of some great, romantic adventure.

  He smiled. “Well, Peter, this is going to be very interesting.”

  “Yes,” Atkins said. “I’m sure it will be.”

  Chapter

  8

  Friday afternoon Tom Hill sat mired in another interminable Pillsbury strategy session at the midtown law firm of Skadden Arps. In the time since its British suitor, Grand Metropolitan, launched a hostile tender offer, Pillsbury had hired half of Wall Street to erect its defenses. They had looked at LBOs, defensive recapitalizations, poison pills, spin-offs, everything. So far nothing had worked.

  One problem was that there were simply too many cooks. Hill represented Shearson. Jeff Beck headed a Drexel team. Bruce Wasserstein anchored the Wasserstein Perella contingent. Investment bankers from First Boston were also flitting about.

  For all of Pillsbury’s woes, Hill couldn’t take his mind off RJR Nabisco. The waiting game had begun. The special committee had been formed and, with any luck, would be up to speed on the company’s values in two or three weeks. At that point, Hill was betting, Ross Johnson’s management group would belly up to the negotiating table, haggle with directors over an offering price, and, ultimately, agree to buy the company for a price a few dollars a share more than $75, maybe as high as the low $80 range.

  In the meantime, Shearson was on full alert to any sign of a competing bid. It was just thirty hours since Johnson’s initial announcement, but Hill knew every investment banker on Wall Street would be looking for ways to top their $75 price. So far, no one had; with any luck, no one would. Hill hated the waiting. It made him uneasy.

  As the Pillsbury meetings droned on, Hill noticed Jeff Beck and Bruce Wasserstein ducking in and out of the conference room. Both men seemed especially busy today. Hill wondered what they were up to. He found himself reflecting on something Beck had told him earlier that day about RJR. “You’re way off on price,” the Mad Dog had assured him. “There’s going to be competition.”

  All at once Tom Hill realized what all the scurrying about and Beck’s warning must mean.

  Kravis.

  It couldn’t be. Henry Kravis wouldn’t try something on this scale without a management team in his camp. Besides, Johnson had said repeatedly that Kravis wasn’t interested in RJR Nabisco.

  Hill had to find out for certain. Excusing himself from the meeting, he headed for a telephone and dialed Kohlberg Kravis’s number from memory. When Kravis came on the line, Hill forced his voice to brim with good cheer.

  “I’m wondering whether you guys are interested in Kraft,” Hill said. “We thought maybe we could help you with it.” It was a transparent excuse for a call: Kraft had been in play a full four days, an eternity in the takeover business. If Kravis were to move on the company, no doubt he already would have retained a banker.

  Kravis could barely contain his anger. “A lot of people have talked to us about Kraft, Tom. We may do something with one of them. But it’s not going to be you….”

  In a split second Hill knew the truth. In Kravis’s venomous tone he recognized the realization of his worst fears. Henry Kravis wanted RJR Nabisco, and he wanted it badly. “Henry came right through the phone,” Hill recalled later. “He was loaded for bear.”

  Kravis’s message was brief. “You know, Tom, you’ve just floored us on this RJR thing. We’re the ones who gave Ross Johnson that idea. We’ve had an excellent relationship with you, Tom. I’m surprised in a deal this size there wasn’t an opportunity to do something together. This is one we can’t just sit on the sidelines on.”

  The conversation was over quickly. Hill hung up, stunned.

  Something had gone horribly wrong. He had to think fast.

  Quickly he called Peter Cohen at Shearson and relayed news of the Kravis call. To Hill’s surprise, Cohen didn’t seem especially worried.

  “So what’s he pissed off about?” Cohen asked.

  “Why don’t we meet with him and find out?”

  “Why don’t we find out and then meet with him?”

  Hill thought through his options. Maybe they could head Kravis off. Maybe they could placate him. Whatever the case, they had to meet with him, if only to more accurately gauge his intentions. Cohen didn’t think a meeting with Kravis was necessary. This was Shearson’s deal; they didn’t need him.

  Hill had to make Cohen realize the significance of the call. Henry Kravis wasn’t someone you simply stonewalled.

  “Peter, you have to understand….”

  A half hour later, Hill called Kravis again. “Peter and I would like to meet with you,” he said.

  It was getting late. Kravis suggested they meet Monday.

  Hill sounded nervous, jumpy.

  “Nah, nah, let’s meet right now. I think we should.”

  “Tom, it’s late.”

  “Henry, I really want to have this meeting.”

  All right, Kravis agreed.

  At six sharp, Hill hustled through a drizzle into the lobby at Nine West. As he entered, he ran into Jeff Beck and an associate on their way out.

  Hill forced a smile. “I know where you guys are coming from.” So Kravis has hired Drexel, he thought. This was getting worse by the minute.

  Upstairs, Hill waited for Cohen, who had been delayed in the Friday afternoon traffic. Cohen finally walked in at around six-thirty.

  “Henry,” he said jauntily, “what are you doing here at six-thirty on a Friday night? You ought to be off skiing or something.”

  “Well, Peter. You’re here, aren’t you?”

  The two men shook hands. As Cohen took a seat, Hill turned to Kravis. “I wanted to have this meeting, Henry, because I sensed you’re very interested in RJR,” he began. “I thought it would be useful to see where that interest lies.”

  “Yes, I do have a very real interest,” Kravis said. “And this interest goes way back.”

  “But this is our deal, Henry,” Cohen interjected. He tried to make Kravis understand why RJR Nabisco was so vital to Shearson’s future. He explained the importance he placed on merchant banking and its place as the cornerstore of Shearson Lehman’s drive into the LBO industry. Hill was coming into his own as a merger adviser, enabling Shearson to review more opportunities than ever before. “You see, we h
ave to be involved,” Cohen said. “It’s a natural for us. We have a built-in flow of business.”

  “That’s all fine,” Kravis said. “You’re now our competitors.” The intimation was clear: If Shearson went ahead with RJR Nabisco, it could forget ever again doing business with Kohlberg Kravis. “I find it surprising that you’re doing this,” Kravis continued. “We’ve given you a lot of business. I guess clients don’t mean that much to you anymore.”

  “Henry, we’ve got to be in this business,” Cohen said. “It’s our future.”

  Cohen reflected on a conversation he had had with Kravis the previous February. The two men had skied together in the Shearson-sponsored American Ski Classic in Vail. It was no accident they found themselves on the same team. While they had waited to compete in a slalom, they had chatted about the changing face of the LBO industry.

  That day Kravis had been concerned about newfound competitors such as Morgan Stanley and Merrill Lynch. “What’s going to happen, Peter?” Kravis had asked. “Who else is coming in? And what are you guys going to do?”

  Cohen had responded with a broad outline of Shearson’s desire to enter the merchant-banking field as well. He didn’t have to mention that the stock market crash last October had wreaked havoc on Shearson’s other businesses. “Given the new pressures on margins in our other businesses,” Cohen had said, “it’s an obvious way to use our capital. Clients are asking us to do it. We can do it all for them. It just makes sense.” As Cohen recalled the conversation, Kravis had then suggested the two firms ought to stay out of each other’s deals.

  Cohen now threw the remark back at Kravis.

  “Henry,” he said, “this is Shearson’s deal. This is exactly what we talked about eight months ago. I thought we had an agreement. You said we would stay out of each other’s deals. Well, here it is.”

  “We never agreed on anything like that, Peter.”