Barbarians at the Gate

by Bryan Burrough

  Go for it, Buffett advised. Once one of RJR’s largest shareholders, he knew tobacco and liked it. “I’ll tell you why I like the cigarette business,” he said. “It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”

  Would Buffett himself like to join forces with Salomon? No, the investor said, not this time. Cigarettes were a fine investment, but owning a tobacco company, with its social baggage and all that Death Merchant business, wasn’t a burden Buffett felt he was ready to bear. “I’m wealthy enough where I don’t need to own a tobacco company and deal with the consequences of public ownership,” he said.

  To the bankers in Gutfreund’s library, Buffett’s blessing seemed to erase the last of their chairman’s doubts. If drastic action were required, Gutfreund agreed, then drastic action would be taken.

  The bankers left Gutfreund’s apartment that night in various stages of euphoria. One of Gutfreund’s doubters, Chaz Phillips, took the bus to his Fifth Avenue apartment feeling high. Phillips was sure he had just witnessed one of the single most important moments in the history of Salomon Brothers. He couldn’t believe it.

  Gutfreund actually did it.

  Into the wee hours the Salomon bankers exchanged congratulatory phone calls. None could believe their good fortune. Finally, after years of talk, Salomon Brothers was actually going to do something.

  “Whoa, whoa, wait a minute,” George Roberts said. “Why do we have to do this tonight? I’ll take a plane and get there tomorrow.”

  “We could do that,” Kravis said, “but by tomorrow it may be too late.”

  Put on the speaker phone in Kravis’s office, Roberts had been caught off guard by the suggestion of an immediate tender offer. Although kept up to date on Kravis’s preparations, he hadn’t expected anything like this. Sitting in his home south of San Francisco, all Roberts had to whet his appetite was a single computer run sent out from New York two days earlier. Naturally cautious, Roberts wanted to hear a lot more before he committed to the first unsolicited tender offer in the firm’s history.

  Kravis laid out all the reasons for expeditiousness. Banks were being locked up. The American Express board was meeting tomorrow, no doubt to approve the bridge loan necessary to cement the deal. If they didn’t move fast, Kravis said, Johnson could sew this deal up within days, if not hours. A tender offer, he argued, was the only way Kohlberg Kravis could be certain of getting its foot in the door. For one thing, it guaranteed a response from the board. Federal securities laws mandate that any target of a tender offer must formally reply to the offer within ten days. The board couldn’t ignore them then, Kravis said.

  Moreover, he continued, it wouldn’t be an outright hostile bid. For one thing, Johnson had already put this company in play. And Kravis intended to make completion of the tender offer conditioned on approval of RJR Nabisco’s board. That way, he said, they obtained the time advantages of a tender offer without launching a full-fledged hostile bid.

  Bruce Wasserstein and Eric Gleacher were brought in and repeated their militant pitches for Roberts. Roberts was less than impressed by the two bankers’ arguments, although he didn’t say so in their presence. Wall Street, Roberts knew, was full of Wassersteins and Gleachers trying to push Kohlberg Kravis into hasty deals whose chief benefit seemed to be the creation of multimillion-dollar advisory fees. Wasserstein was particularly bad, always pestering Henry with new takeover ideas. Roberts took them all with a grain of salt, lumping them together with everything else he hated about New York. After a while Roberts asked the two bankers to leave the room.

  It was an enormous decision. This deal was three times larger than anything they had ever done before. It was also the first time they had launched a bid without the aid of a friendly management team. If they wanted RJR Nabisco, it appeared they would have to fly solo.

  Nevertheless, Roberts felt himself slowly bowing to Kravis’s on-the-scene instincts. Isolated in California, he saw it was fruitless for him to second-guess everyone in New York. “Well,” Roberts said. “Let’s sleep on it, then look at in the morning. If neither of us has any real reservations, we’ll go ahead.”

  The meeting broke up around 10:15. As Kravis began to think about leaving, Gleacher and Wasserstein walked into his office. “We’d like to talk to you about the fees,” one of them said.

  Kravis was irritated by the request. Kohlberg Kravis generally waited until further along in a takeover, even after its completion, before negotiating fees with its investment bankers. Kravis considered it a matter of trust that the firm would take care of its advisers. He cast a stern glance at the two men: little boys asking for a raise in their allowances.

  “Why should we talk to you about the fee now?” Kravis said. “We’ve never had any problems with that before.”

  The two advisers figured that both Morgan Stanley and Wasserstein Perella should receive a fee of $50 million each. It was an awesome number. The largest fees negotiated to that point had been in the $50 million-to-$60 million range—and those were for deals that required massive bridge loans and billion-dollar capital commitments. Wasserstein and Gleacher wanted the same amount just for their advice.

  This is ridiculous, Kravis thought. Here he was about to launch the largest takeover battle of his career—indeed, in the history of Wall Street—and his advisers were more worried about their compensation than their tactics.

  “You’re just not even close,” Kravis told the pair. “We’re not even going to talk about it. This is the last time we’ll talk about it.”

  “Well, fine,” Gleacher said after a moment. “But this is important to us, Henry. We’ll just have to trust you on it.” *

  Later, Kravis took a car home to his Park Avenue apartment. He was pleased by the evening’s events. A tender offer felt like the right thing to do. He was 75 percent sure he would do it. Doubts lingered, of course. How would investors in their funds see it? How would the newspapers play it? Far more important, how would RJR’s board regard it? The directors had to be convinced it was not a hostile bid.

  Kravis wanted to sleep on it. In the morning he would talk with Beattie and Roberts, maybe with Peter Cohen.

  Then he would make his final decision.

  For all Henry Kravis’s feverish preparations, the management group itself had taken the weekend off. Early Sunday evening Johnson, amiably oblivious to the storm gathering before him, breezed into Jim and Linda Robinson’s apartment high above the Museum of Modern Art. Johnson was in a fine mood, looking tanned and well rested in a cotton sweater and casual slacks. On the flight up from Atlanta that afternoon he had stopped in Chattanooga, Tennessee, and, with Laurie and John Martin in tow, played a round of golf. The Honors golf course there, owned by his friend Jack Lupton, a former Coca-Cola bottler, was one of Johnson’s favorites. They had all played well, Laurie teeing off from the short tees, Johnson from the middle tees, and Martin from the back tees.

  Johnson hadn’t worried about the threat from Kravis. In fact, he hadn’t spent much time worrying about anything since Friday. He had slept until noon Saturday and watched college football all afternoon with Martin. Monday he and Laurie planned to visit Bruce, who still lay in a coma after his accident more than a month before. Tuesday they would meet with the commercial bankers, the first step toward raising the $15 billion or so they needed for the deal. That’s when the real work would start, Johnson figured.

  As for Kravis, well, Cohen could take care of him. Kravis would calm down; everything would work out. Cohen said he had things under control and, until he was informed otherwise, Johnson was inclined to believe him. Anyway, what could Kravis do? He certainly wasn’t going to bid $18 billion for this company without management, Johnson felt.

  Jim Robinson wasn’t so blasé All weekend he had agonized over whether to call Kravis himself. Cohen said he had everything under control, but Robinson couldn’t shake the feeling that he might be able to help out. He and Johnson spent much of the evening sorting th
rough options on the phone with Cohen.

  Around eleven o’clock, the Johnsons and Martin retired to the Johnsons’ Fifth Avenue apartment, next to the Pierre Hotel. When they arrived, Martin was surprised to find a message from his assistant, Bill Liss. Returning the call, he found Liss near panic.

  He had just received a call from a Wall Street Journal reporter, Liss explained. “Henry Kravis is going to make a tender offer in the morning at ninety dollars a share.”

  Martin and Johnson exchanged bemused looks. “That’s crazy,” Martin told Liss.

  “That’s nuts,” Johnson echoed. “Who the hell would pay ninety?”

  Takeover rumors, the two men figured. In a deal this size there were bound to be hundreds of bizarre stories floating around. Still, John Martin passed on the rumor to Linda Robinson.

  Peter Cohen was just about to put down the book he was reading and join his wife in bed. Tomorrow, he knew, would be a rough day. Henry Kravis had to be dealt with.

  It had been an uneventful weekend. After meeting with Kravis on Friday evening, Cohen had come home exhausted. Saturday he endured six hours of French lessons. Cohen needed the tutelage—he also was taking Italian—for his new friendship with Carlo De Benedetti, because he had recently joined De Benedetti-controlled boards in France and Italy. Cohen assured his tutor he would pursue his studies more diligently than he had the previous spring. “I promise it’ll be different this time,” he said, having no idea it would be his last French lesson for months. Late that afternoon he took in his son’s peewee football game. On Sunday Cohen lay around the house all day. He talked several times with Jim Robinson and Tom Hill. All agreed Shearson should pursue its dialogue with Kravis. Cohen didn’t have the slightest idea where the talks would lead, but it seemed smart to try and head off Kravis before matters had a chance to escalate.

  Cohen’s phone rang. It was Linda Robinson, relaying news of John Martin’s call and the disturbing rumor that Kravis was launching a tender offer for RJR Nabisco.

  “I have trouble believing that,” Cohen said. “Someone’s just playing around with you.” Like Johnson, he tossed it off to the usual rumors that accompany any large takeover bid. Linda Robinson thought that sounded plausible.

  Less than an hour later, Robinson called again. She had gotten a call herself from a reporter, passing along the same rumor.

  “That can’t be right, Linda,” Cohen repeated. “We’re supposed to meet with Henry tomorrow. Why would he do something like that without the benefit of another conversation? It doesn’t make any sense. It’s just rumors.”

  Before the night ended, Linda Robinson made a final call to Johnson and passed on the news of the second reporter’s call. She assured him he didn’t need to worry. “Myron says it’s impossible,” she told him, using her pet nickname for Cohen. “They’re going to be meeting in the morning.”

  For the first time, though, Johnson allowed himself a moment of concern. “Holy Christ, she got a call, too,” he told Laurie after bidding Linda Robinson good night. “This is strange….”

  Could it be real? Johnson thought. No, it had to be rumors. It just didn’t make sense. Hell, he mused, even if Kravis were going to top their proposal, he wouldn’t do it by $15 a share.

  Nah, couldn’t be….

  Bill Strong, the Salomon Brothers banker, rose early Monday morning at his Summit, New Jersey, home, psyched up for the day ahead. Today was the day the deal makers at staid old Salomon Brothers entered the twenty-first century.

  At twenty minutes past five Strong slipped into his black BMW 735ii and headed for a nearby newsstand. Twenty minutes later he was cruising toward the Holland Tunnel, a pile of newspapers lying unread on the passenger seat, when his car phone rang. It was a Salomon associate, David Kirkland. Kirkland had just heard on CBS Radio that Henry Kravis had announced a $90-a-share tender offer for RJR Nabisco.

  “Oh, Christ,” Bill Strong said.

  Johnson’s attorney, Steve Goldstone, was pulling on a pair of sweatpants at six A.M. when the phone rang. The lawyer had recently moved into an apartment at United Nations Plaza. He had taken to using the downstairs gymnasium to work off stress.

  “KKR has launched a tender offer,” Tom Hill said matter-of-factly, quickly outlining what few details of the offer were known.

  At first Goldstone didn’t understand. “Tell me what it is again?”

  Hill repeated what he knew.

  “And the price?” Goldstone asked.

  “Ninety dollars a share.”

  Goldstone was shocked. Never, in all their weeks of preparation, had he heard anything to prepare him for so high a number. Shearson had said it didn’t expect the deal to go for more than $80.

  “Say that again? Ninety? Nine-oh?”

  “Yes.”

  “I’ll come down to your office right away.”

  Goldstone numbly slipped off his gym clothes. “That call,” he would remember months later, “literally knocked my socks off.”

  The Monday editions of both The Wall Street Journal and The New York Times carried the news that Kohlberg Kravis was set to launch a $90-a-share tender offer for RJR Nabisco. Dick Beattie’s jaw dropped when he picked up the papers. Somewhere there had been a leak. It was the worst breach of confidence he had witnessed in twenty years on Wall Street. Someone, probably an adviser Kravis was paying millions of dollars, had leaked the biggest move of Kravis’s career. Beattie was still agog when Kravis called around seven o’clock.

  “Have you seen this fucking story in The Times?” he asked, practically screaming.

  “Yeah, I’m damn mad about it.”

  “It’s that goddamn Beck!”

  “No, Henry….”

  “Yes it is!”

  Kravis, homing in on a reference to Drexel Burnham in The Times story, had instantly fingered Jeff Beck as the culprit. For years he had put up with Beck’s silly high jinks, the dumb jokes, the hysterics. Now Beck would have to pay.

  Kravis was still livid when he arrived at his office a half hour later. Whatever reservations he had harbored toward the tender offer were now moot. The leak had forced his hand. He had to go forward with the offer. He directed that the bid be formally announced at eight o’clock.

  Trying to set aside his blinding anger at Beck, Kravis scribbled down a list of people to call. It was short, just five names: Charles Hugel, Ross Johnson, Jim Robinson, Peter Cohen, and Ira Harris, now working with the special committee.

  The first four Kravis couldn’t immediately reach. At twenty minutes to eight he reached Ira Harris at his Chicago apartment. Harris, who constantly battled a weight problem, was slogging aboard a treadmill when Kravis called.

  “Oh my God!” Harris exclaimed when Kravis disclosed the looming tender offer. The Chicago deal maker reminded Kravis that, as an adviser to the board, he was strictly neutral in this takeover. But any bid that boosted the payout to shareholders was bound to be good news to RJR Nabisco’s board.

  “Henry,” he said, “that’s great.”

  Peter Cohen rose early Monday morning, ducking into his chauffeured limousine by seven-thirty for the drive to Shearson’s downtown headquarters. After dropping off his children at school, Cohen’s car was cruising down Park Avenue when his wife, Karen, rang. “Henry just called looking for you.”

  Cohen, who hadn’t yet read the papers that morning, reached Kravis minutes later. In all their conversations—at dinner parties, openings, even on the ski slopes—he had never heard Kravis’s voice so tense.

  “Peter, I’m just calling to let you know we knew what you were up to all weekend. Because of it, we’re announcing a tender offer at eight o’clock to buy RJR at ninety dollars a share.”

  “Henry,” Cohen said, fighting back his irritation, “what exactly was I up to all weekend?”

  “You know, trying to lock up the banks and all that. We knew about that. We know about the board meetings, too.”

  “I don’t know where you got that stuff, but nothing remotely like tha
t took place. Those board meetings have been on the calendar for months. Henry, what are you doing? I was going to call you. Have I ever said something and not done it?

  “Let me tell you something,” Cohen continued. “You’re making a mistake, Henry, and I think you’re underestimating us.” Cohen made no effort to hide his disgust.

  Hanging up, Cohen’s anger quickly gave way to shock, then worry. As the limo whisked him downtown, Cohen tried to figure out what had happened. Something had set Kravis off. He dialed Shearson’s lead attorney, Jack Nusbaum.

  “Why are they doing this? I can’t understand it! This is crazy,” Cohen said, his voice rising. “He was supposed to get back to me.”

  Neither man could guess what had gone wrong. Nusbaum said there had to be more to it. If it was a tender offer, it wasn’t much of one. For one thing, Kravis couldn’t have arranged $20 billion in financing in three days.

  “How on earth can they make a tender offer, Peter?” Nusbaum said. “They’ve got no financing. It’s got to be illusory. And he wouldn’t dare do a hostile deal.”

  Ross Johnson was just about to sit down to his normal breakfast of toast, bacon, an English muffin, and a single egg over easy when John Martin burst into the apartment. “The Kravis thing,” Martin said, “we’re getting it from too many sources. It’s true.”

  No, Johnson said. No, it couldn’t be true, he stammered. It made no sense. Ninety dollars a share! It was insane!

  But it’s true, Martin said.

  Johnson immediately thought of Cohen’s meeting with Kravis. Something must have happened Friday night to set him off. Something he wasn’t told about.

  “Somebody’s sure pissed off somebody,” Johnson said. “I’m going to get to the bottom of this.”

  Other than their abortive meeting a year earlier, Kravis didn’t really know Johnson. He called Eric Gleacher at Morgan Stanley to arrange a telephone conversation.