Barbarians at the Gate

by Bryan Burrough

  This was a different Ross Johnson than many at Shearson had seen. The shock of Kravis’s bid was evident on his face and in his voice. It was the first time Steve Goldstone had seen cracks in his client’s sunny facade. Hill thought Johnson “looked like he’d been hit by a load of bricks.”

  “I thought everything was okay,” Johnson repeated. “I thought you were going to meet with the guy. What the hell happened?”

  Cohen, after talking with Hill and Jack Nusbaum, thought he knew the answer: It was Bruce Wasserstein and the other Wall Street advisers. They must have pushed Kravis into a premature bid with harem-scarem tales about Shearson locking up the banks.

  Each of Kravis’s advisers, Cohen explained to the group—Drexel, Morgan Stanley, and Wasserstein Perella—had its own reasons to want Shearson’s big deal crushed. The junk-bond offering to follow RJR’s buyout would no doubt be history’s largest, and could instantly turn Shearson into the greatest challenger yet to Drexel’s hammerlock on the junk-bond market.

  No doubt Morgan Stanley similarly regarded Shearson’s bid as a challenge to its own growing power in the LBO market. Cohen was willing to bet that Steve Waters, bitter about his forced departure from Shearson, was gunning to embarrass his old partner Tom Hill. And Hill’s emergence as a major deal maker was a direct threat to Wasserstein’s reputation. “The fact of life here,” Cohen went on, “is that everybody who advised Henry probably told him to ‘go for it.’ It’s in everybody’s interest that we fail…. Those piranhas were probably nipping at his fingers and toes all weekend.”

  Johnson didn’t particularly care about the intricacies of Shearson’s Wall Street rivalries. And as Cohen and Hill began plotting a counterattack, he was too shaken to listen. “Well,” Johnson said. “I guess this is over. This is the end. I mean, who can compete with that kind of offer?”

  Steve Goldstone could tell it was time to explain some things to his client. Johnson’s interests weren’t necessarily the same as Shearson’s. If Johnson played his cards right, he might yet come out of this with a buyout he could live with. He had a number of options, including joining forces with Kravis, a fact Goldstone was sure Cohen was well aware of. There was another reason to spirit Johnson out of Shearson’s offices: He and Cohen appeared headed for a major blowup. Goldstone sidled up to Johnson and took him by the arm.

  “Ross, look, let’s go back to Davis Polk,” the lawyer said. “There are things we need to talk about.”

  There was a surreal, Alice-in-Wonderland quality about the procession Goldstone led for three blocks to Davis Polk’s offices at Chase Manhattan Plaza.

  For Johnson, the whole thing had become a bad dream. He couldn’t shake the feeling they had left the real world behind in Atlanta. They had stepped through the looking glass to a place where reality was suspended, where the old numbers, the old rules, the old financial reasoning, simply didn’t apply. Money was paper, and paper was money, and people got paid $25 million for lying to you.

  At Davis Polk, Goldstone parked Johnson, John Martin, and Harold Henderson in a thirty-eighth-floor conference room and walked up to his office to retrieve something. He immediately drew a crowd of curious colleagues. My God, what happened? they clamored. Steve, are you okay? What’ll you do now?

  Goldstone stared out his office window north toward the art-deco spire of the Chrysler Building. “The outlook is not good,” he said slowly. “Everything has changed…. Either we’ll reach an agreement with Henry, or…” Or what, he didn’t know. Kravis had caught them totally off guard. To fight him would mean throwing out every financial and operating assumption of the $75 bid and starting over from scratch. He wasn’t at all sure Johnson was willing to do that.

  When Goldstone returned he found Johnson pacing up and down. The group with him looked shell-shocked. The enormity of what had befallen them was sinking in. The prospect of instant riches had vanished, gone in the four-bell ring of the Dow Jones ticker announcing Kravis’s arrival on the scene.

  “At this point, this is over,” Johnson was saying. “I mean, if this is right, this is ridiculous. If they’ve got the money, it’s all over.” Again and again he wondered what Cohen could have done to set Kravis off.

  Goldstone tried to swivel Johnson’s focus from the past to the future. Kravis’s ambush drastically raised the stakes: If they were going to fight, they now would have to top $90 a share. Running a post-LBO company at $90 a share, Goldstone said, would be radically different than running one bought at $75. The added debt would require wholesale cuts of the kind Johnson dreaded. The planes, the Atlanta headquarters, even Premier, would have to be reassessed.

  “Ross,” Goldstone said, “you’ve got to decide whether you are willing to operate this company above ninety. If you’re willing to do that, then the next decision is Shearson’s. The decisions are now Shearson’s to make. It’s not your money.”

  First, Johnson said, he wanted to know a lot more about Henry Kravis’s bid. What did Kravis really want? Could they get rid of him somehow? How on earth could Kravis get $90 of value, when Shearson only got $75? No, Johnson said, he wasn’t going to decide anything until he heard more from Kravis. Cohen would talk to him and find out what had happened. Then, and only then, would they decide their next move.

  Goldstone emerged from the conference room at one point to find Tom Hill loitering outside. The lawyer smiled to himself. It was obvious Hill had come over to keep tabs on Johnson and make sure he didn’t do anything drastic.

  Like talk with Henry Kravis.

  The Kravis camp emerged Monday afternoon to assess the damage from its morning announcement.

  In the days to come Dick Beattie would be Kravis’s most effective source of intelligence. Over the years the soft-spoken lawyer had built a loyal circle of Wall Street friends. His work with Shearson gave him especially good contacts among Cohen’s troops.

  The best was Bob Millard, Shearson’s head of risk arbitrage trading. The two were old friends, and Millard was half-expecting Beattie’s call that afternoon. It was the first of many conversations the pair would have in coming weeks, and they would prove to be invaluable to Kravis. Millard, also a close friend of Cohen’s, would function as an unofficial conduit for the Shearson chief, passing on Cohen’s thoughts and threats in a cordial atmosphere with no risk of confrontation. Beattie, while arguing Kravis’s ideas, usually got a good sense of the Shearson group’s strategy. For security reasons, the lawyer never told Kravis of Millard’s identity.

  That day the two spoke in the tones people sometimes use when attempting to reconcile mutual friends. “Peter says he’s got a winner because he’s got Ross Johnson,” Millard said.

  “You know that’s not true,” Beattie retorted. “Bob, you have to explain to Peter that the best deal will win on this. It’s not who has Ross Johnson. Can’t he see Henry is ready to do this deal without Johnson?”

  Millard had to agree. He had told Cohen the same thing the previous Thursday. But so far Cohen hadn’t listened. Both Beattie and Millard realized the obvious solution was for Kravis and Cohen to get together and divvy up Johnson’s company. A bidding battle could cost the winner billions of dollars and generate ugly publicity. But whether the egos involved would permit a joint effort was another question.

  Bob Millard suggested Beattie give Peter Cohen a call.

  Kravis’s bid was Cohen’s nightmare come true. But unlike Ross Johnson, Cohen wasn’t giving any thought to surrender. It simply wasn’t in his nature.

  As information on Kravis’s bid trickled in that day, Cohen and Hill realized it wasn’t as formidable as they first had feared. For one thing, the bid wasn’t all cash. Kravis had put up just $79 a share in cash, with the remainder coming from securities Kravis valued at $11 a share. Cohen and Hill seized on the structure as a rallying cry. Look, they said, Kravis only topped our cash by $4 a share. Shearson, Cohen figured, could counter by adding “paper,” too. Johnson’s opposition to securities would have to be overcome, of course, but that sh
ouldn’t be a problem if it presented their only recourse.

  Amid the confusion, one other fact was becoming clear. Shearson couldn’t fight Kravis alone. A bid north of $90 would require an equity investment—a downpayment—in the neighborhood of $2.5 billion. Even with money from American Express, Cohen knew it wouldn’t be practical for Shearson to shoulder so large an investment itself.

  That afternoon Cohen took a call from one of his closest friends, Thomas Strauss, president of Salomon Brothers. Strauss was the trading house’s number two executive behind John Gutfreund; his office overlooked its trading floor. The Strausses and Cohens often vacationed together, once sharing an African safari, and were frequent guests at each other’s homes. Strauss wondered whether there might be a role for Salomon in Shearson’s deal. Similar calls poured into Cohen’s office all day, but Strauss’s was among the few he accepted. They agreed to meet the next day for lunch.

  The universe of possible partners, Hill advised Cohen, was small and shrinking fast. Already Kravis had snapped up the obvious ones: Merrill Lynch, Drexel, and Morgan. “We have a choice: Sally or First Boston,” Hill said. “Sally has more capital, but it’s not a factor in the LBO market. In fact, they’re a disaster in the LBO market. They don’t have much depth in their merger practice, either.” First Boston had better junk-bond operations and more merger depth, Hill said, even with the recent departures of Wasserstein and Perella. Hill preferred First Boston, but knew it was a wasted exercise. Friendships counted for a lot on Wall Street, and Cohen wasn’t likely to pass up the chance to work with his buddy Tom Strauss.

  Dick Beattie reached Peter Cohen around four o’clock that afternoon.

  The lawyer was in an awkward situation. His firm, Simpson Thacher & Bartlett, had represented Lehman for forty years and was, along with Jack Nusbaum’s firm, one of Shearson’s two primary law firms. Although Nusbaum was his closest confidant, Cohen also considered Beattie a valued adviser. Cohen had been incensed when he heard Beattie was working with Kravis in the fight for RJR Nabisco and thought that Beattie at least owed him the courtesy to ask approval.

  When Cohen came on the line, Beattie tiptoed around the issue, formally alerting the Shearson chief he was representing Kravis but stopping short of seeking Cohen’s approval. “Peter, I’m calling because we’d like to try and keep the channel of communications open, if we can,” Beattie said. “This tender offer doesn’t mean we can’t still work together.”

  “Why, if Henry Kravis wants to talk, did he launch the tender offer? He didn’t have to do that. Why didn’t he call? I was going to call him. This is ridiculous.”

  Beattie tried to calm Cohen. “Peter, for any number of strategic reasons, it appeared best to do it that way. But we should still talk. This is no reason to close off that option. You ought to talk to Henry.”

  Maybe, Cohen said. Before agreeing, he ran the idea past Johnson, who busied himself at Nine West that afternoon returning phone calls, answering mail, and reviewing new computer runs.

  “Lookit, Peter,” Johnson said, “this isn’t a cockfight here. This is serious, and Henry is a serious guy. You guys have got to get together, and you’ve got to test how serious he is.”

  A meeting between Cohen and Kravis was set for Tuesday morning.

  Jim Robinson’s alarm grew as he read a copy of Johnson’s management agreement for the first time Monday afternoon. It was worse than he had feared: the veto, the free ride, the incredible total all bothered him. But what worried the chairman of American Express most was what Wall Streeters called the “cosmetics” of the deal: From a public point of view—and Robinson had no doubt the document would ultimately be disclosed—the agreement simply looked awful. In a reporter’s hands it would be turned into a document of greed incarnate. To Robinson the prospect of seven men’s sharing up to $2 billion was a public relations disaster waiting to happen.

  Changes would have to be made, he could see, and not just for the sake of cosmetics. The pact was simply too rich; much of the money promised to Johnson would now have to be channeled into a bid high enough to beat Kravis. As his closest friend on Wall Street, Jim Robinson was the natural choice to carry the difficult message to Johnson.

  On Monday night Robinson sat down in Johnson’s office and tried to break the news as gently as possible. “Rawss,” he said in his Atlanta lilt, “we’ve got to reappraise things in a way that is more appropriate, given what’s going on.”

  What do you mean? Johnson asked, bridling a little. He remembered Steve Goldstone’s cautionary words about the management agreement: “These guys are going to try and screw you down and down and down….” Johnson trusted Jim Robinson, to a point.

  “I hope you’re not here as the advocate of Peter Cohen,” Johnson said, “because they’re not going to take us down and just give it all back to Shearson.”

  “No, Rawss, this is how I feel. I’m here as a friend.”

  “Totally different, totally different,” Johnson said. “What do you want to do?”

  “How many people are going to share in the management agreement?” Robinson asked.

  “It could be eight, it could be twenty,” Johnson said. He said he hadn’t given the matter much thought.

  “I thought maybe you might want to better define what it is,” Robinson suggested.

  “I don’t give a goddamn,” Johnson said. “I’ve always thought that a lot of employees would share it. I want to get it to as broad a group as possible.”

  Robinson explained that it might be a good idea to set that idea in motion. Maybe the best thing to do would be to get Davis Polk and Champ Mitchell’s law firm working on an employee stock ownership plan. Johnson agreed. Later he would say that it had been his intention all along.

  Whether or not employees would actually share in Johnson’s riches, of course, was beside the point. What mattered here was cosmetics. Jim Robinson couldn’t throw out the management agreement. But he could make damn sure that, once revealed to directors and a skeptical public, it would be easier to swallow.

  He hoped.

  “OFFERS FOR RJR PIT KKR AND SHEARSON IN A BATTLE FOR TURF,” read the front-page headline in The Wall Street Journal on Tuesday morning.

  Kravis read the article with disgust. Both major papers, the Journal and The New York Times, reported his Friday meeting with Cohen in detail. Both, Kravis thought, made him out to be the heavy, the overlord of LBOs attempting to smite an upstart competitor. He was especially irked at quotes attributed to him about protecting his franchise, a word Kravis would later deny having uttered. Whatever the truth, it was apparent to Kravis that Shearson was using the press to strike at his Achilles’ heel, his public image.

  Kravis had to laugh, though, when he read Cohen’s remarks to the Journal. Playing the wounded innocent, Cohen complained that Kravis was muscling in on his deal after promising to meet with Shearson. “We ski together and socialize together,” Cohen said of Kravis, “and I thought there was a higher level of conduct called for here.”

  Kravis couldn’t believe it. He didn’t consider Cohen his friend. Why, he told friends, he hardly knew the man. They had skied together once—at “some Shearson ski boondoggle” in Vail—and hardly “socialized” outside occasionally bumping into each other at Wall Street functions. The nerve of the guy….

  The atmosphere at Tuesday morning’s breakfast between Cohen and Kravis was no worse than that inside any commercial meat locker.

  Cohen arrived first and surveyed the ground. They had chosen a neutral venue, the dining room at the Plaza Hotel. Cohen asked the maître d’ for an isolated table, one where he and Kravis could talk discreetly, and was led into an uncrowded corner of the dining area. Kravis walked in minutes later and took a seat across from Cohen. After ordering coffee, the two men got straight to business.

  “Henry, I said I was going to call you, and I would have called you,” Cohen said. “I believe I’m a person who keeps his word. Now you’ve escalated this thing.”

  If Co
hen was combative, he was also a realist. A drawn-out battle with Kravis was one Shearson could well lose. He pitched a compromise. “We’re open-minded about this, Henry. We never intended to keep all the equity in the transaction to ourselves. It’s simply too big. We’re looking for a sensible transaction. If we can do a sensible transaction that will help everyone’s objectives, we ought to try. Now, why don’t we try and do something together?”

  “Like what?” Kravis asked.

  “A split. Fifty-fifty.”

  “That’s not going to happen,” Kravis said. Kohlberg Kravis never did fifty-fifty deals. “That’s too much.”

  “I don’t think it should be at anything other than fifty-fifty,” Cohen said.

  “No, no.” He wouldn’t discuss it further.

  Kravis brought up the management agreement. He had been thinking about what Jeff Beck said a month before. They want control of the board. If Johnson didn’t want the Kohlberg Kravis kind of buyout, what kind did he want?

  “It’s your normal deal,” Cohen said. Nothing special.

  “What’s that mean?” Kravis asked. “Is that five, ten, fifteen, thirty percent, what?”

  “Yeah, in that range….”

  Cohen pointedly failed to mention Johnson’s veto power or the $2 billion management agreement he had demanded and received. “If we do something,” Cohen said, “we’ll obviously make that all available to you.”

  As they talked, Kravis attempted to size up Cohen. The man was out of his element, he decided. Kravis knew Cohen had attempted no more than one or two buyouts in his career; Eric Gleacher was calling him “Peter Cohen, Boy Investment Banker.” Yet Cohen seemed to think he was dealing from strength. He’s feeling pretty good, Kravis thought. He thinks he has all the cards because he has management. He thinks the presence of Ross Johnson will stop us.