Barbarians at the Gate

by Bryan Burrough

  Well, Boy Investment Banker, Kravis told himself, you’re in for one hell of a surprise. “What Cohen didn’t know,” Kravis recalled months later, “was that we were charging right through the rice paddies, not stopping for anything and taking no prisoners.”

  While Cohen and Kravis glared over their coffee cups, Johnson decided to take matters into his own hands. He simply had to know if the Kravis bid was real and, if so, what it meant for his management group. Johnson was nothing if not a quick read: He could tell Cohen was less than enthusiastic about sharing the deal of his life with Kravis. Both times Cohen and Kravis had spoken they had gotten into spit fights. Maybe it made sense to try some kind of partnership with Kravis. The only way to find out for sure, he reasoned, was to meet with Kravis himself.

  Scanning his phone messages, Johnson saw Steve Waters’s name. Perhaps the former Shearson investment banker, now working for Kravis, would be a good conduit. Minutes later, Waters picked up the phone in his office at Morgan Stanley and was surprised to hear Johnson’s laughter. “I thought I’d get through to you,” Johnson said, chuckling.

  “Ross,” Waters bantered, “you know I always talk to you.”

  Johnson mentioned he might have an interest in speaking with Kravis. “You really should see Henry,” Waters said. “He’s not such a bad guy. It clearly makes sense for you guys to be talking to each other.”

  Johnson agreed. Next he tracked down Jim Robinson at American Express. He wanted to touch base before striking out on his own. “Listen, Jim, I think I’m going to meet with Henry, just to hear what he has to say. What do you think?”

  Robinson listened as Johnson made his case.

  “I just think the more people talking the better. Maybe it’s right, maybe it’s wrong, but I’d like to hear their position myself. Jim, you’re a highroad guy, and so am I. I think there’s a highroad here.” He left the obvious unspoken: Cohen’s “low-road” arguments with Kravis were getting them nowhere. “Jimmy,” he concluded, “I want to bring in the varsity team, not the JV.”

  When Robinson agreed, Johnson got back to Steve Waters. A meeting with Kravis was set for four o’clock that afternoon.

  After his breakfast with Cohen, Kravis crossed the street and caucused with Beattie and Roberts, who had flown in the night before, in his forty-second-floor office overlooking Central Park. Peter Cohen, they agreed, was the only thing standing in the way of their owning RJR Nabisco. There was no earthly reason for Shearson to be in this deal. Ross Johnson had the management expertise. Kohlberg Kravis had the buyout expertise. Cohen had an appetite for big fees, an eye on making it big in LBOs, and a bad attitude.

  “They don’t bring much to the table,” Roberts said.

  “No, they don’t,” Kravis agreed.

  There had to be a way to get rid of Shearson. The obvious solution was to offer it some lesser role in the deal. Kravis favored some kind of advisory fee and maybe a chance to buy a piece of the action. But he wasn’t going to give up a large share of the stock, certainly nothing approaching fifty-fifty control. Maybe 10 percent, he suggested.

  Beattie wasn’t so sure. Ten percent sounded pretty puny. After all, Shearson had put this deal together. The lawyer didn’t say much, but he felt certain that Cohen would view the offer as an insult. Equally clear, he could tell, was the fact that Henry Kravis didn’t give a damn.

  While Cohen lunched with Tom Strauss and John Gutfreund of Salomon Brothers and attended a Shearson board meeting, Johnson met with a gaggle of gray-suited commercial bankers at Nine West to raise funds for the Nabisco deal. With their niggling questions about cost cuts, the bankers were a nuisance, and Johnson tried to push them off on Jim Stern of Shearson. In turn the bankers, led by Bob O’Brien of Bankers Trust, felt Johnson didn’t understand the importance of their role. For $13 billion, they thought he ought to sit still for their questions.

  But Johnson had more important things on his mind, most notably his meeting with Kravis. A few minutes before four o’clock Johnson stepped into the elevator alone for the ride six floors down to Kohlberg Kravis. As the elevator doors closed behind him, he realized he had forgotten which floor Kravis was on. He punched forty-four and got off there, only to realize his mistake. He tried forty-two and wandered around a few minutes before finding the firm in a back corner.

  Inside, he was ushered into Kravis’s corner office and met George Roberts for the first time. The atmosphere was cordial: Johnson had no ax to grind, and Kravis badly wanted Johnson’s management expertise. Taking long drags on a Premier, Johnson soon was outlining how he would run a post-LBO RJR Nabisco. The conversation was general: The three men wanted to feel one another out. When Kravis and Roberts talked about their operating philosophies, Johnson was impressed. They seemed to know much more about financial structures and money raising than Cohen’s people. Johnson replied with observations about his company, which the cousins, thirsty for information about their prey, listened to intently.

  Johnson fished for more, openly curious about the possibilities of working with Kohlberg Kravis. “Now, Henry,” Johnson said, “if you guys get this, you’re not going to get into chickenshit stuff about planes and golf courses, are you?”

  “That’s not important to us,” Kravis said. “If you take an extra plane ride, that’s up to you.” Talk to Don Kelly, Kravis said. “Well, that’s pretty good,” Johnson said, nodding.

  Roberts, however, wasn’t as flippant. A man sometimes described as a “cold fish,” George Roberts was beginning to dislike Johnson’s breezy, putting-green manners. “Well, we don’t want you to live a spartan life,” he said. “But we like to have things justified. We don’t mind people using private airplanes to get places, if there’s no ordinary way. It is important that a CEO set the tone in any deal we do. Check with Peter Magowan.” Magowan was chief of the KKR-controlled Safeway Stores chain and a friend of Johnson’s.

  “Well, I did,” Johnson said. “I guess the deal we’re looking for is a bit unusual.” Johnson explained that he was looking for a structure in which he would retain significant control of his company.

  No, Roberts said, shaking his head, Kohlberg Kravis didn’t operate that way. “We’re not going to do any deal where management controls it,” Roberts stated. “We’ll work with you. But we have no interest in losing control.”

  Why is that, Johnson wondered.

  “We’ve got the money,” Roberts said, “we’ve got the investors, that’s why we have to control the deal.” From the look in Johnson’s eyes, Roberts could tell it wasn’t the message he wanted to hear.

  “Well, that’s interesting,” Johnson said. “But frankly, I’ve got more freedom doing what I do right now.”

  The subject of cost cutting, one of the keys to a successful LBO, was raised. To Roberts’s surprise, Johnson said he didn’t care much for wielding a budgetary ax. Anyway, he explained, cutting costs was an overrated procedure. “Any Neanderthal can go in there and whack away and cut costs,” he said. “Show me a guy that can spend money.”

  He went on. “I’ve run as spartan an operation as anyone. But we’re bringing in a first-class management team here. We’re not profligate. I don’t want a bunch of nerds telling me whether to take a limo or not. That’s all chickenshit. What you need to worry about is the price of tobacco or the price of assets I’m selling. I want to deal with the big issues.”

  What was important were things like Premier. Johnson began talking about the smokeless cigarette, its strengths and weaknesses, the status of its test marketing. The secret, he told them, was that it warmed rather than burned the tobacco. Suddenly Johnson flicked his Premier onto Kravis’s antique Oriental rug.

  George Roberts, horrified, looked down at the smoking tube at Johnson’s feet. “See, it doesn’t burn anything,” Johnson said, retrieving it with a grin. He thought Roberts was about to jump out the window.

  They had been talking about an hour when Johnson trotted out to take a call. He returned a minute later, apologizing.
“That was Jimmy and Peter. I’m late to meet with your buddy Ted Forstmann.” Johnson smiled. It didn’t hurt for these two to know he had options. “Yeah, we know Teddy,” Kravis said, smiling in return. So Forstmann thinks he’s going to get in this deal.

  The information struck Roberts cold. But then everything about Ross Johnson struck Roberts cold. The man didn’t seem to be a serious businessman. Now he was going to meet with Ted Forstmann? George Roberts wasn’t a man who liked being toyed with.

  As he left, Johnson brought up the prospect of further talks with Shearson. “I hope you can work things out,” he said. “Just be fair. Make a fair deal. No one party should be looking to get some great edge over the other party. Work things out, you know. So we can get on with things.”

  When Johnson walked out a few minutes past six, Kravis and Roberts agreed it was time to make their move.

  Jim Robinson silently cursed cellular phones.

  After Robinson had emerged from a meeting of the New York City Partnership, a group of top corporate executives working to improve conditions in Gotham, he was surprised to find inside his limousine a phone message from Henry Kravis.

  As his car pulled away from the curb, the only thing worse than the late afternoon traffic was the reception on Robinson’s portable phone. When Kravis came on the line, the transmission came in fits and starts. But his message was crystal clear.

  I want to make you an offer, Kravis said.

  The proposal: Kohlberg Kravis would acquire RJR Nabisco. In return, Shearson would receive a one-time fee of $125 million from Kohlberg Kravis and an option to buy a 10 percent stake in the company. Kravis said he’d like an answer by midnight.

  Jim Robinson wasn’t the type of man to get excited at the sight of another man’s wallet. “Henry, that sounds a little thin,” Robinson said, but promised to get back to him.

  Minutes later, Cohen emerged from the Shearson board meeting to hear the same offer. Cohen said little, but from the tone of his voice Kravis knew he wasn’t being greeted with open arms.

  Where was Ross Johnson?

  Ted Forstmann had been waiting for nearly two hours, and there was still no sign of the man.

  After a full day of deliberations, Forstmann was ready to begin his crusade against Kravis and the junk-bond scourge. Forstmann Little’s computers had chewed through every available piece of public information on RJR Nabisco. Teams of analysts from Goldman Sachs had pored over the resulting printouts, and their conclusions only buttressed what Forstmann already knew: Even at $90 a share, RJR Nabisco was a good deal.

  Forstmann Little’s strategy was clear, at least its first step. Kravis’s rash tender offer opened the door for the firm to step in and “rescue” RJR Nabisco. Kravis was already taking a beating in the press for his “franchise” speech, and Forstmann’s advisers were determined to take advantage of it. “We’ve got to cloak ourselves in apple pie and motherhood,” Geoff Boisi told Forstmann, a plan to which he agreed wholeheartedly.

  Now all they needed was Ross Johnson.

  Accompanied by Tom Hill, Johnson finally arrived at Forstmann Little at half-past six. After shaking hands, Forstmann noticed a third man behind them.

  Forstmann took Hill aside.

  “Who is this fucking guy?” he whispered, motioning to the third man. Hill looked sheepish. “Well, without going into great detail, he travels with Johnson. He has nothing to do with this.”

  A bodyguard, Forstmann thought. Bodyguards were not Forstmann Little’s style. It was not a good sign.

  Forstmann led Hill and Johnson into a conference room whose informal furnishings gave it the atmosphere of a family room rather than a boardroom. Twelve black leather chairs ringed a wooden table. A television sat in one corner. The walls were lined with the Depression-era posters Forstmann favored.

  Johnson, a broad smile pasted across his face, took a seat at the head of the table.

  “I’ve just come from the competition,” he began.

  Ted Forstmann flinched. “What?”

  “I’ve just come from talking with Kravis.”

  Forstmann couldn’t hide his irritation. “What are you doing that for?”

  Tom Hill intervened. “It’s something that we had to do, Ted,” he assured Forstmann. “It’s nothing, really. I’d attach no importance to it.” Johnson was merely covering all his bases, Hill suggested.

  The mention of Kravis’s name set Forstmann off on The Spiel. For nearly half an hour he pontificated on the evils of junk bonds, the sins of Henry Kravis, and the way Forstmann Little could save Wall Street. He made a special point to mention his article in The Wall Street Journal that morning. Johnson listened, secretly amused.

  This guy’s cock is really stiff over this Wall Street Journal article, he mused. Johnson thought he understood Forstmann’s world view. Henry Kravis is a devil. Ted Forstmann is an angel. His clients are perfect. He’s not interested in fees. This guy is doing the Lord’s work for people who want to go private.…

  Oh, I see.

  When Forstmann finished, Nick Forstmann and a partner, Steve Klinsky, began asking Johnson questions about his company. What was the outlook for tobacco? Which businesses could be sold? In his rambling replies, Johnson seemed almost hyperactive. Clearly the pressure of the deal was wearing on him, Forstmann thought.

  Tom Hill left the room to take a call. It was Cohen, relaying news of Kravis’s $125 million offer. “That doesn’t sound like my idea of a partnership,” Hill said.

  “Mine either,” Cohen agreed.

  Yet Hill could see it was attractive. A fee that size was nearly half of Shearson’s total merger-advisory revenues for the entire 1987 year. Shearson’s fourth-quarter earnings were expected to be down, and Hill knew Cohen was under enormous pressure to save them. A one-shot injection of $125 million would be tempting.

  “Needless to say,” Hill said, “if we take it, it would be the end of our merchant-banking business. It would be an admission that there’s a price where we will stand down. Even if we dressed it up, it would be clear. There’s no way we can take it.”

  “That was them again,” Hill announced when he returned to the conference room. “We have received the most insulting offer.”

  Forstmann was confused. It was clear Hill meant Kravis. Was Hill negotiating with Kravis on his phone? What was going on here? Lost in his thoughts, Forstmann couldn’t have grasped the irony of the poster over his right shoulder: “Don’t waste my time,” it read. “Idle talk earns nothing.”

  “We have to talk about this,” Hill was saying to Johnson, “because this offer isn’t as insulting to you as it is to us.”

  Johnson and Hill soon left, leaving the Forstmann brothers perplexed. Was Johnson negotiating with Kravis? If so, why was he talking to Forstmann Little? Maybe they would find out later: Hill had invited Forstmann’s crew over to Nine West that evening to talk about joining forces.

  As they ran through details of the meeting, Steve Klinsky came up to Ted Forstmann. “Are you sure that guy is all there?” he asked.

  Forstmann put Johnson’s strange behavior down to excitement. He had seen the phenomenon many times: a chief executive, secure in his corporate environment, bewildered by the blinding pace of Wall Street. “He’s under a lot of pressure,” Forstmann explained. “He’s in a difficult position, you know. I have sympathy for CEOs in this world.”

  Klinsky wasn’t so sure. “I think the guy is totally insane.”

  An hour after Kravis lofted his $125 million offer, Dick Beattie was on the phone to Bob Millard at Shearson.

  “Have you heard about our offer?” Beattie wondered.

  Millard passed on the news Beattie expected. Cohen, the trader said, was bouncing off the walls at Kravis’s offer. He was insulted; he was outraged; he had never seen anything like it.

  “He’s calling it a bribe,” Millard said.

  “I knew it,” Beattie said with a sigh.

  Johnson returned to his forty-eighth-floor offices to find Cohe
n in a rage at the Kravis offer. Hill soon joined him. As he stomped about cursing Kravis, Tom Hill’s face turned so red Johnson thought he was going to have a heart attack. Jim Robinson was also there.

  For all the sound and fury, the Kravis offer brought into the open the unacknowledged rift between Shearson and Johnson, which had now lasted nearly two days, since Kravis’s announcement the previous morning. Johnson still hadn’t openly reaffirmed his commitment to go ahead with the Shearson offer. Robinson and Cohen, although they hadn’t pressed the matter, were clearly worried by Johnson’s meeting that afternoon with Kravis. Would Johnson stay with Shearson or leap to the Kravis camp?

  “Ross, if you want to go with them, you’re perfectly free to do it,” Robinson now told Johnson. “We won’t stop you.” Cohen echoed Robinson’s sentiments.

  “Oh, hell,” Johnson said. “Let’s just everybody calm down. I’ve got to talk about this with my people first. Then we’ll decide what we’re going to do.”

  By nightfall the forty-eighth floor was overflowing with people: teams from Shearson, Davis Polk, Jack Nusbaum’s law firm, and RJR were all busily reworking weeks of analysis in preparation for topping Kravis’s bid. Johnson gathered his executives in his office. Horrigan, Henderson, John Martin, and the others draped themselves over the cream-colored furniture and lined the walls.

  “This is the situation,” Johnson said, explaining Kravis’s offer. “I’m not going to make a unilateral decision here. We’re going to vote on it. I’ll do what you guys want to do. I want each of you to tell me how you feel. Now you can go any way you want to go. But fellows, you’re voting your careers. We can go with Henry, or we can go with Jim.”

  Johnson looked around the room at the men he had chosen to pursue the Great Adventure. You all know what working for Henry Kravis would be like, he explained. There were nods all around. They knew. But the odds of winning with Shearson were hardly any better, Johnson cautioned.