“What’s going on?” Forstmann asked.
Jim Robinson spoke. “Ted, I want you to know what’s going on. There’s no other way to tell you but the truth.”
“What’s that?”
“Our side is meeting with Henry Kravis in another conference room.”
Forstmann stared at a spot somewhere above Robinson’s head. It was as if someone had socked him in the stomach. For a moment Forstmann searched for words. He took a seat on a couch beside his brother.
Disappointment wasn’t a strong enough word for Forstmann’s feelings at the moment. It bordered on betrayal. He had so hoped these people had principles. He had wanted so badly to believe they could see through Kravis, as he had. Now, he realized, he had been wrong.
Slowly, a stream of profanity, like some earthy ticker tape, began scrolling through Forstmann’s mind. Son of a bitch, he thought. Son of a fucking bitch. What did I ever come here for? Of all people, they’re talking to that little bastard Kravis.
Forstmann said nothing.
Robinson continued. “Teddy, what we’ve done is the best thing, not the right thing. It’s the smart business thing to do.”
Forstmann remained silent.
“We don’t think it’s going anywhere,” Robinson said.
Johnson piped up. “No, we don’t think it will. It’s not going to go anywhere. Management is not going to go with these guys.”
Forstmann thought, Then why are you down there talking with them? Oh, how he hated to hear the lies. He wanted to shout “You bastards!” but held his tongue. He had always told his partners that once you lose your temper, you lose the deal.
He looked at Jim Robinson. “Well, it’s none of my business,” Forstmann said, “but I really don’t agree with you.”
He wanted to leave it at that, but knew he couldn’t. “I think that they’re really third-rate people,” he ventured. “They’ve proven themselves over and over again to be third-rate people.”
Again, Forstmann looked at Jim Robinson with imploring eyes. It was an awkward moment. “We’re friends socially, Ted,” Robinson said. “We only know them socially.” He paused. “Anyway, there’s nothing to really worry about, because it’s not going to work out.”
“Jim,” Forstmann said, “whether it works out or not, why are you doing this? I just don’t get it. I mean, how can you do business with these guys when you have us? Our money costs nine percent. You don’t need junk bonds. You don’t need Kravis. I would never have done what they did. I would never have lobbed in ninety dollars. If KKR hadn’t come along, we would have just cheered you on from the sidelines.”
They talked for a while longer, awkwardly passing the minutes talking about tennis and golf. “Well,” Forstmann finally said, “thank you for at least telling me.”
“Yeah,” Johnson said, “you got to give us some credit for at least telling you.”
“Yeah,” Forstmann said. “Thanks.”
Forstmann returned to Boisi and Fraidin a defeated man. “You guys are never going to believe this,” he began.
“Let’s go,” Fraidin said when Forstmann relayed the news. There was no reason to stay and try to work with people who treated you like this, the lawyer said. Forstmann would never pull such a stunt, Fraidin added, and he shouldn’t work with people who did. “I don’t want you around here,” the lawyer told him.
Fraidin sounded like a kindly uncle after a playground fight. But after eight years he had developed a strangely protective attitude toward Teddy Forstmann. In many ways his client was naive about Wall Street, Fraidin knew. He didn’t run with people like Cohen and Kravis, and as much as he criticized them, deep down he didn’t really understand them. Forstmann trusted people to be as upfront as he was, and that sometimes led to rude surprises, like tonight.
“Let’s get the fuck out of here,” Forstmann agreed, and made to leave.
Geoff Boisi stopped him. “Hold it, Ted. Eventually we all want to get out of here. But this is a situation that could turn to our advantage. That is, if you’ll stay.”
The Goldman banker had taken note of the chaotic atmosphere, the bewildered faces, the confusing presence of top executives such as Cohen and Robinson. He saw an opportunity in the air of desperation he sensed about the Shearson team.
“These guys are floundering,” Boisi suggested to Forstmann. “If they can’t work out something with KKR, they’re really going to need us. We could dictate our own terms.”
Forstmann was torn. He badly wanted to fight Kravis and show the world the truth about junk bonds. But Johnson didn’t seem to be able to tell the difference between right and wrong, between Forstmann Little and Kohlberg Kravis, and that bothered him.
They waited.
Across the forty-eighth floor, talks in Johnson’s smoke-filled office were going nowhere. In theory, it was in both sides’ interest to negotiate some form of partnership. Everyone had too much to lose in a long, public fight. But “partnership” clearly meant different things to different people. Cohen rejected Kravis’s offer of a 10 percent equity stake as an insult. Kravis wanted no part of a fifty-fifty split. “We’ve never done that before,” Kravis said, “and we’re not starting now.”
“Well, there’s always a first,” Tom Hill said. “I mean, how many twenty-billion-dollar deals come around? There’s plenty for all of us.”
Kravis, still seething at Hill’s invocation of Jesse Helms, glared at the banker. “We’re not going to do a deal where we give up control. We just can’t do that. That’s the way it works.”
For an hour they swerved from issue to issue, never finding agreement, never mushrooming into outright confrontation. “Well,” Kravis said to Cohen, “what role do you see for yourselves?”
“We’ll do the financing. We’ll do the whole deal.”
Kravis rolled his eyes. “Why don’t you just let us do the deal? You guys can come in as equity partners. What do you care? You’ll get your fair share of fees.”
At one point, Kravis and Roberts asked again about Shearson’s deal with Johnson. “There’s no sense talking about the management deal until we can work out our deal,” Cohen said.
“How can we cut our deal without knowing your deal?” Roberts shot back. Cohen outlined the deal in the vaguest terms.
They were getting nowhere.
George Roberts attempted a Solomonic compromise. The Shearson group could acquire RJR Nabisco outright, he suggested, then agree to sell Kohlberg Kravis its food businesses. It was a complex proposal involving a maze of tax benefits that took a few minutes to explain. Roberts asked Tom Hill how much Shearson would want for RJR’s food businesses. “Oh, fifteen, fifteen and a half,” he said. Fifteen and a half billion dollars.
“Well,” Roberts said, “we have a problem right there. That business isn’t worth more than fourteen billion.” Cohen and Hill left the room and caucused a few minutes before rejecting the idea out of hand.
And so it went. There was no shortage of matters to disagree on. The question arose, for instance, which investment bank would supervise the posttakeover bond offerings. Besides the return on an LBO investment, “running the books,” or leading, those offerings was the plum assignment for an investment bank in an RJR Nabisco buyout. Kravis saw Drexel, the firm that had created and long dominated the junk market, as the natural choice.
“We’re not going to take a backseat to Drexel,” Cohen said. “That’s not even negotiable.” Not to mention the fact that Drexel was about to be indicted. “Who knows what could happen to them then?” he said.
By three o’clock it was obvious that no agreement would be reached. As Kravis and Roberts rose to leave, Cohen took Dick Beattie aside.
“Look,” Cohen said, “to the extent you have any influence here, we should get together before this gets too crazy. This could get really out of hand.”
Downstairs, Kravis and Roberts hailed a cab.
As it pulled away from the curb, Henry Kravis’s only thoughts were on strangling Tom Hil
l. The Jesse Helms remark still incensed him, and no amount of Dick Beattie’s soothing words could calm Kravis down.
“Can you believe that guy, threatening us?” Kravis said.
George Roberts thought Hill was simply one of the worst of a bad breed. “Knowing Tom Hill,” he said, “you could almost have scripted what he was going to say.”
Ross Johnson expected to return to his office and find the situation with Kravis defused. He was shocked to find the talks had fallen through. Cohen was pacing about, uttering foul things about Kravis. “It’s absolutely impossible,” he told Johnson. “We can’t do business with them.”
Johnson couldn’t believe it. In four separate conversations now, Cohen hadn’t been able to reach some kind of compromise with Kravis. What was going on here? A man who prided himself on getting along with anyone, Johnson couldn’t fathom why Cohen was unable to strike a deal, especially at a time when it seemed so vital. Kravis and Cohen were like inert chemicals that exploded when mixed. Having met with him that afternoon, Johnson knew Kravis wasn’t that difficult to deal with.
Johnson listened as Cohen railed about how unreasonable Kravis had been. From the tone of his voice, Johnson suspected Cohen was almost glad the talks had gone nowhere; it gave him an excuse to stiff-arm Kravis and keep the deal for Shearson. Johnson, more worried about his company than Wall Street rivalries, began to have serious doubts about Cohen’s brand of machismo. Jesus, he thought, something is really wrong here.
Johnson’s reverie was interrupted when someone stuck his head into the room and said Ted Forstmann was about to leave.
“Oh my God,” Jim Robinson said. “Teddy’s still down there.”
As Cohen and the others hustled out to head off Forstmann, Johnson and Robinson remained behind. “I feel like keepers of the asylum,” Johnson said.
Geoff Boisi hadn’t been able to stand the waiting a minute longer. Forstmann’s combative investment banker got up from his chair and left the windowless conference room like a man on a mission. Outside, no one was in sight. He checked a number of deserted offices before he found what he was looking for.
Inside an office, a pair of Shearson executives, Jeff Lane and George Sheinberg, sat on a desk, talking. Boisi stuck his head in the door.
“I just want to tell you guys one thing. I’ve been in this business eighteen years, and this is the most atrocious behavior I’ve ever seen. It’s simply outrageous. We will not be treated this way. I simply won’t stand for it anymore.”
With that, Boisi stormed out.
Ted Forstmann had had enough. He and his trio of advisers picked up their coats and began to look for someone to whom to say good-bye.
Suddenly, down a long corridor, Forstmann saw Cohen and a retinue of a half-dozen people trotting toward him. The two groups came face-to-face outside the conference room where Forstmann had been cooling his heels for most of the evening.
“Hey, partner,” Cohen said, extending his arms in welcome toward Forstmann. “Let’s go. Let’s talk.”
Forstmann realized instantly what had happened: The talks with Kravis had fallen through, and Cohen now needed Forstmann Little.
For the second time that night, Forstmann wanted to scream. He looked at Cohen and knew exactly what he wanted to say. You make me sick.
But Forstmann couldn’t leave. It was, he would later reflect, a moment quite similar to ones he had experienced in high school romances. With every girl there was a moment before you broke up when you knew—you just knew—that if you left her right then, you would never make up. Forstmann knew if he left RJR Nabisco’s offices at that moment he would never return. Henry Kravis would gain the biggest prize in history as a result. And nobody would know the truth. Nobody would know the emperor had no clothes. The two groups filed back into the conference room.
Inside, Forstmann tried to keep calm, but as usual, did a poor job of it. Before they went any further, before they could even consider being “partners,” he had to make Cohen understand what Forstmann Little was about. He had to make them understand the fundamental differences between Forstmann Little and Kohlberg Kravis.
“You can’t mention Forstmann Little and Kohlberg Kravis in the same breath,” Forstmann said. “We are not comparable. When I started this business ten years ago, I said I wanted to be the best. I didn’t care about being the biggest. If you think the biggest is the best, go away. You belong with Kravis. Our returns are three and four times the returns they lie about getting.”
Jim Robinson cut him off before he got too far into The Spiel. “We know all that, Ted. We know that’s true. That’s why we’re all here.”
A few minutes later Ross Johnson joined the gathering. Forstmann turned to him. “What I’m saying is, if you have any ambivalence about KKR, you can’t be for me. You just can’t.” It had to be all or nothing, Forstmann said. He wouldn’t be partners with anyone who would even consider joining forces with Kravis.
Geoff Boisi thought he knew what was needed. “We need to hear you guys say that, if we’re going to go forward, you will not deal with these people anymore.” He repeated the same message two or three times so it would sink in.
Boisi looked at Johnson, who slouched down in his chair, his head in his right hand just inches above the tabletop. He appeared exhausted. From time to time Johnson sipped from a glass of clear liquid. Steve Fraidin, who noticed Johnson seemed to be slurring his words, wondered whether the glass held water or vodka.
“Ross,” Boisi continued, “I think what Teddy’s saying is, he wants to be sure you’re through with Kravis. I think he wants you to look him in the eye and tell him you’ve made up your mind. Tell him you’re finished with this other business. If you’re not, we’ll leave right now.”
Forstmann interrupted. “Is it over? ’Cause if it isn’t over, we’re over.”
Finally Johnson spoke. “There’s no deal with those guys. That was something we had to do. It had to be done, and now we’re finished. We need your help. We’d like to work with you.”
There was some more talk, about strategy and tactics and how best to deal with a hostile Henry Kravis. And then somebody said it was four in the morning, and didn’t everyone have plenty of work tomorrow? Soon they rose and shook hands and headed for the elevators. As they did, Ted Forstmann couldn’t help thinking that no one had apologized for letting him sit in a room alone for more than three hours.
The cool morning breeze blew hard against their faces as the Forstmann group emerged from Nine West. For a few moments, the four men stood in silence on Fifty-seventh Street, each lost in his own thoughts.
Boisi broke the silence. “Are you sure you want to do something with these guys?” he asked Forstmann.
“Geoff,” Forstmann said, “it’s where the management is. It’s where we should start. We need to at least try to work with them. Don’t you agree?”
“Speaking as an adviser, and I’m an adviser now,” Boisi said, “I have a thought. I want you to tell them that you’re upset. I mean it. We need to tell them we didn’t like what happened in there.”
It was clear where Boisi stood. He wanted nothing to do with Peter Cohen. But then Boisi had his own agenda. Several of Goldman’s best clients, including Procter & Gamble, were chomping at the bit to get a piece of this deal. “Teddy, don’t you feel you have an alternative?” Boisi wondered. “I mean, why don’t you do something with us?” With Goldman Sachs.
“Geoff,” Forstmann said. “I have three alternatives. I can join up with these guys. I can go team up with you. That’s certainly doable. Or I could do nothing.”
Fraidin laughed, as if to say the idea of doing nothing in Wall Street’s fee-driven atmosphere was something only Ted Forstmann could imagine.
“Geoff, you do take me seriously, don’t you?” Forstmann said. “About doing nothing? I mean, if there’s nothing there, I won’t do anything.”
“I think you ought to tell Cohen that,” Boisi said.
“That’s the type of thing an
adviser should do,” Forstmann replied. “I want as little as possible to do with this Cohen guy.”
Chapter
11
The peace talks off, Cohen’s troops prepared for war. With Kravis forging ahead with his $90 tender offer, every assumption underlying the management group’s $75 bid had to be thrown out. A small mountain of revised analysis was already underway. New divestiture estimates were calculated, and talks aimed at securing $15 billion from the bank group were restarted. In the spirit of men bailing out a sinking ship, the gnomes at Shearson quietly tossed each of Johnson’s corporate playthings overboard to make possible a higher bid. “All the planes, the penthouses, Premier, the country clubs, the Atlanta headquarters,” recalls Tom Hill, “had to be napalmed.”
Not only had Shearson been badly outmaneuvered, it now found itself outmatched by the financial sophistication of Kohlberg Kravis and its advisers, Drexel and Merrill Lynch. Kravis’s introduction into the bidding of PIK preferred stock, which represented a full $11 a share, or nearly $2.5 billion, of his $90 bid, was a masterstroke Shearson couldn’t easily equal. Two years of backing Dan Good’s corporate raiders had left Cohen’s junk-bond department sadly lacking in the expertise it now needed. The worldwide market for PIK stock, which is convertible into junk bonds, then stood about $2.5 billion; Kravis’s offer would easily double its size. That kind of confidence didn’t come overnight. As hard as he tried, Tom Hill couldn’t see how the market could absorb much more than $5 a share; later he would revise that number to $8 a share.
For the moment, Cohen put off dealing with Forstmann. Already Forstmann was pestering him with calls. We have to move fast! Do you think Kravis is waiting around? It was impossible to talk with the man without enduring twenty minutes of why Kravis was ruining the world.
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