Barbarians at the Gate

by Bryan Burrough

  “You people in New York are crazy,” he said. “This is a terrible environment. We’re taking a real beating.”

  Kravis had to agree.

  “I can’t wait to get back to San Francisco,” Roberts said. “This town is crazy.”

  The due diligence, the worried investors, the press—there had to be a way to end this. Maybe, the pair agreed, it was time to jump start talks with Johnson. As they discussed it, Kravis found himself rationalizing the benefits of a joint bid. “We like Jim Robinson,” he said. “We like Peter Cohen, I guess. It wouldn’t be so bad when you think about it…”

  His contempt for Johnson aside, Roberts found himself warming to the idea. Shearson doesn’t run food companies for a living, he thought. Cohen will lose interest once he has his fees. Give him half the deal now, Roberts suggested, and we’ll probably be able to buy back the rest later on.

  However distasteful he found approaching Johnson on bended knee, Kravis knew it was the right thing to do. Depressed by the prospect, he looked at his list of telephone messages. As usual there were several calls from Linda Robinson. Jim Robinson’s wife seemed to have Johnson’s ear. Linda had no obvious ax to grind here; that had to account for something. He picked up the phone.

  Linda Robinson was glad to hear from Kravis. As far as she was concerned, the whole fight—the name-calling, the finger pointing, everything—was getting out of control. There was no earthly reason Kravis couldn’t do this deal with Shearson and Salomon. There was every reason he should.

  It was all about egos, Linda Robinson knew. She considered herself finely attuned to the ways of her swaggering Wall Street clients. As so often happened, Peter Cohen and Tommy Strauss and Henry Kravis and the rest had totally lost sight of their real objective, RJR Nabisco. Their disagreements had nothing to do with shareholder values or fiduciary duties. It was all a test of wills among an intensely competitive clique of macho, Park Avenue bullies in pinstripes. At this point, she was well aware, Cohen would never give in to Kravis, or vice versa. Kravis certainly wasn’t going to cut a deal with Strauss. Each was determined to be King of the Sandbox.

  Someone had to cut through all the bullshit, she told herself. Absent the built-up emotions, the knot ought to be easy to cut. What this takeover fight needed was, well, a woman’s touch.

  “I know we can work something out,” she told Kravis. “Don’t give up on Ross. We’ve just got to get you guys in the same room. We’ve got to get you guys together.”

  “Linda, I don’t know,” Kravis said. “We’re just nowhere right now. There’s a bid and an ask that are just so far apart.”

  Linda Robinson pressed. “There’s just got to be a way to get together. Ross is just a great guy. I know you two would get along great. This is just crazy.”

  Kravis agreed. “All right. Maybe it does make sense for us to get together,” he said.

  “I’ll try to set something up” Linda Robinson said.

  Linda Robinson called Johnson Wednesday morning, excited. “I think we should give it one more try. I think something could happen. What do you think?”

  Johnson liked the idea. He too saw no reason not to join forces with Kravis. No matter what Cohen said, Kravis wasn’t a devil. They all had too much to lose not to join forces. And frankly, Johnson was losing confidence in Shearson’s ability to put together a viable counterbid. Andy Sage was bird-dogging the bankers’ progress and thought they were going nowhere.

  “Sure,” Johnson said. “Why not?”

  Carolyne Roehm was having a showing of her spring fashions at the Plaza at two o’clock, Linda Robinson pointed out. “I’m probably going to see Henry at the fashion show. What should I say?”

  “Tell Henry it’s gotta be done at a high level. We made a mistake the last time when Jim and I weren’t in the room. It should be Jim and me—no one else. Try that out on him, and let’s give it one last gasp.”

  Oh, and one other thing, Johnson said. “This has to be totally confidential.” No one else must know about the approach. No one, Johnson emphasized, not even—and maybe especially—Peter Cohen. Cohen and Hill were simply too volatile to be brought into the process at this point. Johnson wouldn’t even tell Steve Goldstone.

  Before giving Linda Robinson the go-ahead, Johnson called her husband at American Express. Quickly Johnson explained the rationale behind the meeting. Jim Robinson agreed.

  A few minutes before two o’clock, Kravis took the elevator down to Fifty-eighth Street and walked across to the Plaza. Inside the hotel’s Grand Ballroom, Kravis found the crowd gathering. Flashbulbs exploded across the wide room, a sea of flashing teeth and violently teased hair. A sense of anticipation pervaded the air as the crowd awaited the unveiling of Roehm’s spring collection. All the right people were there: Kravis saw Jerome Zipkin, the professional party goer, to one side, and society matrons Anne Bass and Blaine Trump sitting together.

  But Kravis had more than fashion on his mind. He surveyed the room a minute before finding Linda Robinson. In addition to counting her a friend, Jim Robinson’s wife also adored Carolyne Roehm’s clothes. Kravis discreetly guided the tall strawberry-blond into a corner. He looked around, taking pains not to be noticed.

  “So,” he asked. “How’s it going?”

  “I’m working on it,” Linda Robinson said. “I think it can work. I just know you and Ross can work together. I’ve got to set something up with just you, George, Ross, and Jim.”

  “Fine. That sounds constructive.”

  “Now,” Robinson chided. “If we do this, I want you to be rational. I’m going to tell our guys to be rational, too.”

  Kravis assured her he would be on his best behavior.

  “And Henry,” Robinson said, “I hope this isn’t just going to be bullshit, because if it is, you can do it through some other channel.”

  The show was about to start. Kravis excused himself and took a front-row seat by Oscar de la Renta. Linda Robinson slipped into a chair behind them. As the lively music pulsed—“Georgia,” “Hit the Road, Jack”—Roehm’s models bounced down the runway in a group of red, navy, and white short-skirt suits, pantsuits with boxy jackets, and jumpsuits topped with crop jackets or sweeping capes. The strength of Roehm’s collection, as always, was her nightwear, elegant bias-cut dresses in solids or striped silk; slender wool crepes with chiffon godets; lean tuxedo dresses and spare strapless slivers. Only her accessories would turn off the critics—“pins that overpowered,” Women’s Wear Daily fretted the next day, “scarves that overwhelmed and handbags that are best left off the runway.”

  Kravis thought it all grand. Beaming with pride, he chatted and laughed with de la Renta throughout the show. As the models made their last turns, Roehm herself came out, took a turn, and waved at her husband. She looked ravishing, tall and thin, as she acknowledged the applause. Kravis waved back.

  Throngs of photographers hovered around Kravis throughout the show, snapping his picture from every conceivable angle. At one point, Linda Robinson leaned over and whispered in his ear.

  “When you do a really big deal, Henry,” she purred, “just think how many photographers there’s going to be then.”

  Leaving behind the airy kisses and popping flashbulbs, Kravis crossed the street and returned to his office. During the fashion show Roberts had canvassed the other partners to gauge their enthusiasm for renewed talks with Johnson. The feeling was positive. The two cousins established what they wanted from any meeting with Johnson, then called Linda Robinson, who had returned to the forty-eighth floor after slipping backstage to congratulate Roehm with a kiss on the cheek.

  “Look,” Kravis began, “there’s no point in us getting together at all if we can’t deal with some of these issues ahead of time.”

  “Okay,” Robinson said. “What are the issues?”

  Kravis wanted majority control of the equity and the board, but soon consented when Robinson insisted on evenly splitting both. It was the price he would have to pay for peace. But on a third
issue he refused to compromise. Drexel had to run the books on the bond offerings, he said. It was the only way Kravis could guarantee a deal this size could be completed.

  “Linda, listen,” he said. “This is very, very important. You’ve got to understand this. Drexel is going to play this role. It’s just got to happen. If that’s going to be a problem, this deal is not going to happen.”

  “You know there’s real sensitivities on the Drexel thing from the Salomon side,” Robinson said. The two firms were archrivals at the top of the fiercely competitive bond-trading business. “Look,” she told Kravis. “Ross wants to do this deal. He wants to go with whoever’s best. It shouldn’t be a problem.”

  Three points, three agreements. Both Kravis and Robinson were encouraged by their swift progress. Before hanging up, Kravis tried to haggle a minor point. Linda Robinson thought he was backsliding.

  “Henry, you know, every time we make a little progress here, you can’t just go back on it.”

  “All right,” Kravis said. “Enough’s enough.”

  “Do I have your word on that?”

  “Yes,” Kravis said. “Do I have your word on it? Are your people good with you on each of these issues?”

  “Yes,” Linda Robinson said. “There should be no problem.”

  What was needed now, they agreed, was a summit.

  Johnson liked what he heard as Linda Robinson related her conversation with Kravis. The conditions seemed reasonable. Hell, he thought, Kravis was caving in on the equity, going up to fifty-fifty from 10 percent just a week before. A meeting was set for six o’clock. “Henry says it has to be absolutely confidential,” she told Johnson. “They’re not telling their investment bankers. They’re not telling anybody.”

  Johnson nodded. It was the way he wanted it, too. He was taking no chances that this would end up like the disastrous Cohen–Kravis sessions. Johnson was coming to admire the way Kravis handled his investment bankers, who were kept ignorant and more or less docile. The less they knew, Johnson figured, the less they could screw up. Sometimes he wished he could handle Cohen and Gutfreund the same way.

  There was only one hitch, Linda Robinson continued, a matter of social scheduling. “Tonight,” she said, “Jim and I have to go to a party at the Gleachers. What do we do?” If Gleacher found out about a summit meeting, they both knew, the news could spread like wildfire.

  “Don’t do anything,” Johnson said. “Just call ’em about eight o’clock and tell ’em, you know, that something came up. You can’t tell ol’ Gleach. He’d go off like a skyrocket if he knew something was going on.”

  Although she hated to be rude, Robinson agreed it was the only solution. “Now,” she said, “you have to call Henry.”

  First she called Kravis herself. “Now, Ross is going to call you and confirm these things with you. Are we square?”

  “I’m not going to have any surprises, am I?” Kravis said.

  “No, you’re not.”

  “Good.”

  Minutes later Johnson placed his call.

  “Henry,” he said, “let’s give this thing one more go.” It was to be Johnson and Robinson for the management group, Kravis and Roberts for themselves. “All right,” Kravis said. “But no one can know. If I hear one word, I’ll know it came from your side. Because it’s not coming from mine.”

  They agreed to meet at the Plaza. When Johnson relayed news of the meeting to Jim Robinson, the American Express chief insisted that Cohen be included. It just wouldn’t do, he suggested, for Cohen to see his boss and his boss’s wife scurrying around his back arranging meetings with his nemesis. Johnson reluctantly agreed.

  Afterward, Johnson called Cohen. This had to be handled carefully. “I’ve talked with Henry,” Johnson said. “He wants to meet. What do you think I should do?”

  “Go do it,” Cohen said. “You owe it to yourself and your people. It’s the right thing to do.”

  Cohen and Robinson reached Nine West shortly before six o’clock. As the trio walked into the Plaza, Johnson wanted to make sure Cohen checked his ego at the door. “I want this kept on a very low key basis,” Johnson warned the Shearson chief. “I don’t want any powder kegs going off.”

  Kravis and Roberts were the first to arrive in the fifth-floor suite. It was beautifully redecorated, the pride and joy of the hotel’s new owners, Donald and Ivana Trump. The Plaza was packed to the gills that night, but Kravis had wangled the suite out of Ivana by promising to be out the next morning by eight, when a photographer was due in to shoot the room for a promotional brochure.

  As they waited, Kravis paced the room nervously. At one point, he thought he heard noises. A chirping, maybe. Kravis walked into the bedroom and found a pair of caged parakeets. He would listen to their chirping throughout the meeting.

  Johnson, with Cohen and Robinson in tow, arrived at six. Roberts greeted them with a surprise for Cohen. As an icebreaker, and a play on his earlier comments, he presented the Shearson chairman with a box of fine Montecruz cigars.

  “A peace offering,” Roberts said as he handed the box to Cohen. “But I wish you wouldn’t smoke them in here.”

  Cohen smiled. “I’m going to sit back here in the corner and smoke them so the smoke doesn’t bother you,” he said.

  It was a good start.

  “Listen,” Johnson began, addressing the group. “Let’s see if we can get back to square zero here…. This thing is getting ridiculous. It seems to Jim and me—and Peter—that we can work out some compromises that make a lot of sense. It’s not going to be everything you would want. It’s not going to be everything we would want. But it’s going to be good. No one person is going to end up with everything they want to get.”

  In thirty minutes they had the outlines of an agreement. Control of the RJR Nabisco board would be split fifty-fifty: Neither side would have outright control. The stock would likewise be split down the middle, with Johnson’s share coming out of Shearson’s take. If Cohen, unaware of Linda Robinson’s secret peace initiative, was surprised by the quick consensus, he didn’t show it.

  As for fees, Kravis said he planned to pay each of his four investment banks $25 million. In addition, Kohlberg Kravis intended to take its customary fee of one percent. No one had to do the arithmetic: It amounted to more than $200 million, three times the size of any previous merger fee in Wall Street history.

  Hold on, Robinson interrupted. He remained acutely aware that the eyes of the world were on them. They mustn’t appear too greedy, he cautioned. Surprisingly, Kravis agreed in theory to reconsider his fee.

  Kravis brought up Drexel, insisting that the junk-bond powerhouse lead the bond offerings necessary to finance the deal.

  Cohen stiffened. “Why Drexel?”

  “Look, Peter,” Roberts said. “If we’re putting out two billion in equity, well, we wouldn’t put that kind of money on the table if the takeout of that bridge wasn’t certain.” Roberts had no confidence that Salomon, or even Shearson and Salomon combined, could do the job. “If we were doing this deal ourselves”—without Shearson—“we wouldn’t even consider you for it.”

  Cohen didn’t like the idea of selling bonds under Drexel’s yoke and said so. “You know how they are. When Drexel comanages a deal, they hog the deal. They won’t give you anything.”

  “This isn’t going to be that way,” Roberts assured him. “You’ll get half the fees. If you don’t sell a single bond, Peter, you get half the fees. All right?”

  Cohen quit arguing.

  Other issues came up. Shearson would want to handle the auction of all RJR Nabisco assets to be sold, Cohen said. Tom Hill was projecting $103 million in fees from that alone.

  “That makes no sense,” Roberts argued. “You ought to parcel out each business to an investment banker seasoned in that industry.”

  “Well, at least we’d want to be coadviser,” Cohen said.

  “Why pay twice?”

  “No, no, no,” Cohen said. “You don’t understand. That’s not
what’s important. What’s important is getting your name on the tombstone.” The rankings of most active merger advisers were compiled from the names of firms listed on the “tombstone” advertisements that accompanied all major acquisitions. Cohen wanted to get credit for the sales even if Shearson didn’t get a fee. The matter was left unsettled.

  In an hour they were finished. The three major issues had been agreed to. All that remained was for the lawyers to join them and pound out final details.

  Johnson was thrilled. The logjam was broken! Thanks in large part to Linda Robinson, he finally had a deal. It wasn’t perfect, Johnson told himself, but it sure beat losing—or winning at some level that made it impossible to run his company.

  As they headed for the door, there were smiles all around. On the way out, Robinson sidled up to Kravis, his wife’s horsebackriding partner. “You better send a big bouquet of flowers to my wife for this,” Robinson said, smiling. “She went way out on a limb for you.”

  So far only a half-dozen people knew of the secret summit.

  Downtown, Steve Goldstone was growing suspicious. He couldn’t find Johnson. Or Cohen. No one seemed to be at Nine West. He called Tom Hill at Shearson.

  “You haven’t heard anything, have you?”

  “No,” Hill said. “Have you?”

  “No. But something is going on…”

  Roberts and Kravis, who remained behind in the suite, were in high spirits. Kravis phoned Dick Beattie, who, with his partner Casey Cogut, met the pair downstairs in the Oak Room for dinner. The lawyers ordered fish, Kravis and Roberts celebratory steaks. Roberts, a finicky eater, found his too peppery and pushed it aside. As they ate, Kravis hurriedly briefed the lawyers on where the talks stood. The group was scheduled to reconvene upstairs in an hour.

  “It’s not the ideal solution,” Roberts told the lawyers. “But it’s a solution.”