Barbarians at the Gate

by Bryan Burrough

  Cohen insisted Salomon would be no problem, but Goldstone wasn’t so sure. Later he had Gar Bason send Cohen the draft of a letter he was considering sending:

  Dear Peter,

  We have become increasingly concerned at press reports in recent days that suggest that the management group’s financial partners are not fully supportive of Ross and the management equity arrangement that all of us have reached. Ross and his group are confident, based on your and Tom’s [Strauss] assurances, that this [is] not the case. Nonetheless, the continuing rumors that surface in the newspapers are damaging to all of us. As a consequence, I am writing to ask that each of Shearson and Salomon write a brief note to me indicating that you are supportive of our existing arrangements. Naturally we understand that as we go forward with any new proposal, those arrangements will be a subject for discussion among all of us.

  Sincerely yours,

  George R. Bason, Jr.

  On Saturday Ted Forstmann tried in vain to contact Johnson to formally notify him of his new group, and finally resorted to phoning Jim Robinson in Connecticut. “Jim, I’d just like you to know I’m trying to reach Ross. I don’t have all his numbers. Would you mind telling him I was trying to get hold of him?”

  “I think you ought to call him yourself.” Robinson seemed in good spirits.

  “Gosh, I’d love that.”

  Robinson mentioned Forstmann’s new group. “Would you still work with us, Ted? I mean, could we try to put something together? Is it even possible?”

  An idea struck Forstmann. Why couldn’t Johnson join the Forstmann group? Shearson could even have a role. Instead of shoehorning Forstmann Little into Shearson’s cockamamy structure, why couldn’t Forstmann find room for Shearson in his “real money” deal?

  “Absolutely, we would work with you,” Forstmann said. “No problem at all. We’d have to do it the Forstmann Little way. No junk shit. No bullshit. But we’d love to have you.”

  Robinson gave him Johnson’s number, and Johnson returned Forstmann’s call Saturday afternoon. “Ross,” Forstmann began, “I hope you understand what I’m doing is altogether permissible. I wanted to tell you the true story of what happened. But I haven’t been able to see you. Christ, I haven’t been able to talk to you.”

  Johnson brought up The Times story. “My deal has been leaked to the press,” he said. “You wouldn’t know anything about that, would you, Ted?” Forstmann didn’t miss the implication.

  “Ross, I didn’t hear that…I give you my word I didn’t do it. I abhor that. That’s a dirty, fucking thing to do.”

  “Well,” Johnson said, “I will have a way of dealing with Mr. Kravis if that’s who did it.”

  Forstmann brought the conversation back to his group. “You know, Ross, I think we’re the best people in this business. We’re your kind of people. You know where I get my money. GM, IBM, GE.”

  “Yep, John Welch, John Akers,” Johnson said, ticking off the CEOs of General Electric and International Business Machines. “I play golf with ’em.”

  “I don’t blame you for going with all these junk bond guys,” Forstmann said. “But in my deal there’s no junk bonds, no funny money.”

  Johnson laughed. “I don’t have any junk bonds in my portfolio.”

  Forstmann allowed himself to get excited. This sounded promising. “Now,” Forstmann said, “Jim asked me if we could do this together. I said yes. I’m not trying to cut anyone out of anything. I’m not trying to do anything funny. We’ve got a reputation to protect.”

  “I know your reputation.”

  “Ross, you ought to seriously consider what I’m talking about. Talk to Jimmy. He’s a very straight guy. He’ll tell you. If we could get together, it would be great. You’re the key to making this thing happen. I hope you’ll be with us.”

  “Teddy, I’ll give some thought to that.”

  Forstmann garnished his appeal with a personal touch. “Ross, I wanted to tell you I’m very sorry about your son. Goddamn it. I’m really sorry about that.” After Johnson thanked him, Forstmann continued, “You know, we’ll both be around after this. There are more important things than who buys RJR Nabisco.”

  “You’re right.”

  “It’s important we remain friends.”

  “Betcher ass.”

  Johnson had no intention of joining forces with Ted Forstmann’s new group, which he labeled “the five-legged elephant.” As far as he was concerned, Forstmann didn’t have a chance in hell of winning this deal.

  On Sunday they rested. In Atlanta, Johnson curled up with a stack of newspapers and watched football and golf on television. In Connecticut, a morose Henry Kravis wondered aloud whether the board had noticed the curious story in The Times. He paid little attention to Forstmann’s new group; consortia, in his experience, were too cumbersome to win. In New Jersey, Peter Cohen took his son to a New York Giants game, and was probably the only father at the Meadowlands that day to sleep through the entire four quarters.

  That evening a group of bankers and lawyers gathered at Cohen’s Fifth Avenue apartment to plot strategy for the following week. Cohen was outraged at Geoff Boisi and Ted Forstmann, who he felt had given him repeated assurances they wouldn’t pursue RJR Nabisco on their own. The possibility of a lawsuit was batted about, then dismissed. Jack Nusbaum suggested they write a letter expressing their displeasure. Goldstone and Peter Darrow saw no point in it, but Cohen seemed determined to exact his pound of flesh.

  Sunday evening Ted Forstmann was at his East River apartment enduring a vigorous rubdown from a masseur once employed by the Italian national tennis team. Forstmann kept getting interrupted by worried calls from his outside public relations adviser, Davis Weinstock. From the hostile tone of reporters’ inquiries that day, Weinstock said, it was clear Shearson was displeased with Forstmann Little. “They’re claiming you did something,” Weinstock said. “I don’t know what.”

  Forstmann thought for a moment. He must be getting blamed for leaking the management agreement. If that fucking Kravis has convinced people I leaked this thing…

  As Forstmann kept hopping up to take Weinstock’s calls, his masseur grew frustrated. “How can I give you a massage if you keep getting up?”

  “Maurizio,” Forstmann said. “I know you have problems. But I have bigger problems.”

  Finally Forstmann decided to find out what was happening. He called Johnson in Atlanta. Laurie Johnson answered the phone at the house on Whitewater Creek Road. “Hi, Laurie. It’s Ted Forstmann.”

  “Ted, how are you?” She seemed genuinely pleased to hear from him.

  “Fine, fine. Is Ross there?”

  “He’s on a conference call.”

  “It’ll only be thirty seconds. Could you ask him to pick up?”

  Laurie Johnson left the phone for a minute, then returned. “Ross says he’ll call you as soon as he gets off the conference call.” Before he could hang up, she said, “How’s the weather up there?”

  Talk of the weather quickly turned to the condition of the greens at Deepdale. They chatted for nearly ten minutes. Forstmann hung up thinking what a nice wife Johnson had.

  As Laurie spoke with Forstmann, her husband was on the other line with Cohen and Goldstone. Both were alarmed when he mentioned the call from Forstmann. That could mean only one thing: Like Kravis before him, Forstmann was making a play for Johnson.

  “Look, I’m with you guys,” Johnson insisted. “I’m not cooperating with anyone you don’t want me to cooperate with.”

  “Why don’t we call Ted and express those things so you don’t have to?” Goldstone suggested. He was worried that Johnson wasn’t capable of dealing with Forstmann firmly.

  “Fine, you guys do what you think is best.”

  Goldstone quickly called Gar Bason with another job for the baby-faced hatchet man.

  Thirty minutes later Ted Forstmann’s phone rang. He already knew what he was going to tell Johnson. Ross, I want to assure you I know nothing about this dirty leaki
ng business. We don’t do things like that. We abhor that.

  But when he picked up the phone, a voice he didn’t recognize said, “This is Gar Bason of Davis Polk and Wardwell. We represent Mr. and Mrs. Johnson, and I am authorized to tell you to stop annoying them. You are imposing on them by calling them in their home. You will not attempt to reach Mr. Johnson directly anymore. Any communication between Mr. Johnson and you in the future will go through me.”

  “I don’t know who you are,” the astonished Forstmann shot back, “but let me tell you something. I called Mr. Johnson to tell him if anything funny is going on, I didn’t do it. Mrs. Johnson and I were talking about golf and the greens at a club, where I was on the board of governors and helped Ross Johnson get in. I’ll have you know I talked to Mr. Johnson yesterday at the request of Jim Robinson.”

  Now Forstmann was rolling. All the frustration he felt toward Peter Cohen and his cigars and Henry Kravis and lawyers and junk bonds came boiling forth. “Let me tell you something. I know enough about lawyers to know who cooked this up. It wasn’t Ross Johnson. I can tell now the lawyers have taken over. God help everyone. This is what’s wrong with the world today. Guys like you and your little concocted schemes.”

  But Forstmann wasn’t through yet. “I regard this as extremely rude. Rest assured that I will be spending time with Mr. and Mrs. Johnson when this is over. And rest assured I will tell them of your rudeness.”

  And then he hung up.

  Chapter

  13

  The RJR Nabisco directors who gathered at Skadden Arps on Monday morning, November 7, were a sullen, irritated bunch. For three weeks they had watched in growing horror as Ross Johnson turned their company into the centerpiece of a $20 billion circus, and more than a few on the board felt like fools for allowing it to happen. Disclosure of the management agreement shocked most of them and, by Monday, a rising anti-Johnson feeling was fast crystallizing on the board. Steve Goldstone had been right: These directors were no longer Johnson’s friends, they weren’t about to give him favors and they resented him for putting them at the eye of an increasingly public hurricane.

  Several, including Vernon Jordan, had called Charlie Hugel over the weekend, horrified at details of the management agreement. John Macomber had been morally offended. “So gross, so unfitting,” he had sputtered. Hugel had called Marty Davis himself. “Did you see The New York Times?” he asked.

  Davis hadn’t, but had a copy within reach. He had read the article in mounting indignation. What the hell…

  “Can you believe it?” Hugel asked. “This is terrible. He says it’s wrong, it’s not true, but I don’t know…”

  News of Johnson’s secret pact was the crowning blow for a board already feeling the pressure of an anti-Johnson backlash among employees, shareholders, and the media that would grow to earsplitting dimensions in coming days.

  It was coming in a steady drumbeat of newspaper stories: the $52.5 million of golden parachutes; the 526,000 shares of restricted stock given to favored RJR executives, now worth nearly $50 million; the whole no-lose situation Johnson had set up. To make matters worse, the press had picked up on the favors bestowed on the board by Johnson, including the fat consulting contracts and the 1,500 shares of restricted stock each of them had gotten. The spectacle of Johnson’s apparent greed, combined with the bitter public quarreling among the bidders, struck a nerve in a nation already sick of the unrest wrought by takeovers. From the outset, Hugel had been deluged with anti-Johnson, anti-LBO hate mail.

  “This is the ultimate in ‘insider’ trading,” a veteran tobacco worker wrote. “This group of insiders were intrusted [sic] with the management of the RJR Nabisco company. In return we are lied to, cheated and used by a small group of insiders for their own gain. I fail to see the difference between what Johnson is doing and armed robbery, except that you will let Johnson get away with it for your own personal interest.” Other letters pleaded with Hugel to fire Johnson and the entire management group. “Somehow,” a Winston-Salem businessman wrote, “there ought to be a greater value in this world than a stock price.”

  Anger wasn’t confined to RJR Nabisco’s communities. A Nashville shareholder wrote, “The greedy SOBs don’t have the welfare of the company, its employees or stockholders at heart. Fight them if you can!” From Boston: “What has this group of people done to enhance shareholders during their tenure—nothing compared to their manipulation for their own pockets. What have they done for the community in Winston-Salem other than uproot the loyalties of the community? What have they done to build plants, hire and train more people to sell more and better costing products?”

  Directors took special note of a letter from Smith Bagley. The angry Reynolds heir demanded that a blue-ribbon panel be formed to referee the developing auction. He questioned whether the committee could truly “safeguard the stockholders’ interests,” in light of the “close relationships between certain committee members and Mr. Johnson.” Bagley’s letter, while never acted on, upped the pressure one more notch when it was released to the press.

  On a national scale, the fight for RJR Nabisco prompted new debate on the danger LBO debt held for the country. “Our nation is blindly rushing toward the precipice,” warned Martin Lipton, the famed merger attorney, in a memo to clients. “As with tulip bulbs, South Sea bubbles, pyramid investment trusts,…Texas banks and all the other financial frenzies of the past, the denouement will be a crash.”

  Federal Reserve Board chairman Alan Greenspan urged Congress to have banks reconsider how LBO loans would fare in a recession. The comptroller of the currency instructed federal bank examiners to take a closer look at LBO loans. Senate minority leader Bob Dole and other politicians began growling about the need to reform the tax code to curb LBOs.

  On consecutive days in mid-November, two major insurance companies, Metropolitan Life Insurance and ITT Corporation’s Hartford Insurance, sued RJR Nabisco. The value of both firms’ RJR bonds had plunged as the stock had risen. “The value lost by the bondholders will unjustly enrich RJR Nabisco management and other leaders of the leveraged buyout,” Metropolitan Life chief executive John Creedon said. (Former Federal Reserve Board Chairman Paul Volcker called him up and said one word: “Bravo.”) LBOs were generally “unethical,” charged ITT Chairman Rand Araskog, who ordered the company’s pension managers to stop investing in LBO funds.

  In an editorial headlined, “Why the RJR circus is so dangerous,” Business Week reflected the business establishment’s distress. “This spectacle is not just unseemly—it is dangerous,” it held. “It is precisely this sort of behavior that plays into the hands of those who want to shackle the free market with unnecessary regulation. LBOs, including a potential RJR deal, should stand or fall on their financial and economic merits, not on the childish behavior of the principals.”

  For all the high-level handwringing, few felt the effects of the escalating fight as keenly as RJR Nabisco’s employees. In Atlanta, office workers sat during lunch periods glumly reading the daily news summaries the company issued. Isolated, irritated, and uncertain of their futures, the staff spent its days consumed with following the events on Wall Street, its spare time channeled into producing anti-Johnson propaganda. “It all started with a small lemonade stand in Manitoba,” read one Johnson parody. “The next thing I knew I had sold my mother. The rest was easy.” In truth, the headquarters staff was divided between pro-Johnson Standard Brands veterans and the Reynolds “mushroom farmers.” Many of the undecideds stampeded into the Reynolds camp on disclosure of the management agreement. “We have circled the wagons,” one disgruntled supervisor quipped, “and the Indians are inside.”

  An editorial cartoon from the Atlanta Constitution was widely circulated. It showed a group of hapless people in a cereal bowl, on the cover of what looked like a Shredded Wheat box. “RJR Nabisco Shredded Workers,” it said on the box, “List price: 25 billion dollars.”

  RJR Nabisco employees across the country looked for ways to
save their jobs. Second-shift workers at a Winston-Salem cigarette factory got out calculators and began figuring out what all 140,000 employees would have to kick in to make a bid.* In Chicago, two third-shift Nabisco bakery supervisors took the idea of a $3.8 billion bid for all fourteen bakeries to their superiors.

  Nowhere were workers more despondent than in Winston-Salem. It wasn’t bad enough that their venerable tobacco company had been put in play by Johnson and Horrigan. The smokeless cigarette the two had sent into the market untested was dying a brutal death. Premier was the first cigarette ever to be returned for refunds. It was the butt of drive-time disc-jockey jokes in St. Louis and Arizona, where it was being test marketed. The product that was to be the great hope for Reynolds Tobacco was being called one of the great new-product fiascoes of all time. And while managers fought desperately to salvage it, Horrigan and Johnson fought their LBO battle in New York.

  Ed Horrigan put his house under guard and sent out a memo denouncing The Times story as “speculative.” A parody of Horrigan’s memo received wider readership than the real thing. “We have decided to just ‘take the money and run!’” it began, closing, “It has been swell being the CEO to such a fine bunch of chumps. Thanks for making Ross and I rich men. We couldn’t have done it without you.”

  Of the five members of the special committee, Hugel had probably swung the farthest in his judgment of Johnson. Unsure of his friend’s motives from the outset, Hugel let his suspicions grow as the weeks wore on, prodded by a series of unsettling events: the piece-of-the-action offer, the management agreement, and the anonymous memo suggesting the company was worth between $82 and $111 a share. When Hugel had confronted Johnson with the memo, Johnson had called it “a lot of hypotheticals,” suggesting it was the work of a junior-level staffer. Hugel wasn’t so sure.

  Hugel’s annoyance increased Monday morning when The Times carried a story speculating that Johnson’s group might sue Forstmann Little over its new bidding group. Hugel felt he had bent over backward to allow Forstmann entrance into this fight; he wouldn’t stand for Johnson and Cohen’s suing over it. He fired off a letter to Johnson that morning.