Barbarians at the Gate

by Bryan Burrough

  At Shearson, Tom Hill had nothing but contempt for the First Boston “offer.” Maher is so desperate he’ll do anything, Hill thought. The installment note scheme, he believed, was a gimmick that would never work in a deal this size. Hill considered Seslowe a lightweight, a real amateur. “They’ve got everybody in this deal except Abbott and Costello,” Hill cracked, “and they’re dead.”

  Hill and the Salomon Sausages saw the wide girth of Ira Harris behind Jay Pritzker’s sudden interest in RJR Nabisco. Harris, now advising the board, was so close to Pritzker that Hill called them “blood brothers.” Pritzker’s entry into the fray was no accident, Hill decided; the special committee needed a stalking horse to replace Forstmann Little, so Harris came up with Pritzker. At Nine West, John Martin took to ranting how “Fat Ira” was bent on mucking up their deal. In fact, Harris had spoken to Pritzker that Monday and had risen at the special committee meeting to urge listening to what First Boston and the Pritzkers had to say. But even his backing didn’t persuade Atkins to give the new group any information.

  Two days left.

  As the deadline neared, Johnson’s malaise lifted a bit. He began to grow worried what effect the onslaught of stinging publicity might be having on the board. Wednesday he called Hugel.

  “Charlie,” he said, “if you’re going to run this, I want your word that, if we give our best bid, you’re not going to play games and try to negotiate us all over the place.”

  “You’ve got my word.”

  “Are you going to be opening the bids? I don’t want any funny business.”

  “I’ll be right there,” Hugel said. “I’ll personally open the bids.”

  If you’re worried about the publicity, Hugel continued, why don’t you call the directors and explain yourself? Johnson began calling directors the next day. His approach was always the same.

  “My conscience is clear,” he told each director. “I can sleep at night, because I don’t think I’ve done anything wrong…. Whatever happens, the management group has gotten the stock up, and that’s what’s important.” To each he downplayed the management agreement, emphasizing his intention to spread the money around.

  In the days leading up to the deadline, Johnson spent long evenings at Jim and Linda Robinson’s apartment, hashing through pricing strategies. Most nights Horrigan, who had a company apartment downstairs, would join them, and Linda would scurry around serving drinks. Johnson was a scotch man; Jim Robinson preferred a glass of wine. Horrigan insisted on hard liquor, what Linda referred to as “grown-up drinks.” Linda herself sipped berry-flavored Perrier.

  A night owl, Johnson usually kept the Robinsons up until two or three A.M. As it grew late, Linda would lay face down on a living room couch, nibbling popcorn or stroking one of her three dogs. Each was named after an “Amos ‘n’ Andy” character: the King Charles Spaniel was Algonquin J. Calhoun, the two others were Ruby Begonia and Lacy.

  When her husband and Johnson disappeared into a back room, Linda knew they were talking about the management agreement. In sharp contrast to its fiery birth, the pact was being gently renegotiated, largely in late-night one-on-ones between Robinson and Johnson. Jim Robinson didn’t need to push hard to obtain the revisions he sought; the publicity on the greed issue had done it for him.

  By Wednesday, November 16, when the revised agreement was approved in a meeting in Peter Cohen’s office, Johnson had agreed to cut two points from his group’s stake, to 6.5 percent, and to sharply scale back the incentive bonuses. New, detailed provisions were included for spreading the stock to 15,000 RJR Nabisco workers. Later, members of the management group would defend themselves on the greed issue by pointing to that fact, suggesting Johnson had agreed to trim his share of the bounty.

  In fact, he hadn’t. “At that point, Ross was really giving away other people’s money,” says Steve Goldstone. All along, Johnson and Horrigan had each planned to take about a point, or 1 percent, of the equity for themselves. Goldstone valued that point at between $75 million and $100 million over five to seven years. And according to Goldstone, Johnson still planned to take one point under the revised agreement.

  Goldstone and Gar Bason jokingly chided Johnson about the talks with Robinson. “Every time you go off with Jim Robinson,” Goldstone told him at one time, “you come back with $50 million less.” When Johnson told his lawyer he planned to spend the weekend of November 19 at the Robinsons’ Connecticut farm, Goldstone groaned. “Don’t go out there,” he said. “This time you’ll come back with nothing.”

  The Kravis camp’s buoyant reaction to John Greeniaus’s disclosures was short-lived. Wednesday night Scott Stuart got the answers to many of his remaining questions in a phone call from Dillon Read.

  What he heard was startling. Working blind, Stuart had overestimated RJR Nabisco’s available cash by $450 million. Golden parachute payments were $300 million more than he had guessed. And his worst fear about the “Other Uses of Cash” column came true: $550 million more cash was flowing out of the company than his projections reflected. Stuart didn’t need a calculator to assess the damage: $1.3 billion had to be lopped off their projections. It was roughly $6 a share.

  “What happened?” Paul Raether asked in amazement when Stuart brought the news to his office. No one knew. Stuart was deeply embarrassed.

  Already unnerved by press criticism, Kravis was shaken anew when he learned of Stuart’s revisions Thursday morning. It wasn’t just their effect on the projections. Kravis could live with that. The more severe blow was to their confidence. If they could be that far off on fundamental numbers, Kravis wondered, how reliable were the rest of their projections? What else didn’t they know? All their analysis to date, nearly a month of work, was suddenly open to question.

  All this began to sink in on Thursday, not thirty-six hours before bids were due. It was a very bad time to get cold feet.

  “Jesus,” George Roberts said. “How much do we really know about this company?”

  It was a somber group that Kravis gathered in his office Friday morning. The same thoughts were on everyone’s minds. Here it was, the biggest bid in history, and what did they really know about RJR Nabisco? They hadn’t visited the factories, hadn’t talked with more than a handful of executives. All they had was a pile of annual reports, government filings, and stacks of white computer runs—all of which they had lost confidence in.

  Their doubts fueled other concerns. Could a deal this size be done safely? Would the banks, already nervous about LBO loans, come through? Would jittery junk-bond buyers want KKR’s bonds? Roberts brought up life-style issues. They all lived quiet, tidy lives. Buying RJR Nabisco would mean a wave of publicity, Washington hearings, and an unprecedented commitment to run the company. “This firm’s going to be in business for a long time,” Roberts said. “Do we really need this aggravation?”

  “Do we really want to do this to ourselves?” Paul Raether echoed.

  As they talked, they followed a familiar pattern. The discussion began with the most junior, Scott Stuart or Cliff Robbins, and went around the room until it stopped with Roberts. As they completed each circuit, the group grew more and more downbeat. At the outset, Kravis and Raether had been the most bullish. Both were comfortable with a bid in the range of $97 to $98. Roberts was the bear. He wasn’t comfortable with anything much above $93. “Why don’t we do it at ninety-one or ninety-two?” he suggested. “Why take chances?”

  Around two-thirty Dick Beattie stuck his head in. His tone was plaintive: the schoolteacher hurrying children off the playground. “If you guys don’t hurry up and give us an answer, you’re going to be left out of the bidding. I’m going to have to call over there and get an extension or something.”

  “Okay,” someone said. “Give us fifteen more minutes.”

  Selecting lawyers to prepare its bid, normally the most routine of tasks, became a problem for First Boston. Every major firm seemed to be up to its elbows in RJR Nabisco. So many rejected him that Maher’s aides j
oked they should call Jacoby & Meyers, the nationwide discount firm. Finally Maher selected a little-known outfit named Winthrop Stimson Putnam & Roberts. The firm’s first task would be drafting a formal bid letter to be sent Friday afternoon. The search took so long Finn didn’t brief the lawyers until Thursday evening.

  The Winthrop team arrived at First Boston with a draft letter at eight o’clock Friday morning. The lawyers waited anxiously while Maher and his lieutenants studied it. In minutes their verdict was unanimous: The letter was a disaster.

  “This is shit!” Fennebresque ranted behind closed doors. “This is absolute garbage!” Finn agreed. “It’s incomprehensible,” he said, shaking his head.

  Irked, Maher sent the lawyers and a First Boston team to an upstairs boardroom to rework the five-page letter. It promised to be a difficult task, but Maher wasn’t too worried. They had all day.

  Upstairs the scene degenerated into bedlam. A half-dozen Winthrop lawyers attempted to recast the letter. A First Boston contingent attempted its own version. Drafts were written and torn up. New lawyers filed in. First Boston people shuffled in and out. By noon Jerry Seslowe and his partners arrived, adding to the rising cacophony. Lunch was brought in. More drafts were written and discarded. Heated discussions broke out over the wording of obscure clauses. Finn’s secretary, scribbling down every change and suggestion in shorthand, was an island of calm. As the afternoon wore on, a layer of smoke slowly settled atop the arguing lawyers and bankers. Tempers grew short. Points were made then forgotten; talks moved in circles that no one could keep track of. A paper airplane cleaved the smoky air.

  Seslowe had never seen anything like it. First Boston’s people couldn’t seem to agree on the simplest things. Would they bid for the entire company or the food business? Would it be an LBO or a restructuring? Seslowe retreated to a corner where he shook his head in bewilderment. He thought of Tom Pritzker and the senior Pritzker attorney on the deal, Hank Handelsman, who had remained in Chicago. “I’m just glad Hank and Tom aren’t here to see this,” Seslowe repeated, mantralike. No one seemed to be in charge. “What a disaster,” he muttered.

  There was little doubt in Seslowe’s mind that if Jay Pritzker walked into the room, he would back out of the deal. “They would; they’d just walk away,” Seslowe assured one of his partners. Yet in telephone conversations with Pritzker all that day, Seslowe reassured the Chicago investor all was well. Seslowe was acutely aware it was he who had gotten Pritzker into this deal; he wasn’t going to back out until he had to.

  As the day wore on, Seslowe found himself worrying whether First Boston was up to the task of a $20 billion takeover. To a partner he confided, “I would feel much more confident with Wasserstein and Perella around. These guys are a shadow of their former selves.”

  It was two hours before the five o’clock deadline when a copy of the revised letter was delivered to Maher’s office. Maher read it in silence. The letter seemed to jump from point to point with no focus; peering through its tangled verbiage, it wasn’t clear exactly what First Boston wanted from the board, one transaction or three, a merger or a restructuring.

  Maher exploded, kicking the leg of his mahogany desk and slamming his fist violently onto the desktop. “This is the worst piece of shit I’ve ever seen!” he said. “Can’t we do this right? I mean, this is awful.”

  Maher picked up the letter, strode out past his secretary’s desk and up three flights of stairs to the crowded boardroom. To Finn, who knew Maher’s moods, there was no mistaking the anger in his boss’s clenched jaw. Within moments the room fell silent.

  “You guys are missing the point,” Maher told the group. “Now, just listen to me. This is what we’re going to do.” Then, for thirty minutes, Maher dictated a new letter to Finn’s secretary. When someone interrupted, Maher raised his voice and talked over him. Seslowe couldn’t believe the scene. It was like a teacher disciplining a roomful of second graders. For a while he teetered on the edge of phoning Pritzker and advising him to drop out of the bidding.

  As the deadline approached, Maher and the lawyers were still arguing whether to bid for the entire company or just the tobacco operation. “The arguments that broke out weren’t just over spelling and syntax,” Seslowe recalled. “We were still debating what form the bid would take, what we would bid for.”

  A few minutes before five, Maher called Skadden Arps and told Atkins the letter might be a few minutes late.

  “Keep in mind,” Seslowe told Maher after he hung up, “you still have to get this past Pritzker.”

  It was too much for Maher.

  “Chicago! I’ve got to deal with Chicago? This is just a letter! Give me a break!”

  “Jesus Christ, when are we going to get going!”

  Ed Horrigan was nearly foaming at the mouth. For two hours Johnson and his entourage had sat around the paisley-wallpapered Shearson dining room while butlers in white jackets took lunch orders and hovered over them with coffee and baskets of rolls. They were supposed to be discussing their bid, but so far all they had done was pass menus.

  Johnson couldn’t believe the scene. As usual, the room was packed. A full Shearson complement, maybe a dozen people, augmented by a nine-man team from Salomon led by John Gutfreund, plus Johnson and his people. Gutfreund’s group, which had downed sandwiches and Styrofoam cups full of soup before arriving, sat at a separate table. “We’ve come over to watch everybody eat,” Gutfreund said in a rare bit of humor.

  Johnson, Horrigan, and Sage had walked into Cohen’s office that morning and found the Shearson chief standing behind his desk. “Okay, guys,” Cohen had said. “What’s the price going to be?”

  “A pissload,” answered Johnson, smiling.

  Cohen called his secretary to get someone on the phone. Horrigan wondered what the Shearson chief had up his sleeve. A secret weapon? A moment later, Cohen picked up the phone. “Hello?” he said. Horrigan listened in anticipation.

  “Yes, my wife and I have talked it over. Forget the coat. We’ll go with the jacket.”

  Three hours later they still hadn’t begun talking about their bid. The lunch went on and on, until by one-thirty even Johnson was growing impatient.

  “Let’s get on with it, Peter,” he said.

  “Christ,” Sage blurted out, “we need a goddamn number. It’s getting late.”

  “Where is the bid?”

  Steve Goldstone could hear the exasperation in Gar Bason’s voice. It was past two o’clock and the Shearson group hadn’t yet produced a final offer.

  Goldstone had left Bason at Davis Polk shortly after noon and gone to check on the discussions at Shearson. He was surprised to find Cohen, Gutfreund, and more than thirty others eating a leisurely lunch, debating bid structures amid a tableau of white tablecloths, hovering waiters, and clinking china. The scene resembled a banquet more than a strategy session.

  “Gar, it’s aborning.”

  “Hey, come on,” Bason pleaded, his voice strained over the phone line. “We need a number. We’re running out of time. Steve, if they don’t make up their minds soon, we’ll have no bid at all.”

  Goldstone knew his partner wasn’t exaggerating. With less than three hours to go, Bason had been preparing more than a dozen major documents—bank commitment letters, debt documents, and other arcane papers—that couldn’t be completed without a final number. Bason had word processors standing by at three law firms.

  Bason got his number just after three. Across Manhattan, at a half-dozen banks, law offices, and accounting firms, fingers flew across calculators, totting up interest rates, payment schedules, and other key ratios. By a quarter to four the lawyer could see details of the bank letters were falling into place. But it was also clear the three-inch-thick bid package wouldn’t be ready in time for the run uptown to Skadden Arps at Fifty-fifth Street and Third Avenue.

  The logistics of time-sensitive midtown deliveries were familiar to all Wall Street law firms. Subways were out. A single smoky track fire could trap a cou
rier for hours in the musty tunnels beneath Lexington Avenue, and portable phones were unreliable. Moreover, Bason knew the nearest subway station on the key Lexington line was four long blocks from Skadden Arps. He preferred taxis up the crowded parkway along the East River.

  At four-twenty the young lawyer ordered Salomon’s lead counsel, Peter Darrow, a twenty-six-year-old Davis Polk associate named Richard Truesdell, and two other lawyers into a car for the trip uptown. Several key documents the lawyers carried were incomplete, so the four attorneys were to pencil in the remaining numbers in the cab. Lawyers from Citibank and Bankers Trust were to meet the team at Skadden Arps with copies of the final loan documents. As they walked out, Bason handed Truesdell an NEC portable telephone.

  Fifteen minutes later, with the four lawyers scribbling furiously in their seats, the car sagged in heavy traffic at Fourteenth Street. At Davis Polk, Bason crossed his fingers and kept his eyes glued to the clock. Goldstone, returning from Shearson, joined him, along with Johnson and Horrigan. Johnson, the only one relaxed, took in the scene and smiled. “At least we’re going to have some fun with this.”

  Every five minutes Goldstone dialed Truesdell, who rode shotgun: “Where are you now? What block are you on?”

  Worried looks broke out at Davis Polk as the cab nosed through heavy traffic in the Thirties and Forties. With fifteen minutes to go, the cab turned off the parkway onto First Avenue. Ten minutes later, it crawled to a stop at Fifty-fifth and First, where it froze in the grip of a Friday afternoon traffic jam.

  Goldstone was on the verge of hysteria. Horrigan, too, was beside himself. “Why’s this taking so long?” he demanded.

  Panicking, Goldstone grabbed the phone. “Get out of the cab and run!” he barked at Truesdell. The four attorneys piled from the taxi and began sprinting the two long blocks to Skadden Arps. By then Johnson was laughing uncontrollably. “I hope your guy was a cross-country runner,” he told Goldstone, “because there’s no way he’s going to make it by five o’clock.”