Barbarians at the Gate

by Bryan Burrough

  Kravis, too, noticed they hadn’t drawn the first team. He was startled by the presence of a junior Skadden Arps attorney named Bill Frank. What did he know about their deal? And where was Atkins? For the first time Kravis realized that a meeting with the management group must be going on simultaneously. He grew nervous.

  For more than an hour Kravis’s bankers and lawyers explained in detail each component of their bid package, with particular emphasis on its securities. This was nuts-and-bolts Wall Street work. The meeting droned on and on, as representatives from each of Kravis’s half-dozen investment and commercial banks proudly explained their specialties.

  Then, as Scott Stuart was reciting a set of Kravis’s projections, Bob Lovejoy stopped him. The data Stuart was reading didn’t match the figures among the papers in Lovejoy’s lap, the Lazard banker said. If the special committee had done its job, everyone should have been working from the same projections.

  “Looks like you don’t have the most up-to-date information,” Lovejoy said, a worried look crossing his face.

  Well, Stuart countered, what numbers was the special committee using? The two men compared numbers. Both appeared confused.

  Across the room alarm bells clanged in Dick Beattie’s head. He scrawled a note to Cliff Robbins, an associate sitting beside him. “Our numbers ARE bad,” he wrote. “We’ve got to do something about this.” Robbins nodded.

  Afterward, there was pandemonium among the Kravis troops. As they rode down to the lobby, the elevator was filled with curses and shouts. “They’re cooking the books!” people were yelling. “They’re cooking the books!” Beattie was incensed. “This is outrageous. Goddamn it, they haven’t given us accurate information. We’ve been screwed.”

  Pausing in the lobby, Kravis, Roberts, and Beattie pondered what to do. Earlier they had discussed their options in the event they found themselves trailing the management group. Their problem getting information, however bothersome, was their ace in the hole; it gave them grounds for a protest. If Kohlberg Kravis hadn’t been given accurate information, the auction had been flawed. If so, they had to stop the process before it went too far.

  Beattie returned to his office across from Grand Central Station, dictated a short letter, and sent it off immediately to Peter Atkins. It read, in part: “We learned from John Mullin and Bob Lovejoy that we may have received inaccurate information from the management of RJR with respect to certain financial aspects…. [If so] it may be that we will want to discuss our offer with you in light of any new or more accurate information we receive.”

  The pleasant words masked a sharp message. Not long after, an irritated Atkins phoned Beattie. A warning from Henry Kravis was not something he could ignore. He was equally irritated that Beattie’s protest would be a black mark on the auction’s otherwise spotless record. “I wish you had spoken to me and not written this down,” Atkins told Beattie. “I take this very seriously.”

  For the moment, though, Atkins wasn’t willing to pass any new information to Kohlberg Kravis. The investment bankers, Lovejoy and Mullin, replied to Beattie’s letter with one of their own, suggesting—strangely, Beattie thought—that there was no problem with the information flow. Confused and angry, the Kravis troops could do little but await the board’s decision.

  Later that afternoon, Beattie took a second call from Atkins. “Dick,” he said, “we won’t need you tonight. You can let your troops go home.”

  Fear rose in Beattie’s throat. “Are you giving the same message to the other side?”

  “Yes, I am.”

  Beattie relaxed. A little.

  Peter Cohen’s troops had gone through a similar grilling that morning at Skadden Arps. A trio of committee advisers led by Ira Harris pelted his people with questions aimed at establishing the exact value of the group’s securities. As the meeting wound down, Luis Rinaldini of Lazard asked Tom Hill for copies of the group’s cash flow projections. The projections, Rinaldini suggested, could be invaluable in valuing the securities.

  “No way,” Hill said. The projections were the management group’s secret weapon, the very heart of Johnson’s value to them.

  Why not? Rinaldini wondered.

  “We regard our projections as proprietary,” Hill said. “What’s to prevent you from giving them to KKR?”

  “Come on…” Rinaldini said.

  Jim Maher woke Saturday with few illusions about his chances of success. There was virtually no possibility, he knew, that First Boston’s proposal would be accepted as a winning bid. At best, Maher figured, he had a slim chance of interesting the board enough to force some kind of extension in the auction process.

  All morning he paced his apartment, waiting for a call. Around eleven o’clock it came. “Jimmy, you’re going to get a letter,” Peter Atkins announced. “We have a number of questions about your proposal. We need to clarify some things.”

  As always, Atkins was hard to read. Maher hung up thinking the call was a good sign. He’s not calling for his health. On the other hand, Maher reasoned, Atkins could be attempting to establish grounds to reject their offer.

  A messenger delivered the letter five minutes later. The questions were basic, mechanical, tax oriented. Without due diligence, Maher could tell, he couldn’t answer most of them. First Boston simply had to know more before it could guarantee the plan could work.

  Atkins called several times that afternoon with further questions, all of which remained complicated and tax oriented, on issues that Maher felt should be subject to negotiation. “Peter, we can’t be pinned down on some of this stuff,” Maher repeated. “We’ve got to sit our people down with your people and work these things out.”

  At one point Maher called Brian Finn and read him the letter from Atkins. Finn didn’t like what he heard.

  “It sounds like they’re just trying to generate a record to show why they wouldn’t work with us,” Finn said.

  “I don’t think so,” Maher said. “From my conversations with Atkins, I don’t think that’s the case.”

  “I hope you’re right,” Finn said.

  The two men discussed what they should do. Normally they would respond to Atkins’s letter in writing, or have First Boston’s tax counsel meet with Skadden’s. Neither option looked appealing. Meetings took time, and time was of the essence.

  Finn felt First Boston had a trump card in Matt Rosen. The tax lawyer’s familiarity with Finn’s idea, not to mention their personal relationship, had to be an advantage, he said. “Why don’t I just call Rosen and go through their questions?” Finn asked Maher. A quick call, he felt, could cut through the red tape. Maher agreed.

  Finn reached Rosen at Skadden around noon. The tax lawyer sounded tired. “I tell you what makes me nervous, Matt,” Finn said, testing the waters. “It looks like you’re setting up a record to show why we didn’t get the job.”

  “Well,” Rosen said. “I can’t tell you what’s going on. But that’s not the case. That’s not fair.”

  Finn allowed himself to feel relieved. He didn’t think Rosen would lie to him. The tax lawyer had dozens of questions for Finn. To most Finn pleaded ignorance. “I can’t definitely answer that question without due diligence,” he repeated. “I just can’t.”

  Finn hammered home the theme for more than an hour. “Come on, Matt, we know each other,” Finn pleaded. “You know we’re not here to make headlines with something that doesn’t work. You’ve got to let us in the door. You’ve just got to. I can’t make this better without going through the due diligence.”

  When he hung up, Finn was still nervous. He knew Rosen understood the beauty of their proposal. But would he stand up for it with $20 billion at stake?

  Saturday was Jim Robinson’s fifty-third birthday, and the Robinsons retreated to their thirty-five-acre Connecticut farm to await the bidding’s outcome. Around three o’clock, Jim Robinson was surprised to see Ross and Laurie Johnson drive up.

  It was good to see the Johnsons, even better for all of them to ge
t away from the city for a while. Laurie joined the Robinsons in their weight room, which was adorned by a picture of a young, unsmiling Jim Robinson hoisting a barbell. Johnson piled up on a couch, read newspapers, and watched college football on television. All four found it impossible to think about anything except the committee’s deliberations. All afternoon and into the evening they waited expectantly for a phone call that never came.

  Dinner at the Robinson house that evening was Chinese food and telephone receivers. The Robinsons had five separate phone lines, and Linda had three phones brought to the dinner table. All through their meal Johnson and the Robinsons worked their sources for information. Rumors were flying about the First Boston bid, although they couldn’t tell what, if any, impact it had had.

  It was Johnson who finally hit pay dirt. They had known in advance that both the special committee and the full board were to meet the following day; the committee would vote on a recommendation, and the board, in all probability, would rubber-stamp it. Johnson, hoping to learn more about the meetings, had called a source in RJR Nabisco flight operations, a loyal employee who had worked at his side for twenty-nine years. From the worker Johnson learned that the planes normally reserved for the directors’ trips to New York had been grounded. Apparently the full board meeting had been canceled.

  “That’s funny,” Johnson said. “Why the hell would they cancel it?”

  Either the committee’s recommendation was being delayed, Johnson reasoned, or it wasn’t making one altogether. That meant one of two things: The bids were too close to call or there was no winner. Johnson and the Robinsons debated the factors that could have gummed up the works, including the strange First Boston bid and the remote chance the committee had thrown out all bids in favor of a restructuring.

  “Something is very, very peculiar,” Johnson said. But whatever the reason for the delay, he told the Robinsons, “this is bad news for us.”

  Linda Robinson passed on the news to Cohen, who was home alone at his Manhattan apartment while his wife visited friends in Florida. Despite Johnson’s pessimism, the group at the Robinson farm remained optimistic. It was premature, they agreed, to draw ironclad conclusions from news of the board’s flight schedules.

  After dinner a beaming Linda Robinson brought out her husband’s birthday cake, which she had designed herself. A carrot cake with white frosting, it was decked with Oreos; graham crackers; and honey, cinnamon, and chocolate Teddy Grahams, Nabisco’s popular new cookie. But the pièce de résistance was the candles, or what at first glance appeared to be candles. On closer inspection one could see they were actually Winston and Salem cigarettes, each merrily lit atop the cake and wafting curls of smoke.

  By the time Hugel brought the committee to order Sunday morning at a quarter past ten, everyone in the conference room knew what had to be done. Matt Rosen’s tax opinion meant they couldn’t ignore the First Boston proposal and its promise of a bid as high as $118 a share. In order to give Maher’s troops time to firm it up, a second round of the auction would be declared. All bids, including the management group’s winning $100 offer, would be thrown out.

  Atkins and Mitchell had made the final decision Saturday afternoon after Rosen’s conversation with Finn. Not everyone was happy about it: Fritz Hobbs of Dillon Read thought Maher’s proposal was harebrained and said so. But as always, no one was willing to argue too strongly with the lawyers, not with lawsuits hanging over their heads. If Atkins needed any further convincing, Beattie’s angry letter had given it to him. Several of his colleagues expressed quiet relief that, by forcing a second round, the First Boston proposal allowed them to evade a legal challenge from Kravis.

  Charlie Hugel wasn’t pleased with the idea of a second round, either. The First Boston proposal was iffy at best, and he remained convinced Johnson would team up with Kravis. “If we extend,” Hugel said, “and First Boston drops out, these guys get together and then what have we got? We’re back to ninety-three.”

  Hugel drew a sharp rebuttal from Marty Davis. It was in the board’s best interest to draw this contest out, Davis argued: Make the bidders sweat, drive them into a competitive frenzy, buy time to work on the restructuring option.

  The issue had already touched off one conflict between the two men. Davis was furious Thursday afternoon when he saw a statement from Hugel on the Reuters financial wire, to the effect that the Friday bidding deadline was firm and there would be no extensions. Davis immediately dialed Hugel. “What the hell is this about on Reuters?” he stormed, then read him the item. “That isn’t our view; that isn’t right.”

  “I didn’t say that,” Hugel maintained.

  Davis didn’t believe him. He thought Hugel was a babe in the woods or a pawn for Johnson. Maybe both. Marty Davis was, assuredly, neither. He was now a leading special-committee hawk, advocating whatever it took to get top dollar and cutting no slack for the management group. He had been prepared to argue that Beattie’s letter alone was grounds to extend the auction.

  The directors agreed without much debate: Extending the auction was a risk they would have to take. Rosen was trotted out to give an explanation of the tax factors. The matter of his friendship with Brian Finn wasn’t mentioned.* Hugel and the other directors questioned Rosen thoroughly but, in the end, went along with his advice. No matter how much they wanted to get this over with, it looked as if they weren’t yet finished. Before adjourning at one o’clock, Atkins left the room to see how much time Maher would need.

  By Saturday evening Maher had relaxed. From the tone of Atkins’s questions, he could tell First Boston had somehow gotten its foot in the door. He wasn’t surprised when Atkins called again Sunday morning.

  The board is prepared to give you a crack at this if you’re ready, Atkins said. “Are you prepared to dedicate the resources here, Jim?” he asked. “And how much time would you need?”

  Maher wanted two weeks but knew he couldn’t get it. Atkins suggested extending the bidding deadline to a week from Monday, just eight days away. Maher, mindful that the upcoming Thanksgiving holiday might make it difficult to get funding commitments, suggested a ten-day extension, instead. Okay, Atkins said. Tuesday, November 29, at five o’clock it would be.

  When he put down the receiver, Maher smiled and thought to himself: I’ll show you Mickey Mouse.

  On Sunday morning Jerry Seslowe was reading the Sunday papers at his Long Island home, trying to take his mind off the goings-on at Skadden Arps. A driving rainstorm outside made him glad to stay in.

  The phone rang. It was Scott Lindsay, one of Maher’s aides. “Peter Atkins wants you to come in and sign a confidentiality agreement. We’ve got our foot in the door!”

  Exultant, Seslowe wasted no time in climbing into his BMW 325ii and plunging into the flooded streets. An hour later he met Brian Finn at Skadden Arps, where he found Atkins’s mood matched the stormy weather.

  The lawyer was downright hostile. Seslowe felt he was being blamed for having to extend the auction and complicating Atkins’s mission. It was evident Atkins was dead tired and wanted to go home. He must have been up seventy-two hours straight, Seslowe thought. In a corner, Atkins’s assistant Mike Gizang looked like a rag doll.

  “All right, you’re in the deal now,” Atkins lectured. “We’re taking you seriously. Okay? What we don’t want to see is another Forstmann Little. They made a lot of noise but never came to the table. We’re counting on you, by letting you in, to be real.”

  Seslowe nodded. They would be real.

  “Sign this.” Atkins put a confidentiality agreement before Seslowe.

  “I can’t sign anything without a lawyer reviewing it first,” the accountant said.

  “Fine,” Atkins said abruptly. “I’m leaving.”

  “I can’t sign,” Seslowe protested. “I can’t.”

  “You have to sign.”

  Seslowe pleaded to be permitted to fax a copy of the agreement to Pritzker’s lawyer, Hank Handelsman, in Chicago. Atkins made it clear he should
hurry.

  Soon Handelsman was on the phone, requesting changes in the document. Seslowe, eyeing a stern-faced Atkins, cut him off. “Hank, let’s talk real world here,” he said. “We either sign this right now, or we go home…. No, Hank, now. You’ve got three seconds. Peter Atkins is standing right here. We have to sign.”

  By noon a group had gathered at Kravis’s offices. There was nothing to do but wait. Most of the bankers and lawyers assembled in a conference room and cheered on the New York Jets in a game against Buffalo. Someone made popcorn and passed it around. Peter Ackerman of Drexel, who had returned to New York shortly after landing in Los Angeles, stepped out and brought back an armload of books. Kravis spent the day pacing his office.

  “When are we going to hear something?” he kept asking. “Goddamn it, when are we going to hear something?”

  From time to time Paul Raether called Dick Beattie, who remained at home, trying to lose himself in a copy of Richard Rhodes’s The Making of the Atomic Bomb.

  “What’s going on?” Raether asked.

  “I don’t know,” Beattie said. “What do you want me to do, call over there?”

  “No, don’t call ’em,” Raether said. The last thing they wanted to do was be pests.

  At the Robinson farm Johnson’s day of decision wore on. He was the only one of the four friends who didn’t seem obsessed by the committee’s deliberations. For much of the day he sat on a sofa reading newspapers. As the afternoon dragged along with no news, Johnson maintained his cheery facade, even as Linda Robinson nervously threw out calls seeking signs of the auction’s outcome.

  “Don’t worry, Linda,” he admonished his hostess. “Eventually they gotta tell us.”