Barbarians at the Gate

by Bryan Burrough

  To the public the bidding for RJR Nabisco seemed frenzied, the emergence of a third bidding group transforming it into a wide-open race. But in the subdued hallways and offices of Lazard Freres and Dillon Read, there was no such enthusiasm. To the board’s advisers, the First Boston bid was hardly good news. Few among them had any confidence that Maher’s troops would come back in eight days with a concrete proposal.

  Far more worrisome was the poor showing by Kravis. His $94 bid left everyone scratching their heads. What could have gotten into them? Was Kravis trying to lose? Their Sunday evening press release, with its suggestion that no second bid might be forthcoming, seemed ominous.

  From the beginning, the committee’s mission had been to keep alive two viable bidders. When it got two, it aimed for three, and so on. It tried anything, in short, to produce the highest possible value for shareholders. If both First Boston and Kravis failed to surface with second bids, the committee was left with one alternative: Ross Johnson.

  That made Felix Rohatyn, the dean of the committee’s bankers, uneasy. Working with Dillon and Skadden in the days before Thanksgiving, Rohatyn marked out two paths of action. First, Kravis had to be saved. Whatever the cost, they needed him at the bidding table the following Tuesday. That meant plying him with data and advice that showed RJR Nabisco warranted a strong second-round bid. Second, the committee had to work hard to refine a recapitalization plan that, in the worst case, could be used as leverage in the event Johnson came to the bidding table alone. It would involve a big, one-time payout to shareholders financed by borrowings and asset sales.

  The campaign to save Kravis began Monday. “What do you guys need to get back in the hunt?” Lazard’s Bob Lovejoy asked Paul Raether in a conference call that afternoon.

  Raether, presiding over a growing mountain of computer runs, said he needed more information—real information—if Kravis could entertain the idea of bidding again. “We want to meet the tobacco guys, for one thing,” Raether said. “And we want Ed Horrigan there. We want to hear his game plans. If there are really no savings here, we want to hear it from him.”

  Raether had seen what John Greeniaus could do with Nabisco. He strongly suspected Horrigan and Johnson had an undisclosed plan for exacting similar savings from the tobacco business, and he said so. “Look,” Lovejoy said, “if there’s some master plan, we don’t know about it. If there is, they’re lying to us. They’ve sworn up and down they don’t have one.”

  Monday night Lovejoy led a procession to Kohlberg Kravis’s offices to meet with Raether and Scott Stuart. A Lazard team had combed through every piece of information received from RJR Nabisco and, using what little new data they received from Johnson’s bid that weekend, compiled a revised, rosier set of projections for Kravis. Now the Lazard bankers bore in, making sure Kravis got the message that there was more inside Johnson’s company than met the eye.

  Josh Gotbaum, a thirtyish Lazard banker who sported a peace-sign ring, suggested to Raether that an additional $150 million in annual savings could be wrung from the tobacco business. It was a powerful statement. Spread over ten years, that was $8 or $9 a share, enough to boost Kravis well over $100 a share. Lovejoy could tell from their expressions the message was sinking in.

  In fact, Raether wasn’t totally convinced. He knew that the Lazard bankers had an interest in keeping Kravis at the table, so he took their advice with a grain of salt. On the other hand, he had to admit, their message made him feel better. At one point, a Lazard banker named Stephen Golub took Raether aside. Raether had known Golub for years and trusted him.

  “I’ve never seen a company like this,” Golub said. “I’ve never seen a company waste so much money. I was at GM”—notable for overspending—“and these guys make GM look like paupers. There’s money lying on the floor for the taking here. Whatever you do, don’t be too conservative. Don’t be too cautious.”

  “Gentlemen, don’t bother to get up,” Horrigan said as he strode into the packed conference room. “We all know why we’re here.”

  Horrigan was in full battle dress for his interrogation by Kravis Tuesday morning. More than a dozen bankers and lawyers from Kohlberg Kravis and the special committee were arrayed around the cherry table at RJR Nabisco’s New York offices. To a man it was clear that Horrigan was mad as hell, and it took less than a minute to find out why.

  “I understand you fired me this morning,” Horrigan announced, tossing a newspaper article onto the table. That morning the Greensboro (N.C.) News & Record was reporting that Horrigan and Johnson would be “terminated” if Kravis won the bidding contest. If that wasn’t bad enough, the news had come during an interview with Paul Sticht, Horrigan’s sworn enemy.

  “We don’t know anything about that,” Kravis said calmly.

  “I know Paul Sticht talked,” Horrigan said. “I talked to the reporter.”

  “I know nothing about it,” Kravis repeated. “That’s irresponsible and totally incorrect.”

  Horrigan launched into a tirade against Paul Sticht: how he had ruined the tobacco company and how Horrigan’s troops had single-handedly resurrected it. “I wish you a lot of luck if you think that geriatric old fool is going to come riding back into town on a horse,” he said. “The horse had better know the way because the man is blind. You’ve made the wrong deal there.”

  “That’s fine,” Kravis said. “But we came to talk about the business.”

  Horrigan talked for a while about the tobacco industry and about Reynolds. When he was through, the Kravis contingent began peppering him with questions, but it was immediately apparent Horrigan wasn’t going to help.

  “What can you do to cut costs?” Cliff Robbins asked.

  “Nothing.”

  “How will you and Ross run it?” Paul Raether asked. “What’re your plans? There have to be some savings here.”

  “No,” Horrigan said, “there aren’t. We think we run a tight ship here, a very lean operation. We don’t piss away money.”

  “Well,” Robbins said, “what about all these people, these head counts?”

  “Oh, no. In corporate headquarters, we’ve got nobody.”

  Horrigan was a stone wall. Kravis and others put the same questions to him four or five different ways, and each time Horrigan denied any cuts could be made.

  “Well, let’s talk about your numbers,” Robbins continued, referring to the sketchy projections he had received. “Can you do any better with your numbers?”

  “Oh, no.”

  “You can’t do better?”

  “No. We’re doing the best we can.”

  “So your projections are your projections,” Kravis said.

  “Absolutely,” Horrigan said. “There’s nothing we can do. That’s it. We won’t do better, we won’t do worse.” Horrigan launched into a speech about the importance of Premier and other projects he had underway.

  “Is there any other analysis you’ve given the Shearson people?” Robbins asked. “Have you given them anything you haven’t given us?”

  “No,” Horrigan said. “Nothing.”

  When Robbins asked whether they could raise the price of the discount Doral brand, Horrigan snapped, “You do that, and the goddamn floor will drop right out of the bottom of it.” He refused to take any more questions from the young associate.

  “You know,” Kravis said at one point, “this is really fascinating. You can’t do any better at all. Boy, and you can’t cut anything here. Well, if that’s the case, I got to tell you, I think we overbid at ninety-four. If you can’t cut anything out of here, if you can’t cut anything at all—”

  “Nope,” Horrigan interjected. “I sure can’t.”

  “Well, that’s just great. We made our first offer too high then. I just don’t see how we can offer any more.”

  Disgusted with Horrigan’s performance, Kravis headed back downstairs for lunch. He was scheduled to dine with a group including Jay Pritzker, Mel Klein, and Jerry Seslowe. Kravis wasn’t expecting much from the lu
nch. Klein had been pestering him for days to meet, saying how wonderful it would be for their two groups to get together. Fat chance, Kravis thought, although he wagered a meeting might be helpful to gauge how seriously to take Maher’s strange effort.

  Over spaghetti Mel Klein talked in glowing terms about RJR Nabisco and its cash flows. He talked for a while about First Boston’s tax strategy and how they hoped it would work. The only way to improve their effort, Klein suggested, was if the Pritzkers could team up with Henry Kravis.

  “What about First Boston?” Kravis asked.

  “They’ll be happy whatever happens,” Klein said.

  “Fine,” Kravis said. “On what basis would you like to work?”

  “We’ll just be partners,” Klein said. “Fifty-fifty.”

  Kravis shook his head. “That’s never going to happen. If we even have an interest, which I don’t think we do, it would be for you to have less than twenty-five percent. You guys could make an investment with us. But we’re going to run the thing and be in control.”

  “No,” Pritzker said. “That’s never going to work. We just don’t have any interest in that.”

  It was clear there was little room for compromise. From their interest in joining him, Kravis gleaned that the Pritzkers were less than confident in their chances of victory. After lunch Kravis called Dick Beattie, laughing as he related details of the meeting.

  “Those guys,” Kravis said, “are nowhere.”

  Tuesday afternoon the Kohlberg Kravis troops began to scatter for the holidays. Roberts boarded a plane for San Francisco. Ted Ammon headed for a resort in the Dominican Republic, while Scott Stuart opted for Barbados. Raether flew to Florida, where he planned to spend Thanksgiving with his family at Lost Tree. Kravis planned to fly with Roehm and his three children to Vail at two-thirty Wednesday afternoon.

  As he prepared to leave, Kravis took a call from Linda Robinson, who was phoning from a limousine en route to Connecticut. Robinson insisted she wasn’t calling about business. Having just bought a horse together, they had talked about buying a second, which had now become available.

  “We’ve got to make a decision on this this week,” she said. “Other people are waiting in line to buy him.” She groaned. “Oh, this all is just terrible, isn’t it? It just goes on and on.”

  “You mean RJR?”

  “Yeah.”

  “I don’t find it terrible at all.”

  “Why not? God, it’s horrible.”

  Kravis didn’t believe for a minute that Robinson was calling about horses. She wanted to know if he would bid again. For the first time, Kravis decided to lay it on thick. He wanted Linda Robinson to run back to her husband with news that he was out of the bidding.

  “Nah, I don’t find it bad at all, Linda. We’re in great shape. We’re in third place. It’s a terrific position to be in.” Kravis hoped the obvious sarcasm would have its intended effect.

  “I’m just tired,” he went on, turning on the sincerity. “I’m leaving this afternoon. I’m taking my children and Carolyne to Vail to spend Thanksgiving. I can’t wait. I’ve told all my people they ought not to think about this deal, not even think about it, while they’re away. I really don’t know what we’re going to do about next week. We probably won’t even bid at all.”

  Months later Linda Robinson insisted she didn’t believe for a minute that Kravis was bowing out. “I thought Henry was trying to snow me. He was trying too hard.”

  Wednesday afternoon John Martin’s assistant, Bill Liss, took a troubling call from one of RJR Nabisco’s media buyers. The company was one of Time magazine’s largest advertisers, and the buyer said he had just heard from a contact at Time that the magazine planned a cover story titled “Greed on Wall Street,” featuring none other than F. Ross Johnson on the cover. It was a courtesy of Time’s advertising department to alert a major advertiser to a negative piece so that it could pull its ads, if it chose.

  Liss called John Martin, who relayed the news to Linda Robinson. All three were worried: A hard-hitting Time cover was all they needed with bids due in less than a week. It had to be stopped, and Robinson and Martin agreed their only leverage was Johnson. Every major news organization wanted an interview with him, and so far all had been declined. The two instructed Liss to use the prospect of an exclusive Johnson interview as a bargaining chip with Time. Maybe, just maybe, they could keep Johnson off the cover.

  Liss was in a difficult position. Since the formation of the special committee, he had become its official spokesman with media around the world. But Liss was a Johnson loyalist, and when Martin gave him orders, he went fervently to bat for Johnson with Time.

  At Robinson and Martin’s direction, Liss called Time’s Atlanta bureau chief, Joe Kane, Wednesday night offering an exclusive interview with Johnson if the magazine would take him off its cover. Kane demurred, saying it wasn’t his decision. Desperate, Liss offered to make Johnson available if Time would only put Johnson in a “gallery” of pictures. At least Johnson wouldn’t stand out, they figured. Kane begged off, suggesting Liss call his bosses in New York.

  In Florida, Johnson wasn’t at all sure he wanted to give his first interview. Looking for advice, Johnson called his pal Jack Meyers, the former Time publisher who had been at the Castle Pines shindig that August. “Jack,” he asked, “do you think this is something that is, you know, worthwhile?”

  Meyers found out that the story’s writer was a veteran Time correspondent named Frederick Ungeheuer, and he suggested Johnson go ahead with the interview. “Ross, I guess I don’t see any downside here,” Meyers said. Johnson was already taking a beating. How could it be worse? Johnson agreed. “You know me,” Johnson said. “I’ll give ’em the straight story.”

  Ungeheuer was flown to Jupiter for an interview Friday morning. Martin and Linda Robinson coached Johnson at length beforehand: no flip remarks, stress shareholder value, expect tough questions on the management agreement. The night before, Robinson had relayed news of the interview to Peter Cohen, who was immediately alarmed. Cohen had returned from Brussels—he had slept all the way to Europe—and had spent Thanksgiving puttering in his garden. Like Steve Goldstone, he was worried what the unpredictable Johnson might say. But Robinson assured him Johnson had been well coached.

  The next morning Johnson met Ungeheuer at the Jupiter Hilton, and the Time correspondent found RJR Nabisco’s president his usual, breezy self. Afterward Ungeheuer dashed off to write his story—the magazine was due on newsstands the following Monday—and Linda Robinson called to ask Johnson how it went.

  “Goddamn if I know,” he said. “Journalists are journalists. They’ll take out of it what they want to take out of it.”

  After spending the holiday with his family, Maher was back in his office at First Boston Friday morning. Most of his teams had stayed through Thanksgiving, their feasts consisting of pressed-turkey dinners in Styrofoam containers from a nearby delicatessen. The place looked like a fraternity house on Sunday morning. Pizza boxes and nearly empty cartons of Chinese food were strewn about. A dozen pencils jutted crazily from the ceiling, no doubt a product of some late-night brainstorming session.

  The Nabisco team was making headway, thanks to the appearance three days earlier of John Greeniaus. Greeniaus, after guiding Kravis through the company, was now blazing the same trails for First Boston. Kim Fennebresque had become the Nabisco chief’s shadow. Fennebresque thought so much of Greeniaus he suggested hiring him to run the company if they won. Greeniaus demurred; they could cross that bridge later.

  Tylee Wilson also joined the ragtag First Boston team. He and Smith Bagley had met with Fennebresque Tuesday morning. Bagley was mulling an offer to become an investor in the group (First Boston thought he might lend some name value), while Wilson was mulling an offer to be named CEO-in-waiting. Bagley declined; Wilson enlisted.

  He attacked the mounds of RJR documents that had been delivered to First Boston. He interpreted numbers, cautioned on pitfalls, searched f
or an edge. Wilson was delighted to finally join the battle, although he had deep doubts about First Boston’s chances. Fennebresque was delighted to get Tylee Wilson’s credibility, although he had deep doubts about the man. “Wilson basically wanted to ride back into Winston-Salem in a blaze of glory,” Fennebresque would later say. “What he wanted from us was a cure for retired CEO-itis.”

  Tylee Wilson did have his limitations. When it came to lobbying directors, he could only turn to two remaining friends on the board, John Medlin and John Clendenin. “Could you get word to Hugel that these people are for real?” Wilson asked. “They’ve got an interesting concept. I think it’s remote that it will work, but it’s a helluva lot more than is currently on the table.” When First Boston was cleared to interview some tobacco executives, they asked Wilson to come along. “No way,” he said. “If I walk through that door those people are going to clam right up. Do you think they could go back to Horrigan and say they’d told Tylee Wilson anything?”

  Despite some progress, Maher was deeply worried. None of their preparation mattered if Greg Malcolm’s bank team couldn’t obtain the funding for Finn’s monetization proposal, and Malcolm was clearly having trouble. So far every major bank had thumbed its nose at funding Finn’s brainchild. With three major bidding groups, the banks were already spread pretty thin, and it was Thanksgiving, to boot. Citibank had the gall to demand $5 million just to look at their plans. Things didn’t look good, not good at all.

  Maher retreated to his office to think. Maybe this was too much to pull off. Some deals, he knew, became watersheds in a Wall Street firm’s life. He thought back on the takeovers that had advanced Wasserstein and Perella’s careers, half-forgotten takeovers such as Carborundum and Pullman and Conoco. Getting those done had made First Boston what it was today, or at least what it was before everyone left. RJR Nabisco, he had hoped, would bring back that old glory, but now those hopes were fading fast.