Barbarians at the Gate

by Bryan Burrough

  “That’s it. Lights out,” Johnson said. “As far as I’m concerned, it’s sayonara.”

  When Goldstone heard Kravis was at Skadden Arps, he immediately redialed Atkins. Twenty billion dollars and more than a few careers, maybe even his own, were on the line. Atkins put him on the squawk box. Soon the lawyer’s office was filled with the anguished tones of Goldstone’s voice.

  The management group had been cheated, Goldstone insisted. They had been placed in an untenable position, indeed robbed of victory, by that lunatic First Boston bid. As the first round’s high bidder, they had no incentive to boost their offer. In essence, Goldstone argued, they were forced to bid against themselves. To be fair, he insisted, there had to be another, final round of bidding.

  “We’re not done!” Goldstone insisted, pacing amid the eraser heads littering his office floor. “Peter, we’re willing to bid more. We’ll bid more! What is this nonsense about starting an auction and shutting it down an hour later? There are no rules governing these procedures. We put in a bid saying we’ll bid more, and we will. How can you do this? It’s not fair!”

  Atkins tried to calm the feverish lawyer but got nowhere.

  “Peter, you’ve got to keep the bidding open. You’ve got to keep the bidding open as long as people are willing to bid.”

  For forty-five minutes Goldstone pounded at the same theme, and Atkins, emotionless, assured Goldstone his arguments would be taken into account. But there was nothing he, Atkins, could do until the committee met the next morning. Privately, Atkins and the Skadden litigator, Mike Mitchell, found Goldstone’s argument no more persuasive than others he had made over the past six weeks. The crux of Goldstone’s case seemed to be that management was entitled to two out of three falls.

  A few minutes before eleven o’clock, as his impassioned soliloquy stretched on, Goldstone mentioned to Atkins that he would be receiving a letter of protest from Jack Nusbaum. The letter “has been tempered somewhat,” Goldstone allowed. “But Peter, you’ve got to understand. People are bouncing off the walls over here. They’re really upset.”

  At eleven o’clock the letter was delivered to Atkins’s office. “I’ve got it now,” he told Goldstone, glad for the excuse to end the lawyer’s pleas. “We’ll get back to you later.”

  Atkins hung up and looked at Nusbaum’s letter. It was on the stationery of the lawyer’s firm, Willkie Farr & Gallagher.

  Gentlemen:

  …During the last several hours we have been receiving regular reports from the press advising us of the precise nature of the bid submitted today on behalf of the management group, as well as periodic reports that you or your representatives have met earlier this evening with representatives of another bidding group whose bid, if the reports we are receiving are accurate, has seemed to improve as the evening has progressed.

  We believe that the Management Group has been disadvantaged throughout the entire process and we must now insist that if you are talking to other bidders you must talk to us as well so that we have an opportunity to consider our response to any bid which may exceed ours, just as other bidding groups had an opportunity to bid against our winning bid which you published on November 18th.

  Our letter to you today indicated a willingness to discuss all aspects of our proposal. We reiterate that willingness and look forward to the opportunity to continue the bidding process, if that is appropriate, in the full light of day with details of all the present bids being known to all parties.

  The members of the Management Group are at the offices of the undersigned and would appreciate a prompt telephonic response to this letter.

  Sincerely,

  Jack Nusbaum

  Atkins set down the letter and frowned. It was going to be another long night.

  With their protest issued the group at Willkie Farr cooled down and awaited a response. Clusters of tired men stood talking in the halls. In Nusbaum’s conference room Gutfreund sat in one corner, reading the latest copy of Manhattan, inc. A few people dozed off. George Sheinberg of Shearson showed up and passed around a handful of cigars. For an hour there was peace.

  At Nine West, the Robinsons joined the group in Horrigan’s corner office. The couple’s formal attire prompted a round of jokes from Johnson. “A bottle of white and a bottle of red,” he requested of the tuxedoed Robinson. There was little to do but wait. From time to time Johnson tried to reach Charlie Hugel at his hotel room. Maybe, he thought, Hugel could make some sense of all this.

  Having missed dinner, Hugel was starved. Shortly after eleven o’clock he left Skadden for his suite at the Regency, where he prowled the lobby looking for a restaurant. Finding none open, he went up to his room and, stomach growling, prepared for bed. Minutes later his phone rang. “Mr. Johnson would like to speak with you,” a secretary’s voice said.

  Hugel sat on hold, waiting for Johnson to pick up. As he did, the telephone’s second line glowed red. Putting Johnson’s secretary on hold, he punched the button to take the incoming line. It was Peter Atkins, who quickly briefed Hugel on Goldstone’s angry call. He warned him that the management group was on the warpath and might contact him. “They’re really pissed,” Atkins said.

  So that’s what Johnson wants, Hugel thought. He noticed the red light showing Johnson’s call had gone off. Hugel hung up and dialed back Nine West.

  When Johnson came on the line, Hugel could tell he was upset. But the first thing out of Johnson’s mouth had nothing to do with losing the largest takeover in history.

  “We’ve heard they’re going to cancel the golden parachutes,” Johnson said. “Is that true?”*

  Hugel was surprised. Could he have heard Johnson right? Golden parachutes? With the fate of his company hanging in the balance, Johnson was fretting about his severance benefits? Hugel suspected Ed Horrigan had put him up to it. It sounded like vintage Horrigan.

  “That’s ridiculous,” Hugel said. “What would make you think we’re doing that? Anyway, Ross, I’m not exactly worried about that right now, you know. We’re all a little more concerned about the future of the company.”

  “Well,” Johnson asked, instinctively avoiding controversy. “What’s going on? I understand our people have been told to go home. Would you like to embellish that a little?”

  Hugel chuckled. “Well, remember our phone conversation this morning?”

  “Yeah.”

  “Well, they bid.”

  “You mean a blockbuster bid?”

  “Yes.”

  “Well, how much of a blockbuster?”

  “I really can’t tell you.” Just talking to Johnson, they both knew, amounted to a breach of the auction process.

  “Are we talking in the neighborhood of five dollars?” Johnson asked.

  “Yes.”

  “You mean one-oh-six?”

  “You hit it.”

  There was a snort of disbelief from Johnson.

  “Well, okay. We’re out of it,” he said. “That’s the end. God bless ’em.”

  Johnson, alone in Horrigan’s office with Jim Robinson, put down the phone. There was a moment of silence as he digested the news. Finally, he said, “It’s over.”

  Together the two men walked into Horrigan’s anteroom, where Horrigan, Linda Robinson, and the others were waiting impatiently.

  “Well, what’s the news?” someone asked. “What did he say?”

  “Look, it’s over,” Johnson said quietly. “Let’s just say this is where it ended.”

  A cacophony of voices assaulted Johnson. What do you mean? What do you mean? What did he say? How much did they bid?

  In no time Horrigan was raging at the board, at Kravis, at everything. Everyone in the room wanted to know what Hugel had said, what had happened.

  “Listen, I can’t tell you,” Johnson said. “I gotta respect Charlie’s confidence. But,” he added, “the spread is substantial.”

  A few minutes later Johnson called Peter Cohen and the group at Willkie Farr. Jack Nusbaum put him on a speaker ph
one in his conference room.

  “It’s all over,” Johnson said. “KKR won.”

  An uproar engulfed the conference room as Johnson was again assaulted by angry questioners in a virtual replay of the Horrigan group’s reaction.

  “What do you mean they won?” Cohen asked. “What are the terms? Do we know what they bid? What happened?”

  “I can’t tell you,” Johnson said. “But I know the price is substantially above ours.”

  Outraged, Cohen and the others pressed Johnson for more information. “I can’t tell you much,” Johnson said, finally. “But I believe there’s a four- or five-dollar spread. I can tell you, you’re not going to beat a five-dollar difference. They really brought in the heavy artillery.”

  At Johnson’s direction, Linda Robinson began calling reporters at half past twelve. “It’s over,” she told one. “We’re out of it. There will be no more bids.”

  Peter Atkins got back to Goldstone at twelve-thirty.

  “Look, Steve, I’ve discussed your views with our group,” Atkins said. “All I can tell you is, your views of fairness in this auction process are misplaced. The fact that your clients were high in the first round doesn’t remove their obligation to bid high now. There is no question of fairness.” And, Atkins made clear, no question of reopening the auction.

  “I can’t say this strongly enough,” Goldstone replied calmly. “You have a legal obligation to hear our second bid. The directors are obligated to do it. They simply can’t turn their backs on us now. We want to bid again.”

  Goldstone was right, in one regard. There were no rules governing the bidding process. What exists is a constantly changing body of law developed during a series of takeover battles in the mid-1980s. The cases, most decided by the Delaware Chancery Court, say volumes about the obligations of directors to run fair auctions. What they don’t say is how to end one. During the late 1980s board after board unsuccessfully grappled with the question. The $6 billion auction of Federated Department Stores in early 1988 stretched on for weeks, despite determined attempts to conclude it. In the end, most auctions closed when bidding got too high for all but one party.

  Atkins and Goldstone talked for nearly an hour, batting the same, tired arguments back and forth like tennis balls. The irony, of course, was that Goldstone had no idea whether Shearson and Salomon were willing to bid again. Johnson certainly wasn’t. Even so, Goldstone knew they wouldn’t have the opportunity if he couldn’t succeed in reopening the auction.

  Peter Cohen had too much on the line to give up now, no matter what Johnson said.

  Minutes after Johnson’s call he hit the phones, calling reporters and anyone else he could think of that might have information about Kravis’s bid. He wanted to fight, but first he had to know what he was up against. Immediately he picked up rumors about the composition of Kravis’s bid. Apparently Kravis had boosted his number by offering more securities than Shearson and less cash.

  At first Cohen couldn’t understand it. All along, Johnson, quoting Hugel, had repeated the same theme: “Cash is king.” If Kravis had crammed his bid with securities, Cohen figured, then somehow the rules had changed. Again!

  The idea of increasing the “paper” portion of a bid struck him. If Kravis could do it, why couldn’t Shearson? Cohen got on the phone with his aide, Andrea Farace, and ordered up a new set of computer runs, boosting the paper and lowering the cash. It was too early to seriously consider a new bid. That would come later, if at all. But to Cohen it was clear they had to look at every option.

  Another thing was clear: Their decision to withdraw was premature. Cohen called Johnson and asked to hold off on any press release.

  “It’s too late,” Johnson said. “It’s already out.”

  “Look, it’s kind of like an election night thing,” Cohen said. “We don’t know enough to concede yet. We probably did lose, but let’s wait until we know more about it.”

  “Shit, Peter, the goddamn deal is done,” Johnson said, the irritation clear in his voice. “Why the hell do you want to put out a new release?”

  “Well, no,” Cohen said. “It looks like we could bid again.”

  “How the hell can you bid again?”

  “Listen, we can bid as long as we want.”

  “Well, what do you want to bid?”

  Cohen had no idea; he simply wanted to keep his options open. Johnson was flummoxed. He couldn’t understand how Shearson could possibly jump start the bidding at this late hour. He certainly had no desire to.

  Johnson called Goldstone, who returned to his timeworn theme. “Ross, it’s their money,” the lawyer said. “If they want to bid, you have to let them…. At this stage, unless you think you don’t want to run the company, you have to let them bid.”

  “But it’s over…”

  “Ross, you can’t say that. You’ve got to hold on. They’ve got to bid something tonight. There is no tomorrow.”

  Johnson thought the whole thing was ludicrous. It had the same dreamlike quality so much of the last six weeks had had. Reluctantly, he gave the okay to issue a new press release. At one-thirty an annoyed Linda Robinson began redialing reporters to rescind their early release. Some were already asleep. Only a handful of papers, including The New York Times, were able to shoehorn the news into their latest editions.

  As Johnson pondered this latest twist, Frank Benevento came hustling in, waving a new computer run. Benevento was excited. If the group cut the cash component of its bid, he said, it could drastically increase the securities portion. It could, in effect, increase the face value of its bid without increasing its risk.

  Johnson was skeptical. Replacing cash with securities of questionable value made no sense to him. “Frank, how the hell can you evaluate it like that?”

  “You can’t,” Benevento said. “But obviously, they are.”

  “That’s horseshit,” Johnson said. “That makes no sense at all. All along Charlie’s been telling us cash is king. Who in their right mind would see the world that way?”

  Around three o’clock Johnson left for his apartment, wanting nothing more to do with a buyout he half-wished he’d never thought of. As he walked out he gave little thought to the Cohens and Beneventos who wanted to resurrect the bidding. It was just the kind of talk you would expect from tired, frustrated men running on too much energy and too little sleep.

  As far as Johnson was concerned, the snake was dead. Only its tail was still flipping around.

  Alone in his office, Goldstone wasn’t inclined to give up so easily. Never mind what Johnson wanted. If they wanted to win, they had to bid. And they had to bid right now.

  Put on the speaker phone at Willkie Farr, Goldstone pressed his case. Atkins wasn’t willing to reopen the auction, he said. “Decide your best bid and put it in now. Wait for them to invite you in, and it’ll be over…. Guys, actions speak louder than words. Forget about sending letters. Just bid!”

  “Wait a minute,” John Gutfreund said. “We don’t know what’s going on. We don’t want to bid against ourselves.”

  Gutfreund, like Cohen, wanted to win as badly as anyone, and worse than most. But with billions of dollars at stake, the two CEOs weren’t willing to boost their offer while they were flying blind: For all they knew, Kravis was only a dollar ahead. Johnson had been wrong before. If they raised their bid five dollars a share—more than $1 billion—on a hazy tip from Johnson, they risked wasting it. They would look like fools and would leave themselves open to criticism from their own boards, not to mention lawsuits. “Look, we’re not going to bid until we know what we’re bidding against,” Gutfreund repeated.

  Gutfreund didn’t believe for a moment that Kravis had come in at $105 or $106. It was too high. The Salomon chairman, frustrated for six weeks by Goldstone’s inability to discern the committee’s needs, also suspected that Johnson knew more than he was letting on.

  “I am very concerned that Davis Polk is conspiring with Ross Johnson to withhold information from us,” Gutfreun
d told Goldstone. “Ross knows what the bid is. And I’d like to know it. Now ask him.”

  “No, he doesn’t,” Goldstone responded. He wasn’t lying; Johnson hadn’t told him full details of his conversation with Hugel. “Listen, you’ve just got to bid.”

  “Steve,” Tom Hill interjected, “we have to know what Henry bid.”

  “It’s unlikely we’ll ever find that out,” Goldstone countered. “And while we’re trying, KKR is going to spend all night negotiating a merger agreement. We have to move now.”

  As the arguments dragged on, Goldstone realized the only way he could push Shearson and Salomon into bidding was to find out what Kravis bid. He called Atkins. This time he was practically shouting into the phone.

  “This is outrageous! You have to tell us what the other side bid!” Goldstone insisted. “The bids are so close, we have to know before we can bid again.”

  “Look,” Atkins said, “why don’t you talk to Ross Johnson. I’m not going to tell you anything. Talk to Johnson. He’s talked to Hugel.”

  Goldstone hung up, confused. Why was Atkins suggesting he call Johnson? Johnson didn’t know anything. Or did he?

  Goldstone reached Johnson before he left Nine West. “Ross, what happened when you talked to Hugel?” he asked. “What’s going on here?”

  Johnson, still protecting Hugel, ducked the question. He repeated what he had said earlier about “a four- or five-dollar spread.”

  “Steve, it’s over,” he said.

  Hanging up, Goldstone dreaded calling the group at Willkie Farr. He could hear the edge in Gutfreund’s voice; the Salomon executives’ contempt for him was evident. Nevertheless, he called one last time. “Look, you don’t need to know the exact number,” Goldstone said. “Just bid.”