Barbarians at the Gate

by Bryan Burrough

  Atkins and the board advisers were stunned; they had been convinced that Kravis would jump at their offer.

  Now what?

  At ten minutes past two, Hugel brought the board meeting back to order. “KKR just came in with its latest proposal,” Atkins announced: eighty dollars a share in cash, eighteen a share in preferred stock, and ten a share in debentures securities.

  Dennis Block noticed something.

  “Any time restrictions?” he asked.

  Atkins thought for a moment. “No…”

  It was a stroke of luck. Kravis and Roberts had forgotten to lay down a new deadline. Lazard and Dillon would need several hours to evaluate the securities in the management group bid. Thanks to Kravis’s oversight, they now had them.

  But first there was the question of the merger agreement. If the management group was to be taken seriously, the board needed assurances Cohen would consent to the same agreement, including the so-called Schedule Two items, that Kravis had. A letter of agreement was drafted for Nusbaum to sign. “If they don’t sign the letter,” Hugel said, “we go with KKR. If they do sign, we have to get advice about what to do.”

  Mike Gizang carried the message down to Nusbaum on the thirty-second floor. It was scrawled in twenty-one lines on a yellow legal pad. Nusbaum read it, then called Cohen, who arranged a conference call with Gutfreund and Strauss at Salomon Brothers. The agreement was quickly agreed to, and after making a few minor changes, Nusbaum handed it back to Gizang.

  Not only was Kravis’s perch well suited for monitoring traffic into the boardroom, it lay astride the shortest route to the men’s room. Throughout the day, whenever a director would walk past, Kravis would dispatch an associate to stand beside him at the urinals and strike up a conversation. The “urinal patrol” finally paid off when Roberts cut off Hugel and Vernon Jordan en route to the facilities.

  It was past three o’clock and Kravis and Roberts had been waiting for nearly an hour. “What the hell is going on?” Roberts asked.

  The board hasn’t begun deliberating on your bid, Hugel said.

  “What do you mean?” Roberts was stunned.

  Roberts was so angry he followed the two board members into the bathroom and, as Hugel and Jordan attended to matters at hand, continued to badger them. “If the board hasn’t been meeting, what the hell have you been doing in there?” he asked.

  Hugel was vague, mumbling something about legal delays. Moments later he and Jordan emerged, Roberts a step behind. Kravis was waiting for them.

  “What the hell is going on?” he demanded.

  Double-teamed, Hugel paused. “Come on, guys,” he said, “just give us some more time.”

  “This has gone on long enough,” Kravis said.

  “We’ll get it resolved,” Hugel said. “It’s going to be done.”

  “How long is this going to be?” Kravis asked.

  “I need two hours. Just give me two hours. We’ll get it done.”

  Hugel smiled, and motioned at Jordan, who at well over six feet towered over the diminutive financiers. “I got a big guy here in case Ross gets out of hand,” Hugel said, smiling.

  Down on the thirty-second floor, Johnson and the remaining members of the management group spent the afternoon cracking jokes and trying to keep abreast of the events hurtling past them. As the hours passed, they found themselves marveling at the ways of Wall Street which had led their great adventure so far astray.

  Of particular interest to Johnson were the many uses the bidders had found for the strain of junk bonds known as pay-in-kind securities, or PIK. The management group’s decision to “pile on the PIK” in place of cash still boggled his mind.

  “Hey,” Johnson said, “why don’t we start a new company and it’ll be all PIK? I wonder if I could pay all the advertisers, or buy space in Time. Think we could do it in PIK?

  “I mean,” Johnson went on, “we have found something that’s better than the U.S. printing press. And they’ve got it all down here on Wall Street. And nobody knows it’s going on. I wonder if the World Bank knows about it. You could solve the third world debt crisis with this stuff. It’s a brand new currency…”

  Johnson was in hysterics by now. He mimicked a printing press. “Chuck-oon, chuck-oon, chuck-oon. Just print it and let her fly.”

  They could devise a charter for their new company, Johnson said. Call it PIK Associates. And it would include what Johnson dubbed the three rules of Wall Street: “Never play by the rules. Never pay in cash. And never tell the truth.”

  In the boardroom Hugel and the directors now pondered the question of valuing the management group’s securities. No one looked forward to lengthy negotiations. Dennis Block had a suggestion. Cohen had already agreed to duplicate Kohlberg Kravis’s merger agreement. Why not see if they would agree to duplicate its securities, as well? Block wrote a letter on a yellow note pad and Bob Lovejoy of Lazard ran it down to Nusbaum. After a few minutes, Lovejoy reentered the boardroom.

  No deal.

  The board was in a quandary. Three hours earlier it had been on the verge of giving RJR Nabisco to Kravis and Roberts. Even with Johnson at $112, it was clear that every director in the room still wanted to go with Kravis. The only problem was the scoreboard: Johnson 112, Kravis 108.

  “If they say it’s worth one-twelve, until you test it you can’t take the one-oh-eight,” Mike Mitchell insisted. “You simply can’t take one-oh-eight in the middle of the afternoon, even if everyone wants to. We have to go back to the management group and find out if it’s really worth one-twelve.”

  The pressure was intense, and it affected each director differently. Charlie Hugel’s gout flared up, causing him to limp about like a cripple. He’d forgotten to take his gout pills. Albert Butler, who hadn’t had a cigarette since heart surgery eight years before, reached for the pack John Medlin was smoking. “For God’s sake, give me one of those,” Butler growled. The two North Carolinians soon finished off the pack and began bumming smokes from others.

  In the end, they had no choice but to negotiate with Cohen’s people. At ten minutes to four, Luis Rinaldini of Lazard reluctantly led a team of investment bankers downstairs to begin discussing the management group’s securities.

  Restless, Kravis and Roberts went for a walk. Together they left the building, strode south down Park Avenue, then turned right and headed back to Nine West. As they strolled, Roberts tried to see what cigarette brands passersby were smoking. A few were puffing Winstons or Salems, but twice as many seemed to prefer Marlboros. “Well, one out of three isn’t bad,” he quipped.

  Returning to his forty-second-floor office, Kravis returned some phone calls, including one from Jim Maher at First Boston.

  “I had called to congratulate you,” Maher said when he came onto the line.

  “I came back to the office because I couldn’t deal with it any longer over there,” Kravis said.

  Kravis was tired but gracious. “Listen,” he said, “without you guys, we wouldn’t be in there. Thank you very much.”

  “Just remember that,” Maher said.

  Kravis and Roberts returned to Skadden Arps around five o’clock. Dick Beattie, his lower back aching from an old football injury, was sprawled out on the floor, asleep. Paul Raether had tried to read The Wall Street Journal, but was forced to move to another room to escape Beattie’s snoring.

  “Have you seen anybody, heard anything?” Kravis asked.

  “Not a thing,” Raether said.

  Roberts rousted Beattie and sent him on another scouting mission. “Goddamn it, Dick, go find Peter Atkins,” he said. “This is ridiculous.”

  Minutes later, Beattie managed to collar Atkins in a hallway.

  “Peter, these guys are going to leave,” he said. “I’m not kidding you. They’ll walk out of the bidding. They will.”

  “Dick,” Atkins said, “tell them to remain patient.”

  Beattie resumed his post outside the boardroom. A steady stream of investment bankers was hustling
between its double doors and the nearby staircase. It dawned on Beattie that the board must be negotiating with Cohen and Johnson. When Kravis and Roberts heard that, they came to see for themselves.

  Just as they did, the board broke. A number of directors emerged and headed for the men’s room. Bob Lovejoy, the Lazard banker, meandered over to speak with Roberts and Raether. “I know it’s going slow,” he said, “but we’re getting there.”

  George Roberts had had enough. With every bit of anger he could muster, he tore into Lovejoy. “What the fuck is going on! You’re screwing us. We know what you’re doing! You’re down there negotiating with Johnson! I won’t stand for it!”

  Stunned by the unexpected onslaught, Lovejoy tried to calm Roberts. “George, you’re wrong. You have my word. We’re negotiating in good faith with you. You’re not being placed at a disadvantage. You’re actually in pretty good shape.”

  “It sure doesn’t look like that to me,” Roberts said. “Put yourself in my shoes. We’ve been here since nine-thirty last night!”

  Moments later, Lovejoy beat a swift retreat. “Jesus Christ,” Raether heard him mumble, “I’m sorry I came over here…”

  Five minutes later, Lovejoy sought out Kravis and Roberts in an empty office. He had Felix Rohatyn in tow. Clearly Roberts’s speech had had an effect.

  “We’re not negotiating with Johnson,” Rohatyn assured Roberts calmly. “We’re just trying to understand where he is. We’re just getting clarification.”

  Fuming, Kravis and Roberts sat back to wait. Again.

  Three floors below, Johnson, growing restless, also took a walk around the block, his now not-so-Merry Men in tow. As he left, he saw the worried faces of Nusbaum and the others involved in negotiating securities with the board: By now the lawyer had been reinforced by Steve Goldstone, Shearson’s Jim Stern, and Chaz Phillips of Salomon. Johnson didn’t intervene. “I wouldn’t know a reset,” he cracked, “if it shook hands with me.”

  By seven o’clock Johnson had had enough. He asked Goldstone whether he was needed. When the lawyer said no, Johnson’s group prepared to go to dinner at one of Horrigan’s favorite restaurants, Scarlatti, on East Fifty-second. Before leaving, Johnson called John Martin, who remained behind at Nine West.

  What are our chances? Martin wondered.

  “They’re not going to give it to us,” Johnson said.

  Minutes later, Johnson emerged from the building’s lobby into a gaggle of television cameras.

  “Who won?” reporters shouted. “Who won?”

  “The shareholders,” Ross Johnson said, not missing a beat.

  To those inside the boardroom, it seemed as if the Kravis contingent had been slowly creeping toward their door all day. To leave the room meant running a gauntlet of Kravis people. Going to the bathroom, Albert Butler observed, was like facing a receiving line. Most directors stayed put rather than venture outside. Finally, Hugel could stand it no longer and made a break for the men’s room.

  At a urinal, he found himself standing side by side with the young Kravis associate, Scott Stuart.

  “So how’s it going in there?” Stuart asked.

  Hugel’s first impulse was to throw up his hands—Who knows?—but to do so might have caused an embarrassing accident.

  “Don’t worry,” Hugel said, “it’ll be over soon.”

  The board reconvened at ten past six. Luis Rinaldini ran down their progress with the management group. In general they agreed to what the board sought, with one major exception. Cohen and Gutfreund refused to put a reset on their bid’s securities, fretting that it would lock them into guarantees that could cost them tens of millions of dollars. They insisted instead that Shearson and Salomon would use their “best efforts” to guarantee the securities traded at their stated values.

  Felix Rohatyn summed up the situation for the board. “We have one-ten-plus with a problem on the reset versus one-oh-eight. But without that reset, one-ten starts to erode. I’m not sure that either firm [Lazard or Dillon] is ready to give you an opinion that the management offer is ahead.”

  The directors discussed going back to the management group on the question of a reset one final time. Rinaldini called Jim Stern. One last time: Would the management group consider installing a reset? Stern refused.

  Finally, it was time to deal with Kravis.

  Even before hearing Shearson’s answer, Atkins & Co. had resolved to give Kravis the same chance to make a final bid they had given Nusbaum six hours earlier. Around the table, the drawn and gaunt directors hoped Kravis would make this easier for them. As Atkins led a procession out of the room, John Medlin had a final word for him. “Tell them,” he said, “we need another dollar of cash to tilt it in their direction.”

  As Atkins and his group entered the corner office, Kravis sat on a rattan sofa, tired, poker faced, right hand propping up his head. Roberts sat beside him, lips stretched tight across his face. Above the cousins’ heads hung a giant blue Marlin, the trophy of some lawyer’s summer vacation. Raether and three Kohlberg Kravis associates, flanked by Beattie and Cogut, lined the walls. An aquarium filled with multicolored fish burbled to one side.

  The board, Atkins said, was willing to give Kohlberg Kravis one final opportunity to bid. “If you haven’t already done so, this is the time to put in your best bid.”

  Silence.

  Kravis and Roberts were too startled to speak. Beattie and Cogut exchanged a glance of amazement. One final bid? Hadn’t they been through this five hours ago?

  Felix Rohatyn’s voice filled the void.

  “This is a serious offer. You should do your best to respond to it.” Then, looking Kravis square in the eye, Rohatyn said: “We want your highest and last offer.”

  “This is the craziest thing we’ve ever seen,” Kravis said. “We gave it to you five hours ago!”

  A half hour later, Beattie and Cogut emerged from the aquarium room and sought out Atkins. They found him leaning against a wall outside the boardroom.

  Kohlberg Kravis has two conditions before it will place its final bid on the table, Beattie said. First: A merger agreement must be drawn up and submitted to directors as part of the offer. “Because we want this to end,” Beattie explained. Second, and most important, Kravis and Roberts wanted the board’s promise that, if they bid, neither Johnson nor any member of management would be allowed into the final board meeting.

  “We’re not going to give you another offer if it’s going to be reviewed by a board that includes Johnson or anyone in management,” Beattie said.

  “Why not?” Atkins asked.

  “Peter, for obvious reasons. Ross’ll just stand up and bid again.” Cogut chimed in: “If we say X, he’ll just say X plus one. He’s always got the last bid.”

  Atkins had to admit they had a point. This was something he hadn’t thought of. Assuring the two lawyers he would get back to them, Atkins walked off to find some help.

  Five minutes later, Atkins closeted himself in an empty office with Mike Mitchell and Dennis Block. The trio was among the most experienced on Wall Street. But this one had them stumped: How do you uninvite a chief executive to his own board meeting?

  “It’s clear to me you can’t just exclude him,” Block said. “What do we do?”

  Law books were pulled down from shelves and thumbed through, but an answer evaded them. Johnson seemed to have every right to attend the meeting. Holding the meeting without him invited a lawsuit. “There’s no way we can keep ’em out,” Mitchell said.

  The minutes ticked by.

  Could he be fired? Too messy, they decided.

  Atkins was growing desperate. The fate of the entire $25 billion deal hung in the balance.

  Then, suddenly, Mitchell asked the obvious question: “Why don’t we ask them if they plan to attend?”

  It was so simple. Maybe Johnson wouldn’t want to come. Atkins found Goldstone in a hallway. Giving no hint of why he was asking, the Skadden lawyer explained that the board was set to meet and c
hoose a victor.

  “Will your people be there?” he asked in an offhand manner.

  “Wait a second,” Goldstone said. “We’ll check.”

  Goldstone returned minutes later with a question. “Will KKR be at the meeting?” he asked.

  “No.”

  “Well then, no, we don’t plan to be there unless KKR will be.”

  Atkins heaved an inner sigh of relief. Unwittingly, Goldstone had just laid the groundwork for Kravis to boost his bid one final time.

  No one bothered to ask Johnson whether he wanted to attend his final board meeting. By then Johnson and his aides were into their first round of drinks several blocks away.

  Dick Beattie and Felix Rohatyn, both active in New York political circles, leaned against a wall outside the boardroom and discussed ways to improve city schools as they waited for Atkins. Finally Atkins returned and stated: “We can assure you management will not be in the meeting.” Beattie pushed off from the wall and headed for the aquarium room, where Kravis waited.

  Kravis went around the room one last time: What should we bid?

  This time the debate was tense. Every man in the room knew the fate of the deal—and possibly their entire industry—was on the line. Fifty cents a share too much or too little could be the difference. Already the bidding had reached heights all but the foolhardy were uncomfortable with. More than once that day Kravis and Roberts had talked about walking away from this deal. One wrong move could be fatal.

  Scott Stuart sat on the couch beside Roberts, thumbing through a sheaf of computer runs, answering questions as Kravis went around the room. “Let’s just go home,” Stuart said. “We’re being jacked around here.”

  Paul Raether wanted to stay, but could see no reason to raise their bid. “This is just bullshit,” he said. “I think we ought to tell ’em that’s all there is.”