Barbarians at the Gate

by Bryan Burrough

  Around and around the room they went, and when they stopped no one was surprised to find they were boosting their bid again. The verdict seemed unanimous. They would throw in one last raise, just fifty cents a share in cash, roughly $115 million.

  “Is everybody comfortable with that?” Roberts asked.

  All around, heads bobbed.

  Then: “No, I’m not.”

  The voice was Jamie Greene’s. For the second time in two days the young San Francisco associate would be responsible for initiating a shift in strategy. “I don’t know if we should do it at all,” Greene said. “But if we do, let’s do it with a dollar in cash. We’ve come this far. We want to win this deal.”

  “I think he’s right,” Roberts said. “That’s exactly what we should do. We’ve gone this far. We’ve made up our minds we want to own this company. Let’s not get shortsighted now.”

  Kravis agreed. Greene’s last raise was swiftly approved.

  The last issue was a deadline. Once before Kravis’s group had forgotten it, allowing the process to drag on another six hours. They wouldn’t forget it this time. Someone suggested a half hour. Roberts voted for fifteen minutes.

  “Nah, George,” Beattie said, “you can’t do anything in fifteen minutes.” Thirty minutes it was.

  Beattie summoned Atkins and Rohatyn to hear the final bid. Kravis, sitting on the couch, spoke first. “You’ll now hear our final bid, and Cliff will read it to you.” He motioned to Robbins, who sat in a chair beside the aquarium. The young associate read out the new bid. Then he handed Atkins a merger agreement signed by both Roberts and Kravis. If the bid was accepted, Atkins was to return the agreement with Hugel’s signature.

  “We want it back signed in thirty minutes,” Roberts said.

  Kravis nodded. “We’re leaving in a half hour.”

  His face blank, Atkins retreated, followed by Rohatyn. It was 8:15.

  The fuse had been lit.

  Three floors below, Steve Goldstone was famished. He hadn’t eaten all day. He decided to wait out the committee at a Chinese restaurant just across Lexington Avenue.

  As he left, Goldstone turned to Jack Nusbaum.

  “What do you think?” he said. “KKR?”

  Nusbaum nodded.

  The last bid in hand, Rohatyn and the investment bankers huddled in a corner of the boardroom. To the untrained eye, Johnson’s group was the clear winner: $112 versus $109. But things are rarely that simple on Wall Street. Cohen and Gutfreund’s refusal to include a reset mechanism meant their bid had to be discounted.

  Minutes later Rohatyn addressed the board. “Both bids,” he announced, “are between one-oh-eight and one-oh-nine. When you get that close, and when you’re dealing with securities in amounts that have never been dealt with before, in my business judgment these offers are essentially equivalent. They are both fair from a financial point of view. They are close enough that we can’t tell you one is clearly superior to the other.”

  A dead heat.

  It was the last thing the directors wanted to hear. Now they would have to make a decision. In their hearts every person in the room knew how the board felt. The problem was finding a legally defensible reason to feel that way.

  To help the board make its decision, Rohatyn pointed out a half-dozen differences between the two bids. As the directors had long requested, Kravis had promised to leave 25 percent of the stock in shareholders’ hands; Shearson, despite repeated emphasis by the board’s bankers, opted for just 15 percent.* Kravis promised to sell only a portion of Nabisco; Shearson would sell it all. Shearson’s failure to guarantee its securities via a reset was mentioned. So, too, was the management group’s inflexibility on guaranteeing employee benefits such as relocation expenses; Cohen wanted these matters to be negotiable with the ultimate buyers of RJR Nabisco businesses.

  Like some financial smorgasbord, each board member now seized on one of the differences to justify his selection. John Medlin chose the reset. “Shearson’s ‘best efforts’ promise isn’t good enough,” Medlin said. “You don’t do that in a twenty-five-billion-dollar deal. We’ve got to know where those securities will trade.”

  Nods all around. Al Butler thought of his friends holding stock in Winston-Salem and seized on the stock disparity. Juanita Kreps cited Kravis’s promises to treat employees more fairly. Bill Anderson liked that one, too. “Can I assume that KKR will look after employees better?” he asked.

  More nods.

  Security guards had finally released Kravis’s clamoring investment bankers from the reception area where they had been held all day. The cream of Wall Street’s merger society, including Gleacher, Wasserstein, and Beck, had passed the time cracking jokes and passing rumors. Now, let through the dike, the bankers clustered around the entrance to the corner room where the Kohlberg Kravis contingent waited. Casey Cogut once more closed the door in their faces.

  As they waited for the board’s verdict, Kravis and Roberts decided to blunt the crackling tension with a prank. Everyone inside the room picked up his coat and computer runs and, without saying a word, got up and walked out the door, past the bankers, and down the hall, as if to leave.

  The bankers didn’t believe it for a second.

  No one was crazy enough to leave now.

  The half hour was nearly up. Felix Rohatyn left the boardroom and hustled down to where Kravis and Roberts waited.

  “We need another ten minutes,” he said.

  “Ah, come on,” Roberts said. “We’re not going to do this.”

  “Just bear with us,” Rohatyn said. “At this point, it’s clearly in your best interest to stay around.”

  “Is this really ten minutes?” Kravis asked.

  “Yes.”

  “Fine,” Kravis said, “you’ve got it.” He wasn’t going to lose a $25 billion deal over ten minutes.

  Five minutes later discussion inside the boardroom ebbed.

  “Time is running out,” Hugel said. “Call for a motion.”

  Marty Davis spoke first. “I move we award to KKR.”

  “Second,” said John Macomber.

  “All in favor,” Hugel said.

  Hands filled the air.

  “All opposed?”

  No hands.

  “The vote,” Hugel said, “is unanimous.”

  Atkins led a cluster of board advisers to the Kravis contingent. In his hands was a copy of the merger agreement. His face betraying no emotion, Atkins opened the agreement and pointed out a tiny clause that needed approval. “Dick, what is this?” Kravis said, unsure what Atkins was up to.

  Beattie leaned over and inspected the change. It had to do with severance provisions for RJR Nabisco executives. “Yeah,” he said. “We’ll agree to that.”

  Atkins closed the contract and handed it to Kravis. “Here’s your signed contract,” the lawyer intoned. “Congratulations. It’s yours.”

  Kravis went numb. He had been fighting for this so long. He had lost eight pounds in the last six weeks. He took the agreement from Atkins and said, “Great.” Roberts said little: All he could think of was how much work was ahead.

  There were congratulations all around. After a minute, Kravis turned to Cliff Robbins. “Get all the bankers into a conference room and stay with ’em,” he said. “And don’t let any of them use the phones. Especially Wasserstein.”

  Atkins next led his procession three flights down to the Shearson group. When they reached the conference room where Nusbaum, Stern, and the others waited, only Atkins went in. Steve Goldstone was called at the Chinese restaurant and put on a speaker phone. Goldstone’s stomach was in knots as he took the phone.

  Atkins’s tone was funereal.

  “Steve, this is Peter.”

  “Hi.”

  “I’m sorry to report the board has signed a merger agreement with KKR. The bids were dead even. But the board decided to sign with KKR for other reasons.”

  Goldstone went numb.

  “What were those other reasons, if you
can tell me?” he asked, mechanically.

  Atkins explained that all the facts would be contained in an SEC filing in the next few days. Then he shrugged his shoulders and walked out.

  At Scarlatti, Johnson took Goldstone’s call at the maître d’s station. “Hey, Ross,” the lawyer said. “Guess what.” The tone of his voice told Johnson everything.

  “Surprise,” Johnson said. His bemusement was gone. He was very tired.

  “KKR got the bid.”

  “Fine,” Johnson said after a moment. “Let’s get together at Nine West and see the guys.”

  Johnson returned to the table a moment later and broke the news. “I don’t much feel like eating,” he said. “Let’s go back and see the troops.”

  Amid the backslapping and congratulations Charlie Hugel collared Kravis and guided him into an empty office. “Congratulations, it’s a great company you’re buying,” he said. “You know, you only made one mistake.”

  “What was that?” Kravis asked.

  “Paul Sticht. Just be careful about that. That got a lot of people on the board upset. You’ve got to understand there’s a history there.”

  Kravis nodded.

  “Go slow now,” Hugel said. “You’ve got good people down there. I’ll help you in any way I can during the transition.”

  Afterward, Hugel, his gouted foot throbbing, limped down to the lobby, where a security guard tried to sneak him out a back door to avoid the television cameras milling about outside. Hugel barely made it to his car when the crowd spotted him and ran up. Seeing their approach, the security guard slammed shut the car door—right on Hugel’s foot. It hurt so bad he wanted to scream. A fitting conclusion, he would acknowledge, to a painful process.

  When the camera crews chased after Hugel, Kravis and Roberts slipped unnoticed out the front door and spent the evening celebrating at Il Nido, a nearby Italian restaurant.

  Carolyne Roehm sat by the phone at their Park Avenue apartment all night, waiting for the word. At 10:36—she would never forgot the minute—it finally rang.

  “We got it,” Kravis said.

  Roehm let out a whoop of joy. “YEA!!”

  Johnson was gracious in defeat. Arriving at Nine West, the first thing he did was open the bar. Then, scotch in hand, he took time to talk with each of his executives, clapping them on the back and congratulating them for fighting the good fight.

  “We’re now going to go the high road,” Johnson told Jim Robinson, who showed up with his wife and Steve Goldstone. “These people have got new owners. We don’t want a lot of acrimony being created. The game is over. We’ve played it into overtime. Whether they gave you an elbow in the eye or crack-blocked your butt end, it doesn’t matter. That’s the score. Let’s get on with our lives.”

  Not everyone took defeat as well. As the evening wore on, Ed Horrigan grew bitter and morose. Unlike Johnson, who had bounced from job to job in a long career, Horrigan was a longtime Reynolds man. He was used to being the big wheel in Winston-Salem. Despite Johnson’s warnings, he had never really believed they could lose.

  “We got the goddamn shaft,” he complained to Johnson.

  “Ed, you know we’ve been getting it for a long time,” Johnson said. “Shit, I’ve been the lightning rod. But we’ve got to get on. We’ve got to get back, get the businesses in shape.” He went on. “You watch, there’ll be a big social change. It’ll be fine for a while. Then people will be surging over to the new owners. You know, the King is dead, long live the King.”

  Horrigan only grew angrier. At one point, Johnson was forced to intervene in a nasty confrontation between Horrigan and John Martin in a hallway. Searching for scapegoats, Horrigan was railing about Martin’s handling of the press. “You’re the most ineffective, immature, son of a bitch that ever walked the face of the earth!” Horrigan shouted.

  “Ed,” Martin responded, “you come to your conclusions, and I’ll come to mine.”

  Johnson, fearing the two men might come to blows, swiftly broke them up. “Gentlemen, this is no time for this. We’ve been a great team. We’ve done a good job. If anything went wrong, it was me.”

  Horrigan and Martin were glaring at each other. “Come on, now,” Johnson said, “shake hands.”

  “I’m not going to shake his fucking hand,” Horrigan sputtered.

  Well after midnight, everyone had left except Goldstone, the Robinsons, and Ross and Laurie Johnson. The five of them sat around the table in the fishbowl conference room. Linda was helping Johnson with a press release to be issued the next morning.

  Goldstone could tell Johnson was starting to wind down. “You remember that time we talked about the price of doing something like this?” Johnson asked the attorney.

  Goldstone smiled. He thought about that day on the porch, long ago, it seemed, watching the red Florida sun sink.

  Johnson laughed. “It surely was painful. Just like you said. But I’ll tell you the same thing I told you then. I don’t know what else I would’ve done. It was the best thing for shareholders. It was the right thing to do.”

  Johnson’s driver, Frank Mancini, was up on the floor, waiting for the group to break up. Johnson rose from the table and said, “Let’s go home.”

  Epilogue

  On the morning after, Ross Johnson boarded a plane for Atlanta. Before leaving he dictated a press release that, among other things, noted “the best bid” had won. When Linda Robinson ran a copy by Peter Cohen, Cohen grew incensed. He fired off a call to Steve Goldstone. “If this goes out, we’re dead,” Cohen said. “This release will kill us.”

  For an instant Goldstone was confused. He thought they were dead. The bidding was over. Goldstone hung up and called Johnson aboard the plane racing south. Johnson was irked. For the first time in six weeks he decided to put his foot down. In minutes he was on the phone to Cohen. “It’s over, Peter,” Johnson said. “I’ve had it. What point are we serving now? We’re not serving the company or the shareholders…. It’s over.”

  Still, Cohen, Hill, and the other Shearson deal makers spent days thrashing out ways to get back at Kravis. A lawsuit was considered. In the end, of course, they did nothing. Five days after Kravis was crowned the winner, Shearson Lehman Hutton issued a press statement officially closing the battle for RJR Nabisco.

  Wednesday night Jim Maher was thinking about heading home early when Kim Fennebresque came bounding into his office. “John Greeniaus is in town,” Fennebresque said, “and he wants to talk to us.” The Nabisco executive was in a downstairs conference room, the banker said. Maher canceled a meeting and walked downstairs with Fennebresque, who led his boss into the room.

  “Surprise!”

  Maher was speechless. He had almost forgotten Wednesday was his birthday. The room was filled with balloons and cake and champagne and friends. Fennebresque gave a toast. “I never pass up the opportunity to toast the boss in December,” he said, alluding to Wall Street’s January bonuses. “On behalf of everyone who worked so hard in the last two weeks, we very much appreciate your inspirational leadership.”

  Its RJR Nabisco experience proved a boon for Maher’s troops. Despite the doomsayers, First Boston completed more mergers than any other Wall Street firm during the first six months of 1989. Its work with Jay Pritzker paid off in a number of Pritzker-related assignments, culminating in the joint First Boston-Pritzker purchase of American Medical International for $1.6 billion in 1989. In September 1990, Maher was named vice chairman of First Boston.

  The morning after winning the greatest victory of his career, Kravis flew to Florida for his mother’s eightieth birthday. The next day he hopped north to Atlanta to inspect his new prize. Johnson, upright in defeat, was waiting for him at the airport.

  “Well,” Johnson said, “congratulations to you, pal. You’ve got a hell of a company here.”

  Johnson drove them in his Mercedes to the Galleria, where he gave a tour of the headquarters and offered to turn over his office to Kravis on the spot. “I’m here for you to do
anything you want,” Johnson said. “The planes are yours, it’s your company.”

  “Ross, Ross, go slow,” Kravis said, reminding him the company wouldn’t change hands for months yet. “You just keep running the company as you have in the past.”

  That afternoon Kravis flew to Winston-Salem and met with Ed Horrigan. Horrigan was every bit as gracious as Johnson, although, it was soon clear, for different reasons. Kravis, like Johnson before him, needed Horrigan’s tobacco expertise and so, with Kravis’s encouragement, Horrigan agreed to become a tentative member of the Kohlberg Kravis team.

  A week later, Kravis took a call from Horrigan in New York. “I just want to tell you, I’m not going to be number two anymore,” Horrigan said. “I have worked for three guys who are now history: Paul Sticht, Tylee Wilson, and Ross Johnson. I either want to be CEO or I leave.”

  Thus began an intricate pas de deux. As each major presentation to bank lenders approached, Horrigan would say he didn’t feel right about appearing if he wasn’t going to be CEO. He didn’t want to mislead the bankers if he wasn’t going to be with the company. Kravis would adroitly side-step, promising to make clear that Horrigan’s future was undecided. By the third round, Kravis had had enough. “I don’t think you should speak,” he said. “Why don’t you just quit?”

  In mid-February, Horrigan did. His resignation came with: a sumptuous office in Winston-Salem, with secretary; an option to buy his company apartment in New York and house outside Palm Beach, promptly exercised; and a golden parachute worth $45.7 million. Later, he used some of the proceeds to buy a candy company in Atlanta.

  At 8 A.M. on February 9, 1989, Kravis opened the floodgates for a torrent of money. That morning, Drexel Burnham Lambert delivered $5 billion worth of checks—the bridge loan it had promised. Kohlberg Kravis transferred $2 billion from its own bank account to RJR Nabisco’s. Manufacturers Hanover Trust Co. gathered $11.9 billion from banks throughout the world and deposited the loaned money into an escrow account for Kohlberg Kravis.