It totaled $18.9 billion, the amount needed to pay the cash portion of the buyout. It was the biggest river of money ever to course through the U.S. financial system. The Federal Reserve Bank couldn’t wire money in amounts over $1 billion, so the banks moved it around in increments of $800 million to $950 million. The flow was so big it made U.S. money-supply statistics temporarily bulge as it roared through the system.
A thirtieth-floor conference room at Dick Beattie’s firm, Simpson Thacher & Bartlett, was packed with 200 lawyers and bankers, acting as a financial Corps of Engineers. They carefully monitored the river, seeing that tributaries entered and locks opened at the right times. By 10:45 A.M. it was over. The money had all changed hands, and so had the ownership of RJR Nabisco.
Johnson officially resigned that day, pulling the chord on his $53 million golden parachute.* His fanciest Gulfstream jet yet, ordered before the LBO battle, flew him to Jupiter on its maiden voyage. Johnson released a final statement before leaving: “The process we commenced last October has benefitted the company’s shareholders and has proven the financial strength of our varied businesses.”
Yet in the world’s greatest concentration of RJR shareholders—Winston-Salem, North Carolina—they weren’t thanking Johnson even as the money gushed into town. No sooner had Kravis won than signs began popping up: “Good-bye Ross, Hello KKR.” Nearly $2 billion of checks arrived there in the late-February mail. Now, more than ever, Winston-Salem was “the city of reluctant millionaires.” The river of money had washed away the last of RJR’s stock. Local brokers and bankers who managed people’s money got calls from distraught clients. “I won’t sell my stock,” more than one sobbed. “Daddy said don’t ever sell the RJR stock.” They were patiently told they had to. They were told the world had changed.
No sooner had the checks arrived than out-of-town “financial consultants” descended on Winston-Salem to advise its residents on how best to spend their new riches. In leaflets tucked under windshields in the Reynolds parking lot, in pesky phone calls, in seminars at the Holiday Inn, stockbrokers offered to help people reinvest their windfall in the market. The frequent, incredulous response: “You want me to buy stock?”
“You have to understand,” said Nabby Armfield, Jr., a retired stockbroker, “Reynolds wasn’t a stock. It was a religion.” Mr. Armfield even recorded a song to express the community’s frustrations that became an underground hit. Sung to the tune of “Frosty the Snowman,” the chorus went:
F. Rossie the snowman had a triple comma dream,
You can have the skim milk and I’ll make do with cream.
Hey all you bucolics, here’s a deal that’s really sweet.
You take title to the chaff and I’ll haul off the wheat.
In December Johnson sent each director a dozen roses with a note: “Congratulations on a great job. The shareholders won.” He had one more dinner with them before his last board meeting in December, where everyone made polite conversation but made no amends. John Macomber was in an avenging spirit, advancing the idea of scrapping the management team’s 1988 bonuses. Bob Schaeberle was practically in tears as he talked about the breakup of Nabisco. Marty Davis squelched the idea of paying each special committee member a $250,000 fee.
The Winston-Salem directors took the brunt of public criticism there. A high-society matron was seen elaborately crossing the names of John Medlin and Albert Butler from her Christmas party list. A tobacco employee walked up to Medlin one day and declared: “I wish I had a million dollars in your bank so I could take it out and really hurt you.”
For the other directors, life went on, rather more pleasantly. USA Today named Charlie Hugel one of its business heroes of 1988. His Combustion Engineering Co. was bought by a Swedish company the following year, and Hugel accepted a familiar title under the new ownership: non-executive chairman. John Macomber was named chairman of the U.S. Export-Import Bank. Vernon Jordan went on RJR’s reconstituted board, joining Medlin as a holdover.
Paul Sticht swung into his third term as chairman of RJR, and wasted no time causing a commotion by announcing (incorrectly) that headquarters would return to Winston-Salem. Once again he flew around the country in his beloved corporate jets and settled into his old office in the Glass Menagerie. He was pleased to see the end of Ross Johnson—but, he admitted, the price was horrible. “I feel bad,” he told a visitor a few days after his return. “I wish it had never happened.”
Sticht, of course, was a figurehead as RJR’s interim chief executive. Kravis surrounded him with an “operating committee” of partners and trusted RJR executives, to keep him from any mischief. Kravis also stepped up his search for a permanent chief executive.
At the same time, on Thursday evening, March 9, Jim Robinson got a call at his apartment from his longtime number two, Louis Gerstner, a dynamic executive whose signature adorned the American Express travelers check. “I have to see you in the morning,” Gerstner said. Robinson pleaded that his schedule was crowded; Gerstner said it was urgent. They agreed to meet at the Robinsons’ apartment soon after dawn the next day. There Gerstner dropped a bomb: he was to be the next chief executive of RJR Nabisco.
Later that morning, a startled Robinson was riding in his limousine when he took a call from Kravis. The buyout king apologized for luring away Gerstner and said he hoped it wouldn’t cause American Express too much trouble. Jim Robinson was nothing if not diplomatic. “Henry, I want to compliment you on your judgment,” he said. “You only made one mistake. You didn’t offer it to me first.” Both men laughed, but the sting was undeniable.
Wall Street is a small place, and in the interests of harmony Kravis wasted no time healing wounds inflicted during the fight. He made peace with Peter Cohen at a summit in February and actually hired Tom Hill to investigate the possible takeover of Northwest Airlines. Relations between Kravis and Tom Strauss remained strained. Shortly after the deal closed, the Strausses moved into a new Park Avenue apartment directly below the Kravises. When the Salomon executive had some remodeling done, a crack appeared in the wall of Kravis’s apartment.
Kravis also moved to smooth relations with Linda Robinson. Soon after the Gerstner episode, Linda took a message that Kravis had called. She ignored it. Within days she received a small ceramic doghouse with a cute note from Kravis, suggesting he was in the Robinsons’ doghouse. Linda Robinson waited a few days, then sent Kravis a twenty-pound bag of dog food. All was forgiven. She and Kravis still own “Trillion.”
Fees, of course, went infinitely further toward soothing Wall Street’s wounds. In the coming months, it rained money at the firms lucky enough to be on the winning side in the RJR Nabisco fight. Drexel Burnham reaped $227 million in fees from a $3.5 billion bridge loan. It got even more from selling junk bonds. Merrill Lynch got $109 million for its role in the bridge financing. A syndicate of 200 banks collected $325 million for committing $14.5 billion of loans. Kohlberg Kravis itself collected $75 million in fees from its investors. Morgan Stanley and Wasserstein, Perella got $25 million apiece. Kravis even spread the largesse to those whose feelings he might have bruised. Geoff Boisi’s Goldman Sachs got the job of auctioning Del Monte, while Felix Rohatyn’s Lazard Freres did the same for the company’s stake in ESPN.
The closing dinner Kravis threw to commemorate the deal will long be remembered. Held in the Pierre Hotel’s grand ballroom, four hundred investment bankers, lawyers, and other friends of the firm feasted on lobster, followed by veal with morel sauce and a three-foot-high cake decorated with edible replicas of Nabisco products, all washed down with Dom Perignon.
“It’s wonderful to see all these friends of KKR here tonight,” Dick Beattie opened the evening. “To think it only took a billion dollars in fees to get us all together.”
Beattie was in rare form, roasting enemy and friend alike. “I see Jeff Beck over there,” the lawyer noted. “Jeff, I want to remind you that this dinner is off the record.” Amid gales of laughter, Beck’s voice echoed through the hall. “T
alk to Wasserstein! Talk to Wasserstein!”
RJR Nabisco may have been the Mad Dog’s last hurrah. In January 1990 The Wall Street Journal printed a lengthy article suggesting that much of Beck’s colorful background was fictitious. For years, stories of the investment banker’s days as a decorated Vietnam jungle fighter and heir to a billion-dollar fortune had been repeated as fact. Some of these anecdotes made it as far as early, unpublished versions of this book. But during the fact-checking process, Beck’s tales couldn’t be corroborated and so were dropped from the finished manuscript. That discovery led to the Journal article. After its publication Mr. Beck resigned from Drexel.
In the months after his victory, Kravis shone. At parties, nouvelle society’s adoring courtiers cheered, “Make way for King Henry!” In May, he and Roehm and a group of friends toured India, dining with Prime Minister Rajiv Gandhi and the Maharaja of Jaipur. Kravis and Roehm wore thick leis of jasmine, tuberose, and roses and were honored guests at an elephant festival, where the beasts paraded in gold and multihued costumes. They slipped down a river by barge, were serenaded with sitars and ate feasts cooked over open fires. At the Maharaja’s, fans blew cold air off blocks of ice topped by jasmine. “My goodness,” said Oscar de la Renta, “if this is not refinement, what is?” Life, as they say, was good.
But Kravis’s victory tour proved shortlived. In August, his simmering dispute with Jerry Kohlberg burst into the open when Kohlberg sued Kohlberg Kravis, claiming he had been cheated out of the proceeds from several LBO investments. The suit was settled in early 1990; terms weren’t disclosed. Soon after Kohlberg’s suit, Kravis encountered his first publicized problems when he was forced to reschedule or miss debt payments on three LBOs, including Owens-Illinois. “Cracks in House That Debt Built,” read The New York Times headline.
Kravis insisted it was much ado about nothing and began focusing his attention on European targets. Yet a year after the fight for RJR broke out, Kravis had yet to initiate a new LBO. Competition remained stiff and, after his brush with publicity during RJR, Kravis was reluctant to enter heavily publicized fights like the Northwest Airlines fray. For the first time, newspapers and competitors began openly speculating if Kravis had lost his touch.
At RJR, Lou Gerstner wasted no time whittling down Johnson’s empire. With Dick Beattie at his side, Gerstner sold seven out of eight corporate jets, plus more than a dozen corporate apartments and homes. Only Johnson’s prized hangar proved unsalable. “It’s just too grandiose,” Beattie fretted in September 1989. “We can’t give the thing away.”
McKinsey & Co. consultants swarmed the Atlanta headquarters, evaluating everything and alienating many. Employees felt as though they were in an occupied land. For many, it was the final straw. When Kravis announced in April that headquarters would be moved to New York, only 10 percent of the managers offered jobs there agreed to go. “I don’t feel like I work for a company anymore,” said one refusenik, “I feel like I work for an investment.”
Just how good an investment it would prove remained unclear. The company reported a $1.15 billion net loss in 1989, after paying its $3.34 billion debt tab. It ran up a $330 million deficit in the first half of 1990. But its all-important cash flow was robust and its divestitures of some food businesses reaped nearly $5 billion. (The Del Monte canned-foods operation was sold to a group which included Bob Carbonell. He became the new company’s chairman.)
John Greeniaus proved true to his word, improving Nabisco’s operating profit by half and tripling its cash flow in 1989. The Dinah Shore LPGA budget was halved, PGA sponsorships were scuttled, and much of Team RJR Nabisco was given its unconditional release. And while Nabisco’s gains proved hard to sustain, Greeniaus became a Kravis favorite. He was named to RJR Nabisco’s board.
Reynolds Tobacco, however, was embattled. In March 1989, RJR killed Premier. In the next few months, it trimmed the payroll by 2,300 employees. In the course of the year, Philip Morris widened its lead ever further over RJR, taking advantage of the disarray. Attacks by health advocates grew fiercer. RJR had to scrap a new black-oriented cigarette, called Uptown, after Health and Human Services Secretary Louis W. Sullivan blasted the brand. Even Winston-Salem’s neighboring city, Greensboro, joined the trend toward antismoking ordinances.
Yet the business still generated prodigious cash under its new chief executive, a forty-three-year-old New York banker named Jim Johnston. A onetime marketing whiz at Reynolds Tobacco, Johnston was fired in 1984 for opposing cigarette loading. He ended the practice upon his return, forcing $340 million in write-offs but boosting factory and distribution efficiency. That change, together with deep cost-cutting, produced a 46 percent gain in operating profit for tobacco in the first half of 1990.
1990 brought the first serious challenge to RJR Nabisco’s health, and ironically it came from Wall Street. That all-important “reset” provision, forged in the final desperate hours of bidding, called for more than $4 billion of bonds to be restored to their original face value by April 1991. And as the date approached, the bonds were trading at a deep discount: the cost of a true “reset” could run into the billions, more than enough to break the company. Grasping for levity at a particularly black moment, George Roberts quipped that, without some form of immediate rescue, the sequel to Barbarians at the Gate might be called Huns on the Run.
To its credit, Kohlberg Kravis wriggled out of its fix. In July 1990, it announced a $6.9 billion refinancing package, enabling it to buy back the junk bonds and substitute less onerous forms of debt. The costly maneuver probably assured that, as a buyout, RJR would neither be a free-fall disaster nor a windfall profit for Kohlberg Kravis. Whatever the case, it assured big paydays for the bankers and lawyers who reconfigured the original deal: another $250 million in fees.
For Kravis ultimate success, it was clear, was years away. To make matters worse, Philip Morris, sensing RJR’s vulnerability, moved in for the kill, pummeling the company in a number of key markets. It expanded its sales force, undercut Reynolds on pricing, and attacked its strong discount brand, Doral, with two new off-price brands of its own. Analysts predicted RJR’s cigarette volume could fall 7 percent to 8 percent in 1989, while Philip Morris gained volume.
“Philip Morris is eating our lunch,” Cliff Robbins of Kohlberg Kravis acknowledged in October 1989. “Marlboro is an unstoppable machine. We have a lot to do.”
By 1990, Wall Street’s party was over, the memories of massive takeovers and buyouts receding more each day. In the wake of RJR Nabisco, LBO activity had dropped sharply, and by the fall of 1989, neither Kohlberg Kravis nor Forstmann Little had initiated a single major buyout. The prospect of anti-LBO legislation, raised during RJR, delayed many deals. What came to be known as the “Ross Johnson” factor nixed others: Few chief executives, after all, were willing to go through the public pillorying Johnson had endured.
But what brought Wall Street to a grinding halt were tremors in the junk-bond market. The first eight months of 1989 saw $4 billion worth of junk-bond defaults and debt moratoriums, the most spectacular being the troubles of Canadian entrepreneur Robert Campeau’s U.S. retail empire. In October, the unraveling of a $6.79 billion buyout of United Airlines caused a panic on Wall Street, sending the Dow Jones Industrial Average down nearly 200 points and prompting fears of a new market crash.
As Ted Forstmann had pointed out, junk bonds could be a useful tool, if used correctly. The problem, of course, was that they had been abused and overused. In the months to come, the junk-bond slump deepened, cutting off the fuel to Wall Street’s takeover engine. When its banks put the squeeze on Drexel Burnham—already staggering from having paid $650 million in fines to settle its portion of the Milken case—the firm that symbolized the junk-bond era filed for bankruptcy protection and announced its intention to liquidate.
With Drexel’s demise, and the guilty pleas of financial titans Ivan Boesky and Michael Milken in the insider-trading scandals, popular opinion turned strongly against Wall Street and the
unfettered greed of the 1980s. That backlash, combined with deteriorating financial fundamentals, effectively spelled the end to an era unlike any Wall Street has ever seen.
A new wind was blowing. As the new decade dawned, the hottest specialty for young MBAs became financial restructuring, i.e., fixing the broken takeovers of the eighties. Thousands of Wall Streeters, including a goodly number of under-thirty millionaires, lost their jobs as finance skidded into what promised to be a years-long slump. The memoirs of a young Salomon Brothers bond salesman, Liar’s Poker, which lampooned Wall Street’s decade of excess, hit the bestseller list and stayed there for nearly a year. Everywhere, investment bankers and their merger brethren were attacked as something akin to low-grade war criminals. As a concept, takeovers were openly derided, even, sometimes, by those who made their fortunes on them.
For the most part, The Group’s members emerged from the wreckage in good shape. In September 1990, Tom Hill was named co-chief executive of Shearson Lehman’s investment banking unit. Eric Gleacher left Morgan Stanley to start his own boutique, Gleacher & Co., and quickly struck pay dirt, putting together ConAgra’s $1.34 billion acquisition of Beatrice from Henry Kravis. Steve Waters was among two investment bankers to take the reins at Morgan after Gleacher’s departure. Bruce Wasserstein suffered a barrage of media criticism for his roles in a number of disappointing deals.
Among those who didn’t survive the era’s end was Peter Cohen, who agreed to resign as Shearson’s chairman under pressure in January 1990. Relations between Cohen and Jim Robinson, already tense after the RJR Nabisco fight, deteriorated rapidly in 1989 as Shearson floundered through a number of setbacks, including a widely unpopular restructuring that led to the resignation of its president, Jeff Lane. On publication of this book, Cohen was surprised to learn details of Linda Robinson’s secret role negotiating with Henry Kravis. The disclosure came at a sensitive moment for Cohen, who felt it undermined his authority, and led to the final breach with the Robinsons. Afterward, he told a number of people that this book portrayed him unfairly and that Jim Robinson was party to every decision he made in the Nabisco deal, including negotiation of Ross Johnson’s benefits package.
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