Barbarians at the Gate (19 page)

Steve Waters was a nut for organization, an ex-Vietnam helicopter pilot who still had an air of the military. He thought of Shearson’s M&A
group as the Marines, fast and hard-hitting. Yet his edges were appealingly soft. Waters wasn’t ashamed to be a bit square; he and his wife taught Sunday school classes at their Presbyterian church in Connecticut. If he wasn’t the consummate takeover tactician, Waters’s easygoing manner, forthright attitude, and sincerity—a rarity among his ilk—made him a favorite of Johnson, whom he had known since Standard Brands.

J. Tomilson Hill III, Harvard College, Harvard Business School, was the warrior of the pair, a zealot for the Wall Street trenches. To enemies—and he had a few—Tom Hill came across as an oiled-back Gordon Gekko haircut atop five feet, ten inches of icy Protestant reserve. Hill was well tailored and proud of it; “the best-dressed man on Wall Street” a competitor called him, and Hill wore his dark Paul Stuart suits like armor. His office was all cool modern art and Lucite-encased tombstones commemorating past victories.

Hill could be charming but rarely glib; sometimes it seemed as if he chose every word from a dictionary. Around Shearson he wasn’t popular. “Found a single person who likes the guy?” more than one colleague asked. A longtime coworker described Hill as “the ultimate heretic. You can’t believe he’s devout about anything. He’s like a jungle fighter…capable of being a really nasty guy.” To colleagues, Waters and Hill made an unlikely pair.

That spring Hill’s tactical skills were in demand as never before. He helped call the shots in the defense of Federated and engineered a raft of Shearson-backed hostile offers, including a Black & Decker bid for the big toilet-seat maker, American Standard. But as Hill’s prestige rose—later that year he would be profiled in
USA Today
—Waters found himself embroiled in a nasty internal battle to gain better bonuses for their troops. At a meeting of Shearson’s top managers, Waters roundly denounced the bonus structure, revealing that he had urged some of the department’s brightest associates to consider leaving if they weren’t better paid. The speech angered many at Shearson, most importantly its chairman, Peter A. Cohen, who believed Waters was inciting unrest in the ranks. When Waters offered his resignation, it was accepted.

Waters wasn’t surprised to learn that Hill had been quietly assuring senior Shearson executives he could handle the department on his own. As he cleared out his office on his last day at Shearson, Hill walked in, offering his hand in farewell. Waters left it there, hanging in the air. “I wouldn’t treat someone the way you treated me,” he said. When he left
Shearson that spring, many on Wall Street suspected Tom Hill’s fingerprints were on the dagger protruding from Steve Waters’s back.

With his partner gone, Hill moved fast. Waters had brought in many of Shearson’s best clients, and it was now Hill’s job to make certain none of them followed him out the door. At the top of Hill’s damage-control list was RJR Nabisco. Ross Johnson was one of the department’s five most lucrative relationships, and Hill had a hunch he was ripe to do a deal. He brought out RJR Nabisco’s balance sheet. Any fool could see the tobacco business was throwing off cash that had to go somewhere.
This one’s a live wire,
he thought.
Something’s going to happen.
Hill dialed Andy Sage and set up an introductory meeting.

After leaving Shearson, meanwhile, Waters talked through his options with a number of his clients, including Johnson, who offered office space during his search. Another client who helped Waters scout job opportunities was Henry Kravis. One day that spring Waters spoke to Kravis and found him in a good mood. “I just found a new friend this morning,” Kravis said.

Tom Hill had called. Waters knew the two men didn’t get along: Kravis had taken it personally when Hill had bad-mouthed a Kravis offer to Federated’s board three months before. “Suddenly I’m the nicest guy in the world,” Kravis said in mock wonder, relating Hill’s conversation, “and he’s got the most interesting ideas in the world. Funny how things like this work.”

Waters ultimately accepted an offer from his old friend Eric Gleacher at Morgan Stanley. On his second day in his new job, Waters sat down in Gleacher’s corner office to discuss what clients they could hope to snatch from Shearson. Johnson topped the list.

“Listen, every two or three years he does something big,” Waters said. “We really want to stay close to that situation. Something big is going to happen. I can feel it.” With Gleacher’s go-ahead, Waters formed a team of investment bankers whose top priority was generating ideas to run past Johnson.

As the bankers circled, Johnson remained transfixed by his stock price. It was like a scab at which he constantly picked. Most chief executives wouldn’t have bothered; many companies live with low stock prices all their lives, and almost no chief executive thinks Wall Street gives his stock its due. RJR Nabisco’s directors weren’t concerned. Profits were up; sales, too. But Johnson couldn’t leave well enough alone. The old urges to action were returning, and the stock price was simply their latest manifestation.

Months later, when friends would ask him why he chose his ultimate course, Johnson would speak of stock multiples and capital structures. He would recite all the steps he had taken to get the stock up: the profit gains, the pristine balance sheet, the stock buy backs, and Premier. It was all true, but it was intellectual window dressing for something much deeper. He could never leave well enough alone. There was shit to be stirred.

In the name of boosting his stock, Johnson had sorted through dozens of schemes. Benevento had gotten pumped up about his General Motors dual-stock idea, but Johnson killed it at a May 31 meeting. Benevento loved the plan’s mad complexities. But to Johnson it was just more paperwork. “Holy God,” he exclaimed, “it’s just too complicated.”

Johnson clung to the idea of a joint venture with Pillsbury, directing Dean Posvar’s planning department to do an exhaustive evaluation of the company. He had Beck noodling out possible approaches. He took Jim Welch to visit Pillsbury’s chief executive, Bill Spoor. Spoor entertained the idea, but demanded all kinds of standstill agreements to ensure Johnson couldn’t take control of the company.

When the Pillsbury talks fell through, Johnson had Ira Harris check on possible approaches to Quaker Oats. Maybe, he reasoned, the two companies could combine their grocery-products businesses. But Quaker’s chief executive, Bill Smithburg, was an ardent antismoker who wanted nothing to do with RJR Nabisco. Steve Waters tried to get Johnson interested in a takeover of Kraft, the Chicago food giant. Johnson passed; Kraft was too big, too expensive, and its brands wouldn’t fit well with Nabisco. Tom Hill also proved energetic in his pursuit, making presentations on a number of possible takeover candidates. Johnson was happy to browse, but found them all too expensive.

There were other ways to boost the stock price, of course. Johnson had high hopes for the smokeless cigarette, Premier, which was due in test markets by fall. Premier had been wheeled out for public display the previous September in an elaborate press conference at New York’s Grand
Hyatt Hotel. Rumors swept the stock market the week before that the company was developing a revolutionary new cigarette, and the stock had shot up three points. Premier was judged to be “material” news to RJR Nabisco’s shareholders forcing a public announcement. A Reynolds executive named Dick Kampe used a pointer and a cross-sectional diagram to explain Premier to the press. In a separate room, Horrigan took the message to financial analysts. “Simply put,” a beaming Horrigan declared, “we think this will be the world’s cleanest cigarette.”

What neither man mentioned were some lingering problems. Horrigan’s people, in fact, hadn’t wanted to introduce the product so soon—it was far from market-ready—but their hand had been forced. For one thing, Premier was flunking its taste tests. In its U.S. research laboratories, Reynolds scientists found that fewer than 5 percent of smokers liked its taste. In Japan, another team of researchers quickly learned to translate at least one sentence of Japanese: “This tastes like shit.” It had a very basic problem for a cigarette: It tasted awful if lit by a match instead of a lighter. The sulfur in a match reacted badly with Premier’s carbon tip. It also made it smell awful—“like a fart,” as Johnson delicately put it. If all that weren’t bad enough, the cigarette was hard to draw on—darned hard. Inside the company, they called it “the hernia effect.”

Privately, line executives knew they needed years to iron out the glitches. Even in limited production, Premier’s carbon tips had a habit of falling off. Internal projections determined that Premier couldn’t be ready for test markets before 1991, 1990 at the outside. Yet Horrigan had promised the world it would be out in 1988.

But then, the company’s top executives had refused to listen to reason for some time. When Washington lobbyist Paul Bergson doubted the wisdom of Project Spa, warning of regulatory problems, he was ousted by Horrigan in favor of a Winston-Salem lawyer named Champ Mitchell. Charlie Hugel thought the idea of a smokeless cigarette was nutty and said so: People
liked
to blow smoke, tap ashes, watch their cigarette burn. Nonsense, Johnson argued. Premier was just what was needed to combat the country’s rising health concerns, especially the issue of “passive smoke” that had led to smoking being banned in many public places. “Throw it out there,” Johnson argued. “Let the consumer decide.”

As Premier moved toward its fall introduction, further new hopes for boosting the stock arose in June. In a New Jersey federal court, the widower of a lifelong smoker named Rose Cipollone was suing a number
of tobacco companies for contributing to his wife’s death. Reynolds wasn’t a defendant, but its fate was tied to that of its fellow tobacco companies. The case mounted by Anthony Cipollone was considered among the strongest ever brought against the tobacco industry; the plaintiff’s lawyers had unearthed a raft of damaging documents. A tobacco victory, Johnson reasoned, would give his stock a real pop.

When the jury finally delivered a verdict, it broke tobacco’s unbeaten streak—but just barely, clearing the industry of conspiracy and awarding only $400,000 in damages. “A tip for Tony Cipollone,” Johnson chortled, and waited for RJR Nabisco’s stock to spike up. It didn’t. Johnson’s office became a wailing wall where everybody came to cry about the injustice of it all. Horrigan was particularly bitter; he had predicted the stock would climb at least six points. “The market is never going to give us its due,” Henderson complained. “The equity markets just aren’t a suitable capital structure for some companies.” Arguing to take stock from public hands was in fact the intellectual basis for an LBO, although no one openly advocated it at the time. Horrigan thought Johnson would never go private. “The problem with the company going private,” he said to himself, “is that nobody would pay any attention to him.”

At forty-six, Martin was part of the Frank Gifford connection. During the seventies he had been one of the bright young men at ABC Sports. As logistic chief for “Monday Night Football,” Martin had become Howard Cosell’s surrogate son. As an ABC programming executive, he hammered out three Olympics contracts. Martin was television smooth, with a low, soothing voice that inevitably made a good first impression. “He meets well,” it was said of Martin. He dressed so well friends at ABC called him “Suits.” He was also a scratch golfer and had once been club champion at Winged Foot, one of the New York area’s prestigious country
clubs. Martin joined RJR Nabisco in January 1988 from Ohlmeyer Communications, and he and Johnson were soon inseparable.