Barbarians at the Gate (22 page)

Johnson had just checked into London’s Inn on the Park when Laurie called with the news. It wasn’t clear whether Bruce was dead or alive. Johnson and Martin hopped on the first Concorde back. On the flight, Johnson lit up a Premier in the No Smoking section. “It’ll be interesting to see if anyone notices,” he told Martin. By the time Johnson arrived at the Westchester County hospital, his son was in a coma. Doctors weren’t sure when, if ever, he would regain consciousness. The Johnsons stayed at Frank and Kathie Lee Gifford’s home in Connecticut. Gifford was a rock: his son Kyle had once suffered severe head injuries in an accident.

On Thursday, Jim Robinson visited. The two friends took a long walk around the hospital grounds. “Rawss, all you can do is make sure you’re getting the best medical attention you can get,” Robinson said. “Other than that, and hoping, there’s not a lot of value you can add.”

“I know you’ve been through a similar situation,” Johnson said.

“You just have to keep your focus and perspective,” Robinson advised, “and go on about your life.”

On Friday, Johnson stared at his open briefcase. Mail was piling up at
the office. He knew he had to get himself together, get back on track. He decided to take Robinson’s advice and plunge back into work. Monday morning he visited Bruce’s hospital room, then drove to Manhattan, where he met with Sage and Benevento.

Walking into his office, Johnson brought out a sharp pencil, a calculator, and an accounting spreadsheet, the kind he learned to use at General Electric thirty-five years before. All around him, on the floor and the furniture, he piled reports from his planning department, blue-book statements, studies from investment bankers, and computer printouts. He wanted to see for himself if an LBO made sense, for he no longer trusted investment bankers or computers to give him the answer. As Benevento looked on in wonder, Johnson hunched over the spreadsheet and went to work. “Nobody,” he said, “is better at this than me.”

Benevento knew what Johnson must be going through; he had three sons of his own. For the first time, Johnson submerged himself in the possibilities and challenges of an LBO. For five hours he and Benevento waded through the numbers, dissecting cash flows, market shares, profit, and sales projections for every RJR Nabisco business. From time to time, Johnson stood and called Atlanta or Winston-Salem to get up-to-date figures.

Johnson wanted to value each business, determine what it might sell for. That, plus tobacco’s future cash flows, would go a long way toward determining what price, if any, he could offer in an LBO. By Monday evening he had a feeling: Not only could he raise enough to try a buyout, but he was ready to give it a serious look. Walking to his apartment that evening, Johnson thanked God for giving him something to take his mind off his son.

The next morning a Shearson contingent led by Peter Cohen and Tom Hill arrived at Nine West. The two Shearson executives handed Johnson some how-to materials to scan while thinking about a buyout, and Johnson asked them to study all aspects of an LBO. Johnson was well aware the project they were contemplating could lead to an LBO three times larger than any seen before.

“Peter, is this something you think is doable and viable?” Johnson asked Cohen. “Because you’re talking about a pissload of money here. Just a pissload of money.”

“Yeah,” Cohen said confidently. “We can do it.”

The next day Johnson returned to his son’s hospital room. Earlier he
had canceled a meeting of the executive committee scheduled for Thursday, citing Bruce’s accident. Besides, he told Hugel, there really wasn’t anything pressing to discuss.

The last time Welch returned one of his calls, Beck had subtly probed for signs of a shift in Johnson’s outlook.

“You know, Jimmy, we have all the money you need if you want to do this deal.” Beck didn’t have to mention the word buyout; he had been pushing the idea so long Welch understood what he meant.

“I know that, Jeffy.”

“Well, you know, shit happens. And I find it peculiar that you’re answering all of Ross’s phone calls.”

“We don’t know anything,” Welch said. “Nothing’s going on.”

Something was going on; Beck could feel it. It crossed his mind that Johnson might be attempting an LBO, but he dismissed the notion. Drexel had gotten nowhere recommending that approach for two years now. Still, something had changed.
Maybe they’re preparing some kind of restructuring,
Beck thought.

On September 12, he took his suspicions to a man he had courted just as fervently as Johnson: Henry Kravis. Beck had helped Kravis with a number of deals, including his largest, Beatrice. When he arrived at Kohlberg Kravis’s offices, ironically just six floors below RJR’s New York offices, Beck got right to the point.

“I think it’s time to do something about RJR,” Beck said.

“Why is that?” Kravis wondered.

“For some reason Johnson’s stopped taking my calls. He’s having Jim Welch call me back. We ought to just have a meeting and make an offer.”

“You’re probably right,” Kravis said. “Get me the numbers and set something up.”

Beck agreed. “There’s a problem, though. You won’t give Ross what he wants.”

“What’s that?”

Beck had talked with Johnson’s people long enough to know their concerns about LBOs. Johnson simply wasn’t interested in working for someone else. “For one thing,” he told Kravis, “they’ll want control of the board.”

“That’s true, we won’t give him that,” Kravis said. “That’s a problem.”

The two men talked a while but came to no resolution. Nothing could be done, it was clear, without speaking to Johnson first. “Try to set something up,” Kravis said, “and we’ll discuss it at a meeting.”

Later, Beck got back to Welch about setting up a conference between Johnson and Kravis. Welch was noncommittal, but suggested they might get together in the last week of October or the first week of November. The Mad Dog didn’t know it, of course, but by then his request would long be moot.

Few even in this social stratum had the connections to throw a private party at the museum, but greeting their guests inside the wrought-iron gates of its Medieval Court was a couple who had muscled their way in with a $10 million donation: Henry Kravis and his stunning, fashion-designer wife, Carolyne Roehm. No more than five-foot-six, Kravis wore a tuxedo and a tan. He had a ready smile, rheumy blue eyes, and a voice that held the faint echo of his Oklahoma childhood. But it was Roehm, as always, who attracted attention. Three inches taller than her husband, agonizingly thin, her gleaming dark hair pulled back, she wore a strapless gown of emerald green satin Charmeuse, and a necklace of glistening cabochon emeralds. At social events, she clung to her husband’s arm.

After champagne and cocktails the guests gathered around a small stage and, as the lights went down, were bathed in the dulcet strains of the teenage violinist Midori. Kravis and Roehm, who took seats in the front row at the far right, had invited the young Japanese to play after enjoying
a private recital in their palatial Park Avenue apartment. Roehm sat rapt, her hands clasped to her chest, Kravis silent beside her.

Afterward the Kravises guided their guests past foliage-crowned trellises into the specially decorated Blumenthal Patio, its stone balconies draped with giant tapestries, lush green vines twisting through its columns and balustrades. Atop the dining tables, which were covered with hunt tapestries trimmed with heavy bullion fringe, were centerpieces of miniature fruits in gilded baskets, each surrounded by gilt candlesticks with green shades. The wines, a Louis Latour Mersault 1985 and a Château Beychevelle 1979, accompanied a dinner most notable for the inclusion of rabbit pie, which some shunted aside with a round of nervous jokes. “Who maimed Roger Rabbit?” someone quipped. Dessert was a baba au rhum served with great silver bowls piled with a colorful display of miniature fruits and sorbets. The evening was topped off by a special showing of the museum’s new, 160-piece Degas exhibit, which the guests toured thoughtfully.

“Oh, what is so rare as the perfect party?” wrote the society columnist Suzy days later. “The evening was superb from beginning to end, the one to be measured against by any host and hostess seeking to entertain with wondrous taste and big dollops of flair.”

The affair was, in fact, an unofficial coronation of sorts for its hosts, Kravis and Roehm, the prince and princess of the newly moneyed set dubbed “Nouvelle Society.” Married just three years, they had rocketed to the fore of Manhattan society, capturing the imagination of social climbers everywhere. Their $5.5 million Park Avenue apartment, laden with Renoirs and French antiques, was practically legend on the charity circuit. Stories of Kravis’s lavish gifts to his wife were told and retold in hand-clapping, cheek-clasping awe.

Yet for all the attention, Kravis himself remained something of an enigma. Friends inevitably described him as kind, gentle, and upbeat, a caring father and husband who wrote long, ardent love letters—qualities, of course, that never quite came across in his business dealings. Often characterized as even-tempered and controlled, he nevertheless had a mean streak, a tendency to dismiss a competitor like Ted Forstmann as “having an Avis complex,” or to remark cruelly about an overweight associate. There was a steely glint in his eyes that made one want to believe the stories of unbridled greed and ambition. And there was an air—maybe it was his cool, boarding-school reserve—that hinted at something
tightly coiled beneath: a sense, however slight, of menace.

His rise on Wall Street had been swift, even by the standards of the high-flying eighties. Practically unknown just five years before, Kravis and his secretive firm had ridden Wall Street’s leveraged buyout wave to prominence in the mid-eighties. Years later, the mystery of how Kravis had shunted aside his longtime mentor, Jerome Kohlberg, remained the stuff of drawing-room speculation. If it were ranked as an industrial company, the businesses Kohlberg Kravis controlled, from Duracell batteries to Safeway supermarkets, would place it among the top ten U.S. corporations. Now, with $45 billion in buying power, Kravis was the unquestioned king of Wall Street acquisitors, his war chest greater than the gross national products of Pakistan or Greece, his clout rivaling that of any in financial history.

No one really knew what made Kravis run. The best guess was it had something to do with his diminutive stature or his father, who had made, lost, and regained a fortune by the time Kravis was born in 1944. Little in Kravis’s early years foretold greatness. He grew up rich in postwar Tulsa, remembers riding his bicycle a lot, loved golf, and wasn’t too keen on classes at Edison Junior High.

His father, Raymond Kravis, was the son of an English tailor who emigrated to Atlantic City at the turn of the century. After working in a Pennsylvania coal mine, Ray Kravis moved to the Southwest, where he became wealthy in the roaring stock market of the 1920s. He lost everything in the crash of 1929, and, having borrowed heavily on margin, worked for years afterward to pay off his margin calls. After the war, he began a second career as a petroleum engineer, estimating oil reserves for Wall Street firms such as Goldman Sachs and managing to amass a second fortune.

When Henry was thirteen Ray and Bessie Kravis sent him off to follow his older brother, George, to a boarding school named Eaglebrook in the hills of northwest Massachusetts. Moving on to the Loomis School in Connecticut, “Hank” Kravis was a popular student: vice president of the student council, scrappy captain of the wrestling team, dorm monitor. Teachers remember him as mature, purposeful, controlled.

Kravis was a small boy, and sometimes seemed driven to prove himself among the bigger kids. Years later he relished the touchdowns he scored as a high-school halfback after the coach said he was too puny to play. One of his favorite memories was of his first job at seventeen, working in the mailroom for the Sunray DX Oil Company in Tulsa. After a few days he
had been given his first big assignment, distributing the mail for the entire company. But when he woke up on the big morning, he couldn’t see. His new contact lenses hadn’t been fitted correctly; the pain felt like needles being driven into his eyes. Unable to remove the lenses, his parents out of town, Kravis got in his car and, practically blinded, managed to navigate the empty, early-morning streets of Tulsa to get to work. Afterward his eyes had to be bandaged. “But I got the mail out,” Kravis recalled proudly.

An economics course at Loomis persuaded him to pursue a business career, and he majored in finance at tiny 600-student Claremont Men’s College in California. (He had applied and was accepted to his father’s alma mater, Lehigh, just to show he could get in.) At Claremont, Kravis spent his freshman year majoring in golf, beach, Las Vegas, and the racetrack at nearby Santa Anita. His junior year he captained the golf team. By his senior year he was focused on a Wall Street career. His senior thesis was on convertible debentures.

Ray Kravis knew the people at Goldman Sachs, the old-line Wall Street firm, and each summer during college his son worked there, beginning as a runner. Plunked down amid the shouting, red-faced men on the trading floor, Kravis decided he couldn’t see himself among them at age forty. For one thing, he wanted an office. His senior year Kravis secured a post-graduation internship at the Madison Fund, one of Wall Street’s hot money management firms. There he made a name for himself as a stock picker. These were the “go-go years,” when every stock seemed to be rising. Friends joked he could have done as well using a dart board.

In the fall of 1967 Kravis enrolled at Columbia Business School and immediately regretted it. He missed the action on Wall Street. His father persuaded him to stick with it, but Kravis called his boss at Madison, a man named Ed Merkle, who let him continue working while he completed his studies. Going through the motions, he graduated two years later, at the height of student riots, with an undistinguished record of
B
s and
C
s.

Wall Street beckoned. Madison had acquired a small railroad, Katy Industries, and Merkle, impressed with Kravis’s drive, put the young Oklahoman in charge of diversifying its businesses. Kravis settled on an industry he knew, oil field services, and, working for the first time with corporate “finders,” spent a year traveling the backroads of Louisiana buying mom-and-pop companies for Katy: a barge and tugboat outfit and a dredging company. It was good, nuts-and-bolts experience.

As Katy grew, Kravis selected the father of a business school friend, a
man named Jacob Saliba, to be its new president. Together they rented a suite at Manhattan’s Delmonico Hotel—Saliba took the bedroom, Kravis the living room—and continued buying a string of companies for Katy. Eventually Katy was sold, and Kravis, at twenty-five a young man in a hurry, looked for a new challenge. Goldman Sachs was too hidebound, too structured, so Kravis joined a small firm named Fahaerty & Swartwood, where he hoped to begin a venture-capital operation. It didn’t pan out and, after a year, he left. Out of work, he turned for help to his cousin, George Roberts.

Just a year older, Roberts had grown up in Houston. His father and Kravis’s mother were brother and sister. The grandfather Kravis and Roberts shared was a Russian Jew who fled to America in the late 1890s rather than fight in the czar’s army. After his name was changed by an Ellis Island clerk, “George Roberts” joined people from his native village in Muncie, Indiana, where he eventually owned a dry goods store and the Roberts Hotel, which still stands. After losing everything in the Depression, he entered the oil business in Tulsa, and eventually died of a heart attack, alone in an oil field tent.

His son, Louis Roberts, grew up to be a freewheeling oilman in Houston, where he made and lost several fortunes in the Texas oil fields. During the 1950s Lou Roberts often took his teenage son George along to business meetings. At an American Petroleum Institute conference one year, father and son sat by a dirt-caked wildcatter in cowboy boots while listening to a speech by the chairman of Humble Oil, the predecessor to Exxon.

“Which one of those two men would you like to be?” Lou Roberts asked his son afterward.

“I’d rather be like the guy up on the stage, the businessman,” young George answered.

The businessman, his father explained, had 50,000 employees to watch over, a long, tiring workday, and could expect a pension of several hundred thousand dollars on retirement. The wildcatter, on the other hand, had maybe 30 employees, several dozen oil wells that pumped away while he slept, and was probably worth $5 million.

“Now who would you rather be?” Lou Roberts asked.
*

George Roberts, who grew to be as introverted as his father was garrulous,
never, forgot that lesson about the importance of being your own boss. After attending Culver Military Academy in Indiana, he had been a year ahead of Kravis at Claremont. When George was twenty-one, Ray Kravis had landed him a summer job at Bear Stearns, the big Wall Street trading house. Arriving most mornings before his peers, Roberts—quiet, steady, hardworking—struck up a friendship with the head of the firm’s corporate finance department, Jerome Kohlberg. After law school at the University of California-Hastings he went to work for Kohlberg full-time.

Bear Stearns was a cutthroat place, even by Wall Street standards. Run by its hard-charging chief, Salim (“Cy”) Lewis, Bear was essentially a loose group of private fiefdoms. At Lewis’s encouragement, competition rather than cooperation was emphasized, and jealousy and internal politics flourished. Roberts enjoyed working for Kohlberg because the older man sheltered him from the incessant turmoil. But he soon grew tired of New York. He was raising a family and longed to return to California. When Kohlberg arranged a transfer to Bear’s San Francisco office, Roberts, who would continue working for Kohlberg on the coast, nominated his cousin Henry Kravis as a replacement.

Friends joked that Kravis’s new boss, Jerry Kohlberg, had one suit (dark) and one tie (yellow, painfully narrow). A forty-four-year-old graduate of Swarthmore and Harvard Business School, he was a quiet, balding family man who loved tennis, the trumpet, his three children, and books. Like Roberts before him, Kravis was taken under the wing of Kohlberg, who ignored, for the moment, his protégé’s penchant for raising a little hell. Kravis had grown into the kind of young man who, at his thirtieth birthday party, rode one of his gifts, a Honda motorcycle, around his Park Avenue apartment. He stopped only when the band complained.

For the most part, Kravis’s work under Kohlberg was the routine stuff of investment banking: private placements, fairness opinions, stock underwritings. But in his little fiefdom, Kohlberg had also developed a profitable sideline: something known as “the bootstrap deal.”

Leveraged buyouts, as bootstrap deals came to be known, began as a kind of aid to the elderly. By the mid-sixties, many of the men who had founded family-owned companies and prospered during the postwar economic boom were growing old As they looked for ways to avoid estate taxes, yet allow their families to retain control of their firms, they had three options: remain privately held, sell shares to the public, or sell out to a larger company. Each approach had drawbacks. Remaining private
ignored the problem. Going public exposed the founder to a fickle stock market. Selling out usually meant losing operating autonomy.