Barbarians at the Gate (29 page)

“Look,” Sage replied, “it’s already been agreed to in principle.”

“I’m telling you,” Goldstone warned, “they won’t agree to it. They’d be giving away way too much.”

Sage was adamant. “I’m telling you, this is the deal. They’ll take it.”

Tom Hill and Jim Stern walked into Sage’s ambush at RJR Nabisco’s Manhattan offices Thursday morning. From the first words, the meeting was to be drastically different in tone than the gathering in Atlanta. Gone was the good ol’ boy, putting-green folksiness of Ross Johnson. In his place was an icy, bullying Andy Sage.

In the dramatic setting of RJR Nabisco’s glass-walled New York boardroom, the Shearson bankers listened as Sage laid down the law. If Shearson wanted Johnson to go forward, Shearson would have only two of seven board seats; Johnson would take three, with the remainder going to a pair of independent directors. Johnson’s executives would put up no money for their stake in the business; Shearson would loan them the funds to buy their stock, which could be repaid through the use of incentive bonuses. Shearson would even pay Johnson’s taxes. In effect, management would take its cut for free. And, Sage repeated, management would settle for nothing less than 20 percent of the profits.

Hill was speechless. He had expected tough negotiations, but nothing like this. He didn’t even know where to start objecting. When Hill and Stern attempted to reason with Sage, he made it clear Johnson stood ready to scrap the whole project, or, worse, take it to another investment bank.

To Hill, Sage seemed to have no regard for the way LBOs were done. “Andy,” Hill argued, “we’re putting up all the money. We’re taking all the risk. Get off it.” Asking Shearson’s investors to settle for a straight 40 percent return was ludicrous; money managers placed their money with Shearson for the “upside” well beyond 40 percent. Johnson’s cut, Hill felt, shouldn’t top 10 percent.

But Sage wouldn’t budge. For two days Hill and Stern slugged it out with the former Lehman banker. The negotiations grew emotional, until the three men began shouting at each other. Both Shearson bankers would later recall them as the toughest of their Wall Street careers. Throughout, they kept in touch with Cohen, who was attending a meeting of senior American Express executives in Tucson that week.

“Sage is being totally unreasonable,” Stern told Cohen late Thursday. As the talks progressed, his judgments grew harsher. “Peter,” Stern said, “it’s a fucking nightmare.”

More so than Hill, Jim Stern was amazed at Sage’s behavior. As a junior investment banker at Lehman in the seventies, he had worked with Sage on Standard Brands, and considered him an old friend. But now, during a heated exchange, Sage accused Stern of acting unprofessionally, an accusation that struck a nerve. “That’s it; I’m outta here,” Stern said, rising to leave. Sage quickly apologized.

Part of his intransigence, Sage would later acknowledge, was his somewhat outdated understanding of how banking relationships worked. During Sage’s days on Wall Street, the client was the boss, the investment bank the hired help. But Shearson, which would invest hundreds of millions of dollars in an RJR Nabisco buyout, wasn’t hired help; it was a full partner. Sage failed to grasp the distinction. “They weren’t supplicants for business anymore; they were players,” he would later say.

Sage was also driven by disdain. He didn’t feel Hill and Stern were up to the grand old Lehman standards, and he appeared to want to teach them a lesson about negotiations. “Andy,” Johnson said later, “felt these guys were jackasses. He just didn’t feel they were sharp at all.”

Groping for allies against Sage, Hill called Goldstone. The Davis Polk lawyer remained skeptical of Sage’s demands and for the first time told Hill so. “Look,” Goldstone said, “if our clients convince you they’re entitled to this, great. But if there’s a way I can be helpful here, I’ll try.”

Goldstone regretted the conversation when Hill, at a crucial point of the negotiations, mentioned to Sage that even Davis Polk supported Shearson’s position. Afterward Goldstone endured a thorough chewing out from an angry Sage. Who are you representing? Sage pointedly asked the lawyer. Goldstone stayed out of the fray after that.

As the negotiations wore on, Hill, with Cohen’s approval, began to concede key points. Yes, Shearson would take just two board seats. Yes, Shearson would pay Johnson’s taxes. But handing management 20 percent of one of the country’s largest companies for free? Not only would Sage’s demands chew into Shearson’s profits, they would look awful to the public.

“Andy, you’re setting yourself up for a big, big negative p.r. issue,” Hill warned. “Look at the raw dollars…. People are going to say management is ripping off the company.” Sage countered: We’ll worry about that when the time comes.

Nothing Hill came up with worked. And at every turn, Sage threatened to walk. One part of Jim Stern wanted to call Sage’s bluff; another wanted
to tell him to go screw himself. Stern gained a small compromise when Sage agreed to the idea of granting management extra stock for meeting certain performance incentives, or “bogeys.” There would be bogeys for completing a divestiture program, for targeted operating profits, for reaching certain rates of return.

But the Shearson bankers couldn’t persuade Sage to back off his central demands, that those bogeys would march Johnson’s cut up to 20 percent. At one point, Stern, in an effort to convince Sage the agreement was too rich, ordered up a computer run showing returns on an LBO priced in the upper $80-a-share range. Sage scoffed at the premise. “You’re crazy,” Sage said. “No one would bid that.”

After two days, Hill and Stern threw up their hands and appealed to Cohen. “Peter, you’re going to have to deal with Ross yourself,” Stern said, washing his hands of Sage. “This guy’s crazy. He’s impossible to deal with.”

Sage, too, had had all he could stand of Shearson. That weekend Stern refused to return his calls. By Sunday Sage was ready to dump Shearson and call up another firm, probably Drexel. “Let’s get rid of these guys and go back to scratch,” he complained to Johnson, who was in Florida with Goldstone for the weekend.

Johnson wasn’t worried. Every negotiation was a fight, he felt, and some fights were just worse than others. Anyway, Shearson wasn’t dealing from strength. In three days Johnson was to go before his board and make the pitch. He knew how badly Cohen wanted this deal and doubted Shearson would spike the entire effort over this one negotiation.

“Oh, they’ll come around,” Johnson assured Sage. “If they don’t, there’s no deal.”

Returning to his Connecticut home Sunday night, Hugel called Johnson, who had returned to Atlanta. They talked about whom to put on the special committee. In effect, Hugel was letting Johnson help name his own judges. They agreed on Marty Davis of Gulf + Western. Johnson’s old friend, named a director that spring, knew more about corporate restructurings than anyone on the board, having shaken up his own company repeatedly over the last five years. They agreed, too, on Bill Anderson, the former NCR chairman whom Johnson had blessed with an $80,000 consulting agreement. At least one of the directors, they agreed, should come from Winston-Salem. They decided on John Medlin. The most curious selection was John Macomber. After their earlier run-ins, Johnson didn’t trust the former Celanese chairman. But he and Hugel agreed it would be better to place Macomber on the committee than risk his stirring up trouble among other directors.

“Another thing, Charlie,” Johnson said, reminded of something Goldstone had told him. “You’d better make sure the board has a lawyer. We want it to be like Sani-Flush ran through there.”

Hugel had already put “lawyer” on his list. His selection of counsel would be crucial, for it would be up to the committee’s lawyer to make certain that the directors acted within the bounds of their complex legal and fiduciary duties. On Monday morning, Hugel began putting out help-wanted calls to some of New York’s most prestigious law firms. He grew alarmed when the first three said they had conflicts, a sure sign that outside banks or investment bankers were already working on the deal. Suddenly Hugel realized Johnson had gone further than he’d let on.

Atkins picked up his briefcase and strode through the crowds at La Guardia to a pay phone. He needed to be in New Mexico by late afternoon for an important meeting. At forty-five, Atkins spent more time traveling than he liked. It wasn’t the jet lag that bothered him. His colleagues at Skadden, Arps, Slate, Meagher & Flom marveled at his constitution. When other lawyers tired in postmidnight negotiating sessions, the well-dressed Atkins “always seemed to look like the cover of
GQ,
” said one of his partners. “The rest of us would be hanging over lamp
shades, but not Peter.” The son of an engineer born in the Flatbush section of Brooklyn, he was one of Wall Street’s top securities lawyers. Skadden Arps was the nation’s third-largest law firm and by far the most active in the budding field of takeover law.

Atkins picked up a phone and called his secretary to make new reservations. There was, she said, a message from a Mr. Hugel. The only Hugel that Atkins knew, and only vaguely, was chairman of Combustion Engineering. He’d call him later, Atkins told himself.

Atkins’s secretary made reservations aboard a United flight to Albuquerque via Denver’s Stapleton Airport. He ran for the gate. When he arrived, Atkins found this flight, too, was indefinitely delayed. Denver was socked in. As he cursed his luck, he heard his name paged. He walked over to a courtesy phone and called the operator.

There was a message from a Mr. Hugel: “Tell him he’s going to miss the biggest deal ever.”

Hyperbole, Atkins thought, his mind only on getting a flight to New Mexico. His secretary checked again for alternate flights and reserved him a seat on a Continental Airlines flight via Dallas.

This time Atkins sprinted for the distant Continental gate. He arrived, out of breath but triumphant, just as the plane was boarding. As the line inched forward, Atkins took out the cellular phone he carried and dialed the insistent Mr. Hugel. Twenty minutes later Peter Atkins was in the air flying west, and Charlie Hugel had himself a lawyer.