Read Barbarians at the Gate Online
Authors: Bryan Burrough,John Helyar
Barbarians at the Gate (31 page)
Johnson had mentioned that Dillon Read, Reynolds’s longtime investment banker, and Lazard Freres would be excellent choices to serve as the board’s investment bankers. He thought it would be great to throw Ira Harris a piece of business. Horrigan couldn’t believe it. “In doing this with
Shearson, you’re about to give Ira Harris the biggest screwing of his life,” he said. “His ego is going to get such a bruising. He’s not going to be your friend; he’s going to be your archenemy.” Johnson’s odd mixture of naïveté and Machiavellian wiles never ceased to amaze Horrigan.
*
Wednesday morning Hugel and Atkins flew to Atlanta aboard a Combustion Engineering jet. After checking into the Waverly, Hugel walked next door to caucus with Johnson, as he did before most board meetings. He found him in his usual jolly mood, maybe even a bit bouncier than normal. It was clear Johnson hadn’t changed his mind; the buyout was on. Hugel wanted to know how Johnson planned to approach the board that evening, and the two men walked through Johnson’s speech.
Hugel mentioned that Peter Atkins planned to attend the board meeting. Johnson appeared surprised. He half-heartedly suggested that maybe public disclosure of the matter could be put off, but didn’t pursue it. Afterward Hugel walked back to Atkins’s hotel room and directed him to draw up a press release to be issued the following morning, if necessary.
“Oh, God.”
Goldstone groaned when he heard Hugel had brought along Atkins. Until that moment he had held out some hope the board wouldn’t disclose Johnson’s presentation that night, giving the management group a chance to finish its negotiations in secrecy. Now he knew an announcement was all but certain.
The clincher was Atkins’s past. Just two months earlier, the Skadden Arps lawyer had had his knuckles rapped by a Delaware judge for his role in the buyout of Fort Howard, a Wisconsin paper company. The company’s management had used a textbook gun-to-the-head strategy to prod its board into a merger agreement. Atkins, representing the board, allowed talks with the buyout group to remain secret until the last minute, opting for disclosure only when the company’s stock began rising.
Atkins had been selected to advise Fort Howard by the company’s chief executive, the man making the bid, a fact that troubled the court and called into question Atkins’s actions in favor of secrecy. “It is obvious that
no role is more critical with respect to protection of shareholder interests in these matters than that of the expert lawyers who guide sometimes inexperienced directors through the process,” the court said. “A suspicious mind is made uneasy contemplating the possibilities when the interested CEO is so active in choosing his adversary.” Atkins’s choice of secrecy, the judge noted, was “a source of concern to a suspicious mind.”
The opinion all but accused Atkins of selling out his neutrality to a buyout group. Goldstone guessed he was still stinging from the rebuke. Jack Nusbaum concurred. “It was clear Atkins was going to be living down Fort Howard,” Nusbaum recalled. “We figured he was going to be holier than Caesar’s wife.”
After Hugel left, Johnson welcomed John Greeniaus, the young Nabisco president, just down from New Jersey. Although few knew it, Greeniaus was to have been Johnson’s successor. Three months earlier, Johnson had sat with him and mapped out plans for his future in detail. Greeniaus would move to Atlanta from New York in early 1989 to become an executive vice president. He would be put on the board at the annual meeting in the spring. Then, at a mere forty-five years old, he would become chief executive on Johnson’s retirement in 1990.
Greeniaus had done nothing but thrive under Johnson. Although never one of his inner circle, he had followed Johnson through his career, rising from liquor marketing manager at Standard Brands Canada to CEO of Nabisco in just ten years. Greeniaus was as serious and introverted as Johnson was devil-may-care. He wasn’t without a sense of humor: he kept an anvil in his office. But he always wore starkly conservative suits. He was wholly incapable of rousing his salesmen with stirring speeches. While Johnson was out carousing at night, Greeniaus would be planted in his office catching up on paperwork. He didn’t play golf. He wore lifts. But Greeniaus delivered results, and Johnson had brought him along rapidly. Envious rivals whispered it was because Greeniaus was Canadian.
When he walked into Johnson’s office at four o’clock, Greeniaus was unaware of the cataclysm about to engulf RJR Nabisco. He hadn’t been made part of the buyout group for the simple reason that Nabisco, like Del Monte, would be sold to finance it. Greeniaus didn’t know it, but he was about to go from heir apparent to outcast.
“Johnny,” Johnson said, greeting Greeniaus excitedly, “I’m going to do a leveraged buyout!”
Greeniaus sunk into a chair and a state of shock. He absorbed phrases and, gradually, meanings. Johnson was working with Shearson and a group of executives.
But not me,
it dawned on Greeniaus,
not me.
He looked at Johnson as his one-time mentor prattled on about the incredible opportunities available to everyone in an LBO.
He’s blowing up Nabisco. I’m out of a job. My people are screwed.
He sat there, silent, numb. Finally, he ventured a question. “Why didn’t you have everybody part of the management team?”
Johnson explained it was because Nabisco would be sold. But, he added, Greeniaus could help find the right buyers. Johnson kept saying what a great opportunity this was for him. “You’ve got a wonderful watershed in your life, Johnny. If you don’t like what the new situation is, somebody else will want you. You’re young, you’ve got a lot of opportunity. The world is your oyster.”
And if for any reason he didn’t like Nabisco’s new parent, Johnson pointed out, he could resign and receive three years’ golden parachute pay. Together with his 50,000 shares of restricted stock, Greeniaus could walk away with more than $7 million.
“Johnny,” Johnson announced, “I’m gonna make you rich!”
Greeniaus walked out of Johnson’s office an hour later, destroyed. He walked to the Waverly, wondering if he was dreaming. He went to his room and sat for several minutes in silence. He would have to do something, he thought. Just have to.
Afterward Johnson remained in his office, alone. Outside, the warm autumn afternoon was fading into darkness. In little more than two hours, he would make the biggest speech of his life. He sat at his desk jotting down notes on a yellow legal pad. He selected his words carefully. It was just like the practice tee, he thought; concentrate, make the necessary adjustments, and everything will work out fine.
Johnson rose early the next morning, the memory of Wednesday night’s board meeting still fresh in his mind. He was due at headquarters for the compensation committee meeting at eight o’clock, to be followed by a gathering of the full board. A press release announcing the LBO effort was due to go out at nine-thirty. As he read his morning papers, Johnson came down with an attack of the giggles. There, on the front page of the
Atlanta Constitution’s
business section, was a story headlined “Analysts say RJR isn’t likely to be involved in any merger.”
The newspaper had concluded that RJR Nabisco would remain on the sidelines in the latest round of food-industry takeovers. In addition to Philip Morris’s run on Kraft, Grand Metropolitan had launched a hostile bid for Pillsbury. “Well,” Johnson told his wife, “they sure have us figured out again.”
Before leaving the house, he took a congratulatory call from Ronnie Grierson, then a worried one from Hugel. Several of the directors had huddled after dinner last night, Hugel said, and some, including John Macomber and Vernon Jordan, were concerned about what the LBO might mean to their $50,000-a-year pensions; it might make for a difficult comp meeting. When Johnson arrived at headquarters, he found Hugel was right.
That morning the committee was to have taken up the matter of lifetime pensions for board members, a sweetening of their current ten-year
deals. Now, of course, any such move might look as if Johnson were attempting to influence the board. He urged that they table the matter, and they did, although Johnson got a distinct feeling of displeasure from several directors. Johnson also fielded questions about the board’s other perks, including cut-rate auto insurance. What would become of them? Irked, Johnson said they’d have to wait and see.
Horrigan was in Atlanta that morning and raised a fuss about the release. As drafted, it said Johnson was leading the buyout group. Horrigan insisted his name be added, saying he feared his people in Winston-Salem would revolt if they thought Johnson was running off with the company. “We have to say it’s Johnson and Horrigan,” he told Harold Henderson. “There can’t be any doubt left that I’m in this with him.” Henderson, who could see red creeping into Horrigan’s face, gave in.
All hell broke loose when the announcement crossed the Dow Jones News Service at 9:35. RJR’s public relations chief, Bill Liss, had risen that morning thinking the day’s big news would be the third-quarter earnings report and the board’s approval of a new Planters peanut factory. Moments after the release went out, the first of hundreds of calls began flooding the switchboard, from wire services and newspapers, radio and television stations. They came from Ames, Iowa, and Altoona, Pennsylvania, from overseas reporters and overwrought shareholders. The local television stations were soon set up outside, and a helicopter hovered overhead, its occupants peering through the upstairs windows. Liss hadn’t had a day like it since his years handling skyjacking crises at TWA. But to each of the callers, he and his four-person staff could only say the same thing. Beyond the press release, no comment.
At noon, a reporter outside headquarters told his television audience he planned to question Johnson as he left the building to go home for lunch. At the house on Whitewater Creek Road, the Johnsons’ maid was watching. “Oh, Mrs. Johnson,” she called to Laurie. “Mr. Johnson is coming home for lunch.” Laurie called her husband, puzzled. “Are you coming home for lunch?” she asked.
Johnson couldn’t have gone home if he wanted to. The building remained under media siege all day. Even local reporters knew a $17.6 billion LBO would be the largest corporate takeover in history. It was the biggest story of the day, soon to be the biggest business story of the year. The trendy shopping center on Atlanta’s north side was suddenly the center of the business world.
Thursday morning Jim Robinson was at his mother’s home in Atlanta, preparing for a board meeting at Coca-Cola, which he pronounced the Southern way:
Co-Cola.
Atlanta raised and Harvard trained, at fifty-two Jim Robinson had been called Corporate America’s secretary of state. The company he had headed for ten years, American Express, was one of the world’s true financial superpowers, overseeing $198 billion of other people’s money. Twenty-eight million members used its credit cards. When Jim Robinson spoke, heads of state listened; his plan to settle the Third World debt crisis had created widespread interest the year before. Robinson’s manner was formal, a cross between southern planter and establishment banker. His wife, Linda, a power in her own right, headed her own New York public relations firm.
At seven o’clock Robinson took a call from Peter Cohen, who told him of the impending news release. Robinson was surprised. Although he hadn’t kept up on details, he hadn’t expected any announcement until at least the following week, if then.
“How did this happen so quick?” Robinson asked.
“The lawyers felt it was far enough along,” Cohen said, “and the board concluded that they had to put out an announcement.”
It wasn’t an auspicious beginning, but neither man was too worried. They weren’t expecting any trouble.
October 20 dawned clear and cool on Wall Street. Two blocks north, commuters hustled from the bowels of the World Trade Center, past the corner Burger King and down Broadway to the brokerage offices beyond. Talk on the street that morning was of the presidential elections just two weeks away and the World Series, which the Los Angeles Dodgers were poised to win.
A year after Black Monday, Wall Street was still nursing its postcrash hangover. The disastrous downturn so widely predicted hadn’t materialized, but neither had a recovery. Instead, Wall Street was mired in a funk. A malaise pervaded the executive suites, and brokerage earnings were down. Investors who had fled the market in droves showed no sign of coming back; securities transactions of all types were down 22 percent.
Since the crash, some 15,000 Wall Streeters had lost their jobs. Shearson wasn’t alone in contemplating layoffs; rumors swept the Street daily
of impending purges at other firms. Those who weren’t scared were bored. On trading floors across lower Manhattan traders swapped bad jokes more often than shares of stock. The only thing flying high was paper airplanes.
As it had been all year, the lone source of optimism remained the merger business, especially merchant banking. Peter Cohen was not alone: Merchant banking was on the minds of every Wall Street chief executive. Merrill Lynch bragged that its LBO portfolio generated returns of 100 percent a year. “Not since the heyday of J. P. Morgan,”
Business Week
noted in a June cover story, “has Wall Street been buying so many corporations.”
The Street’s lingering slump lent a new edge of desperation to the merchant-banking game: Windfall profits from LBOs and bridge loans were the fastest way to shore up a brokerage’s sagging profits. A single deal could generate upfront fees of $50 million or more, enough to save a firm’s quarter. In June, Morgan Stanley posted a $120 million pretax gain from the sale of its 10 percent stake in a Texas chemical company; the entire firm posted record profits of $230 million in the entire year of 1987. With those kinds of numbers being thrown around, even the laggards in merchant banking—firms such as Goldman Sachs, trading colossus Salomon Brothers, and little Dillon Read—began scanning the Street for investment opportunities.
At the vanguard of merchant banking was the merger crowd. Most every investment bank has a merger department, and its inhabitants are a close and incestuous lot. Their predecessors in investment banking had forged decades-long friendships with their corporate clients, attending to private placements and underwritings in a tidy, gentlemanly fashion. In the late seventies, with the proliferation of hostile takeovers, there rose a new breed of investment banker. They were mercenaries, warriors clad in $2,000 Alan Flusser suits, form-fitted Turnbull & Asser shirts, Bulgari watches, and Hermes silk ties from the airport shops at Paris and Brussels. To men like Shearson’s Tom Hill and to their cousins the takeover lawyers almost any takeover is a good takeover, for every takeover produces a fee. To say Wall Street’s merger advisers have shifting allegiances is a misstatement. They have no allegiances, period—except to their firms and themselves.
“All these guys,” says the chairman of one of Wall Street’s largest firms, “have three balls. Loyalties one, two, and three are to themselves. Loyalties
four and five are to their buddies in the deal business. Loyalty six or so is to their client.”
In their world, takeovers are “deals,” and the top producers are “players.” The top players juggle work on several deals at once. At any given time, on any number of deals, they may be simultaneously teamed with and opposed by their closest friends. While the merger makers are often compared to mercenaries, cynics might find a more apt comparison in professional wrestling: a squad of high-priced grapplers traveling from venue to venue, leaving onlookers wondering whether all that spitting and fighting was actually for real.
At the merger crowd’s core is an elite clique of a dozen or so top deal makers who have been fast friends and competitors for more than a decade. When they call themselves anything, it’s simply The Group. They grew up together, their careers intertwined in hundreds of now-forgotten takeover contests. Most graduated from college in the late 1960s, became friends while pioneering merger work in the mid-1970s and threw surprise fortieth birthday parties for one another in the late 1980s, as players in the white-hot crucible of the decade’s largest deals.
In addition to Hill, The Group’s members are Bruce Wasserstein and Joseph Perella, the first superstars of the merger era, who left their longtime firm, First Boston, in a huff to form their own merger boutique, Wasserstein Perella & Co., in early 1988; Eric Gleacher, the bantam merger chief at Morgan Stanley; Donald Drapkin, a former attorney who became vice chairman of takeover-minded Revlon Group; Michael Goldberg
*
and Morris Kramer, a pair of attorneys at Skadden Arps; Jim Maher, a Wasserstein intimate who replaced him as First Boston’s new merger chief; Stephen Schwarzman, the fast-talking president of The Blackstone Group, another leading merger boutique; and Allen Finkelson, an attorney at Cravath Swaine & Moore. “These guys are all guys I would stake my life, my entire career, on,” says Drapkin. “We all have a habit of finishing each other’s sentences.”
Although its members are scattered among several Wall Street firms, The Group sprang almost entirely from a pair of investment banks, First Boston and Lehman Brothers, and a pair of major law firms, Skadden Arps and Cravath Swaine & Moore. Most were run-of-the-mill underwriting specialists or mortgage attorneys who longed for something exciting; they
thrived on the adrenaline they found in corporate combat.
In one regard, American corporate merger activity can be viewed as a running chess game between these old friends. Wasserstein, in many ways the center of the group, is the acknowledged grandmaster; the brother of playwright Wendy Wasserstein, he introduced innovations in merger strategy and tactics that could fill volumes. For years Gleacher, who first rose to prominence in the Bendix-Martin Marietta battle, was his chief rival. By 1989 he had ceded that position to Hill, who had left First Boston a decade earlier rather than face a power struggle with Wasserstein.
“In almost any deal,” said Hill, “one of these guys is going to be there. Our lives are constantly crisscrossing. We’re able to cut through a lot of the dancing that takes place.” Says Mike Goldberg: “You see Tom Hill and Joe and Bruce and First Boston on every deal. You know each of these people and what they might do in a given situation. And believe me, you don’t want to be the new man at a poker game that’s been running for years.” Adds Allen Finkelson, who made his career on legal work doled out by Wasserstein: “People ask me, what do I account for my success? It’s a certain amount of coming of age, turning forty. The other thing has to be with my whole group coming of age. All of us are turning forty. And we help each other.”
