Barbarians at the Gate (32 page)

The Group’s patriarch is Joseph Flom, a takeover lawyer of legendary proportions on Wall Street. Most of The Group learned the merger business at Flom’s elbow; to several he remains a father figure. Semiretired, gnomelike, Flom is adviser to practically all The Group’s members on matters professional and private, the moderator of their disputes, and, from time to time, their toughest competitor. “The fact that it’s a small fraternity is good for discipline,” Flom says. “I see this in small-town legal bars. You fight harder because, it’s like, who’s going to win the chess game? It keeps you honest because everybody knows each other. Everybody knows what everybody’s doing. There are no secrets.”

That kind of inbred thinking helped spawn the insider-trading scandals that swept Wall Street in the late eighties. To The Group, the investigations represented a jarring wave of McCarthyism. Almost without exception those convicted were their friends and colleagues. The first to be named in the scandal, a high-flying Drexel Burnham investment banker named Dennis Levine, had been hired and supervised by Gleacher after leaving Smith Barney under the disapproving gaze of its merger chief at
the time, Tom Hill. By far the toughest blow was the indictment of investment banker Martin Siegel, a close friend of Wasserstein’s and several other group members. Unlike Levine, a fast-talking upstart, Siegel was respected, Harvard trained, one of them. “Everybody who’s not in The Group,” jokes Gleacher, “is in jail.”

Does The Group’s friendship come at the expense of their clients? Only a grand jury would know for sure. Even when on opposing sides in a billion-dollar takeover contest, its members are constantly talking to one another; these “back-channel” communications have become a staple of their deals. For all the camaraderie, though, the evidence indicates they are competitors first and friends second. Men like Hill, Wasserstein, and Gleacher, the first to proclaim themselves great friends, are also the first to spread gossip about the others’ failures. Their multimillion-dollar bonuses often depend on knowing and beating each other.

There are, of course, other important deal makers in Wall Street circles outside The Group: Felix Rohatyn, the conservative dean of establishment bankers at Lazard Freres; Ira Harris, Chicago’s Lord of LaSalle Street; Jeff Beck, the Mad Dog of Drexel; Geoff Boisi, the investment banking chief at Goldman Sachs. Like several members of The Group, they would each be drawn into the vortex of RJR Nabisco.

Philip Morris’s sudden attack on Kraft presented him with a perfect opportunity to ride to the Chicago company’s rescue. He had been bird hunting in Spain but had managed to get a call through to Kraft’s chairman, John Richman. Kravis offered his services should Kraft seek a friendly merger, and Richman had seemed interested without appearing threatened. Even now Kohlberg Kravis associates were running the numbers on a Kraft LBO. It could be the largest in history, topping $13 billion. Kravis was also eyeing Pillsbury, which had begun talking to possible merger partners to fend off Grand Met. That afternoon Kravis was scheduled to take in a presentation on Pillsbury’s financial situation at Skadden Arps.

But as busy as Kravis’s week had been, it was about to get far busier. He was on the phone in his corner office, which overlooked Grand Army Plaza forty-two floors below, when his secretary put a note in front of him.

“RJR going private at 75 a share.”

Kravis nearly dropped the receiver. For a second he was speechless. It couldn’t be true.

Paul Raether, Kravis’s right-hand man, wandered in moments later. “Have you heard?” Kravis asked quickly.

“Heard what?”

“Ross Johnson is going private at seventy-five.”

Raether paused for a moment as the enormity of the news sank in. “Holy Christ,” he said. A second thought raced through Raether’s mind:
That’s too cheap.

Kravis began to grow angry. “I can’t believe this,” he fumed. “We gave them the idea! He wouldn’t even meet with us!”

Gleacher was leaning back in his desk chair when he saw the headline cross his computer screen. In a flash he swung forward and stabbed at his telephone console. “I don’t give a shit what you’re doing,” he barked. “Get down here right now.”

Steve Waters was in Gleacher’s office within seconds. Both men were stunned as they stared at the screen.

RJR? A deal? Without Morgan Stanley?

Look at the price, Gleacher said. At $75, they quickly agreed, Johnson was stealing the company.

That morning Gleacher and Waters acted as if by reflex. Both men knew the drill, the questions that had to be answered: Was this a done deal? Who was advising Johnson? Who was advising the special committee? And, most important, how could Morgan Stanley get a piece of the action?

Before they could move, however, Waters had to dart down the hall to answer his ringing phone.

“What the hell is going on?” Paul Raether demanded.

“I don’t know, Paul. As soon as we find out, I’ll get back to you.”

The moment Waters replaced the receiver, the phone rang again. This time it was Kravis himself.

“What the hell is going on?”

“Henry, you’ll know as soon as we do.”

“Who is it? Who’s doing the deal?”

“I don’t know. We’re trying to find out. It could be Shearson.”

Gleacher and Waters hit the phones. After several minutes, during which news of Shearson’s involvement crossed his screen, Gleacher reeled in the first fish: Andy Sage. Gleacher knew this was no time to come on strong. “Hey, Andy,” he joshed, “what are you gonna to do with all that money?”

Sage mumbled something noncommittal.

“I gotta tell you,” Gleacher said. “I was a little surprised we didn’t get a chance to represent the special committee. Did Shearson do something to prevent us from getting hired?”

No, Sage said. Andy Sage was a pro, and Gleacher got little out of him. Later Gleacher reached Jim Welch. Welch vaguely assured him that Morgan would somehow get its foot in the door. Down the hall, Waters managed to collar Dean Posvar, Johnson’s planning chief. Posvar told Waters the deal was all but finished. “We’re just fleshing this out,” he said. “We’re rushing it as fast as we can, and it ought to be a done deal by the middle of next week.”

A window of opportunity existed, Waters concluded, but not a big one. Anyone who wanted this company would have to move fast.

For weeks Beck and a small army of strategists from four separate investment banks had been devising defenses for Pillsbury to fend off Grand Met. That day he and other Pillsbury bankers were holding talks with a number of potential merger partners.

Beck was floored by Johnson’s announcement.

An LBO? Without Drexel? Without me?
It made no sense.

He rode downtown in a car with John Herrmann, a Shearson banker he knew from their days at Lehman. Herrmann was beaming, going on about what a coup the deal was for Shearson.

“This is going to be the greatest deal ever,” he said as Beck stepped out of the car at his lower Wall Street office.

The Drexel banker could barely contain his anger. “I don’t think so, John. I don’t think so.”

Upstairs, Beck took a call from Kravis. “What the hell is going on?” Kravis said.

“I don’t know, Henry. You know we wanted to meet with them. Let me call and get the lay of the land and I’ll get back to you.”

Beck quickly called Johnson in Atlanta but was stopped by Johnson’s secretary, Betty Martin. “They’re all in a board meeting,” she said.

Beck was fuming.
Lock and load!
He simply had to talk to Johnson. “Betty, if you don’t get these guys out of that boardroom, you know, I’m just taking names at this point. This goes beyond being urgent.”

Minutes later, Johnson came to the phone.

“Hey man, what’s going on?” Beck asked, the exasperation clear in his voice.

“Well,” Johnson said. “We’re going to buy the company.”

“You know, it’s nice to read about it on the tape, Ross. I don’t understand you.” Beck wasn’t even trying to hide his irritation.

It was Johnson’s turn to show his irritation. “We’ve already got our primary partners on this, Jeff. And that’s that.”

The Mad Dog had been muzzled.

Kravis’s interest in RJR Nabisco was no secret to Beattie. For more than a year his firm had been compiling analyses of tobacco litigation to fathom its impact on the company.

“Did you see this?” Beattie asked.

“I sure as hell did,” Kravis said.