Barbarians at the Gate (33 page)

“I don’t believe it. We’ve got to find out what the hell is going on.”

“Dick, I don’t understand it. We talked to Ross. Why didn’t he come to us? This doesn’t make any sense.
I
gave him the idea.”

“I know,” Beattie said. “It’s crazy.”

“Why in the world is he doing this with Shearson, of all people? They’ve never done a deal.”

Dick Beattie knew that all too well. After Kohlberg Kravis, his second largest client was Shearson Lehman Hutton.

“God, Peter,” Millard said, “this is really terrific.”

But the trader, who made his living following takeovers, was curious why Cohen had chosen this approach. Why hadn’t Shearson tried to sew up the deal before its public disclosure, as Morgan Stanley and others so artfully did? “Why are you leaving yourself so vulnerable?” Millard asked.

“Well,” Cohen replied, “it had to be done this way.”

“What makes you so sure no one else is going to top it?”

No other company has the muscle, Cohen said.

“What about other financial buyers? What about KKR?”

“KKR won’t do it,” Cohen said. “Henry won’t give Ross Johnson the deal we gave him.”

“So what?”

Millard reminded Cohen that Kravis had moved unilaterally in recent months against targets like Texaco and Kroger. “Just because they don’t have management, Peter, doesn’t mean they won’t bid for it. Why wouldn’t they bid for it?”

“Well, because they won’t give Johnson the same deal we did,” he repeated.

“But if they buy it,” Millard said, “Johnson will take whatever deal he’s given.” It was clear Cohen didn’t understand what Millard was driving at. The trader suggested Shearson might want to feel out Kravis to see where he stood. “You’d better go talk to them,” he said.

Cohen didn’t seem to be listening.

“This is crazy, Jim,” Beck said. “The price is crazy. I don’t understand what you guys think you’re doing.” Why, he argued, doesn’t Johnson team up with Kravis? “Why should we work at cross purposes?” he asked.

Welch tried a half-hearted appeal for Beck to remain on the sidelines. “We want Drexel to applaud this deal, to be our friends,” he said.

Beck was surprised by Welch’s naïveté. “Well, Jimmy, I can assure you that we will applaud this transaction. But not the way you’re thinking.”

“Why?”

“We’ve been trying to get you to do this deal for two and a half years! If you think we’re going to sit back now, not be a part of the biggest deal in history, I mean, you leave me speechless. I don’t know how to respond.”

“Well, would you consider going in with us?”

“Jim, we’ve got other obligations.”

Welch called Beck twice more in attempts to snare Drexel, but Beck remained irate at Johnson’s snub. As a result, Drexel, the largest piece of financial artillery on the Wall Street battlefield, was free to be used by a competing bidder. Beck had no doubt who that would be.

“What’s going on with RJR?” he asked.

“I don’t know. They’ve cut off communication at this point,” Beck said. “I don’t know what’s going on. But you know we’ve got to do this deal. Are we retained?”

“Don’t worry about it,” Kravis said. “There’s going to be a role for you.”

The assignment would ultimately be worth more than $50 million to Drexel. Money aside, Beck couldn’t help thinking how much fun it would be beating the pants off Ross Johnson.

Half-listening to one of his major clients, Strong stared intently as details of Johnson’s curious proposal inched into the public domain. As the news sank in, Strong did what any good investment banker would do. “Would you be interested?” he asked the client on the phone.

No, came the answer.

Strong had to be audacious. Salomon was the sick man of investment banking. Despite all the dire predictions, only one major LBO, the Revco drugstore chain, had gone belly up, and it was a Salomon deal. When the market crashed a year earlier, only one major junk-bond offering, for Dallas-based Southland Corporation, had been repeatedly rejected as unsafe by institutional investors; Salomon was its cosponsor. Only one major bridge loan, to a Norfolk-based chain of television stations named TVX, had collapsed. Salomon again. For three years the firm had been struggling to enter merchant banking; the results had been a string of public humiliations. Strong and his colleagues had been scrambling to pick up the broken glass ever since.

On Wall Street, Bill Strong was not a big name, having just made partner two years earlier. But he was hardworking and energetic, possessed of an earnest Midwestern work ethic. A former accountant, he was from Indiana and proud of it. Strong looked clients in the eye and said he prided himself on honesty and integrity, traits he didn’t believe were terribly widespread in investment banking. A lot of investment bankers had the same spiel. Only Strong actually seemed to mean it.

Like every other banker on Wall Street, Strong was intrigued by the possibilities opened by Johnson’s proposal. By Thursday evening he had assembled a stack of RJR Nabisco annual reports and 10-K financial reports filed with the Securities and Exchange Commission. A cursory read convinced Strong that $75 was way too low. These guys were stealing the company.

He got excited. Salomon had had more than its share of merchant banking disasters, but this deal, if done right, could erase a lot of bad memories. And Strong had the ideal partner in mind: Hanson Trust. An avid shopper of American companies, it had developed a U.S. arm that, were it independent, would be among the country’s largest corporations. Using Salomon’s financial firepower and Hanson’s marketing expertise, Strong thought, they would be an unbeatable team.

Friday morning he pitched his idea to John Gutfreund, Salomon’s
autocratic chairman. As Strong outlined it, RJR Nabisco was a unique deal. It had once-in-a-lifetime brand names up for grabs, he explained. Tobacco’s cash flow was a torrent so strong it could virtually pay for the entire deal. “This one,” Strong told Gutfreund, “has everything.”

Gutfreund, often skeptical of his enthusiastic young deal makers, listened with interest. “Fine,” he said. “Make the call.”

At ten Strong called his contact at Hanson. He explained the situation, running down a handwritten list of RJR Nabisco’s chief attractions. Tremendous cash flow from tobacco. Unmatched food brands. Undervalued stock.

“You put in a billion five, we put in a billion five and jointly acquire it,” Strong said. And just one thing: “I need a quick response.”

The call came back at two o’clock.

“Done,” the Hanson aide said. “We’ll do it.”

Strong was jubilant. A meeting to flesh out details was set for Monday morning. In the meantime Strong had plenty of work to do. He called Gutfreund and brought him up to date. The chairman sounded encouraging. Strong then assembled a team of ten bankers and analysts to pore over RJR Nabisco data that weekend. It was a smallish group for such a gigantic project. But Strong wanted to keep a low profile and avoid leaks. He wanted to be ready to move first thing Monday morning.