Barbarians at the Gate (34 page)

“Hi, Johnny!” Johnson cried when he spied Mullin. He came over to shake the bankers’ hands as if it were a backyard barbecue rather than an LBO. To the bankers, yet to grasp the enormity of the task before them, Johnson seemed without a care in the world.

“Well, boys,” he crowed, “we’re off to the races! Whaddya think?”

Quite frankly, they didn’t know what to think, especially when escorted into a conference room to meet with Hugel. As chairman of the special committee, Hugel briefed first the Lazard bankers, then the Dillon pair, on events to date. Both banks agreed to represent the committee for a fee of $14 million apiece. Their job would be to analyze any bid from Johnson and advise the committee whether it was fair to shareholders. They would do the same in the unlikely event other bids cropped up.

Several of the bankers’ antennae rose when Hugel insisted on bringing the process to a quick conclusion. He suggested their review could be wrapped up in ten days, a time period Rohatyn and Harris thought ridiculously short. Speed favored Johnson, and the two bankers immediately wondered whether Hugel was in Johnson’s pocket. For now, they kept their suspicions to themselves.

The crowd on the twenty-first floor began to thin when the meetings broke up in midafternoon. Horrigan flew to Winston-Salem to explain the news to his tobacco troops. Johnson sat alone in his office, opening mail and tending to paperwork. For the moment, there was little else to do. “Gee,” he told Martin, “I feel like I brought my harp to the party and nobody asked me to play.”

Goldstone and the other Wall Streeters were smuggled out an underground passage to avoid the reporters waiting outside. Along with Peter Atkins and a pair of directors, Marty Davis and John Macomber, he boarded an RJR Nabisco jet for the trip to New York. Atkins huddled with the directors for most of the flight. As they neared New York, Goldstone found himself crouching behind the cockpit entrance with Atkins.

“Look at this,” one of the pilots said.

The two attorneys peered through the windshield. Below, they could see past the Verrazano Narrows bridge up the length of New York Harbor to Wall Street. The setting sun bathed the harbor and much of lower Manhattan in a stunning display of blues and reds. Goldstone thought it was among the most beautiful things he had ever seen. For a moment his lawyerly demeanor dropped and he felt part of some great, romantic adventure.

He smiled. “Well, Peter, this is going to be very interesting.”

“Yes,” Atkins said. “I’m sure it will be.”

One problem was that there were simply too many cooks. Hill represented Shearson. Jeff Beck headed a Drexel team. Bruce Wasserstein anchored the Wasserstein Perella contingent. Investment bankers from First Boston were also flitting about.

For all of Pillsbury’s woes, Hill couldn’t take his mind off RJR Nabisco. The waiting game had begun. The special committee had been formed and, with any luck, would be up to speed on the company’s values in two or three weeks. At that point, Hill was betting, Ross Johnson’s management group would belly up to the negotiating table, haggle with directors over an offering price, and, ultimately, agree to buy the company for a price a few dollars a share more than $75, maybe as high as the low $80 range.

In the meantime, Shearson was on full alert to any sign of a competing bid. It was just thirty hours since Johnson’s initial announcement, but Hill knew every investment banker on Wall Street would be looking for ways to top their $75 price. So far, no one had; with any luck, no one would. Hill hated the waiting. It made him uneasy.

As the Pillsbury meetings droned on, Hill noticed Jeff Beck and Bruce Wasserstein ducking in and out of the conference room. Both men seemed especially busy today. Hill wondered what they were up to. He found himself reflecting on something Beck had told him earlier that day about RJR. “You’re way off on price,” the Mad Dog had assured him. “There’s going to be competition.”

All at once Tom Hill realized what all the scurrying about and Beck’s warning must mean.

Kravis.

It couldn’t be. Henry Kravis wouldn’t try something on this scale without a management team in his camp. Besides, Johnson had said repeatedly that Kravis wasn’t interested in RJR Nabisco.

Hill had to find out for certain. Excusing himself from the meeting, he headed for a telephone and dialed Kohlberg Kravis’s number from memory. When Kravis came on the line, Hill forced his voice to brim with good cheer.

“I’m wondering whether you guys are interested in Kraft,” Hill said. “We thought maybe we could help you with it.” It was a transparent excuse for a call: Kraft had been in play a full four days, an eternity in the takeover business. If Kravis were to move on the company, no doubt he already would have retained a banker.

Kravis could barely contain his anger. “A lot of people have talked to us about Kraft, Tom. We may do something with one of them. But it’s not going to be you….”

In a split second Hill knew the truth. In Kravis’s venomous tone he recognized the realization of his worst fears. Henry Kravis wanted RJR Nabisco, and he wanted it badly. “Henry came right through the phone,” Hill recalled later. “He was loaded for bear.”

Kravis’s message was brief. “You know, Tom, you’ve just floored us on this RJR thing. We’re the ones who gave Ross Johnson that idea. We’ve had an excellent relationship with you, Tom. I’m surprised in a deal this size there wasn’t an opportunity to do something together. This is one we can’t just sit on the sidelines on.”

The conversation was over quickly. Hill hung up, stunned.

Something had gone horribly wrong. He had to think fast.

Quickly he called Peter Cohen at Shearson and relayed news of the Kravis call. To Hill’s surprise, Cohen didn’t seem especially worried.

“So what’s he pissed off about?” Cohen asked.

“Why don’t we meet with him and find out?”

“Why don’t we find out and then meet with him?”

Hill thought through his options. Maybe they could head Kravis off. Maybe they could placate him. Whatever the case, they had to meet with him, if only to more accurately gauge his intentions. Cohen didn’t think a meeting with Kravis was necessary. This was Shearson’s deal; they didn’t need him.

Hill had to make Cohen realize the significance of the call. Henry Kravis wasn’t someone you simply stonewalled.

“Peter, you have to understand….”

It was getting late. Kravis suggested they meet Monday.

Hill sounded nervous, jumpy.

“Nah, nah, let’s meet right now. I think we should.”

“Tom, it’s late.”

“Henry, I really want to have this meeting.”

All right, Kravis agreed.

Hill forced a smile. “I know where you guys are coming from.”
So Kravis has hired Drexel,
he thought. This was getting worse by the minute.

Upstairs, Hill waited for Cohen, who had been delayed in the Friday afternoon traffic. Cohen finally walked in at around six-thirty.

“Henry,” he said jauntily, “what are you doing here at six-thirty on a Friday night? You ought to be off skiing or something.”

“Well, Peter. You’re here, aren’t you?”

The two men shook hands. As Cohen took a seat, Hill turned to Kravis. “I wanted to have this meeting, Henry, because I sensed you’re very interested in RJR,” he began. “I thought it would be useful to see where that interest lies.”

“Yes, I do have a very real interest,” Kravis said. “And this interest goes way back.”

“But this is our deal, Henry,” Cohen interjected. He tried to make Kravis understand why RJR Nabisco was so vital to Shearson’s future. He explained the importance he placed on merchant banking and its place as the cornerstore of Shearson Lehman’s drive into the LBO industry. Hill was coming into his own as a merger adviser, enabling Shearson to review more opportunities than ever before. “You see, we have to be involved,” Cohen said. “It’s a natural for us. We have a built-in flow of business.”

“That’s all fine,” Kravis said. “You’re now our competitors.” The intimation was clear: If Shearson went ahead with RJR Nabisco, it could forget ever again doing business with Kohlberg Kravis. “I find it surprising that you’re doing this,” Kravis continued. “We’ve given you a lot of business. I guess clients don’t mean that much to you anymore.”

“Henry, we’ve got to be in this business,” Cohen said. “It’s our future.”

Cohen reflected on a conversation he had had with Kravis the previous February. The two men had skied together in the Shearson-sponsored American Ski Classic in Vail. It was no accident they found themselves on the same team. While they had waited to compete in a slalom, they had chatted about the changing face of the LBO industry.

That day Kravis had been concerned about newfound competitors such as Morgan Stanley and Merrill Lynch. “What’s going to happen, Peter?” Kravis had asked. “Who else is coming in? And what are you guys going to do?”

Cohen had responded with a broad outline of Shearson’s desire to enter the merchant-banking field as well. He didn’t have to mention that the stock market crash last October had wreaked havoc on Shearson’s other businesses. “Given the new pressures on margins in our other businesses,” Cohen had said, “it’s an obvious way to use our capital. Clients are asking us to do it. We can do it all for them. It just makes sense.” As Cohen recalled the conversation, Kravis had then suggested the two firms ought to stay out of each other’s deals.

Cohen now threw the remark back at Kravis.

“Henry,” he said, “this is Shearson’s deal. This is exactly what we talked about eight months ago. I thought we had an agreement. You said we would stay out of each other’s deals. Well, here it is.”

“We never agreed on anything like that, Peter.”

Cohen’s little speech sent shivers through Kravis.
So this is what it’s
come to,
he thought. Every investment banker with an extra nickel in his pocket thinks he ought to go into LBOs. After five years of steadily mounting competition, Kravis was sick of it. Morgan Stanley, Merrill Lynch, firms he had never heard of, all wanted a piece of his business. Now it was Shearson Lehman. The entire idea behind Kohlberg Kravis’s 1987 fund was doing deals too large for anyone else to handle. Once and for all, Kravis had hoped, his firm could leave the competition behind. Now, just as they had carved out a territory for themselves, here came Peter Cohen, a man who probably didn’t know the difference between LBO and BO, claiming he had a right to do an $18 billion deal! Kravis couldn’t believe the ingratitude, the gall. One part of him wanted to teach all of them, particularly Peter Cohen, a very rough lesson.

“I regard Shearson as a firm we’ve given business to,” Kravis repeated. “I have a relationship with you. This would have been the perfect deal to bring to us.”

“But we’ve raised this money,” Cohen repeated. “We have a responsibility to investors in the fund to put that money to work.”

“This deal is so visible, so big,” Kravis warned. “It has all the right cash flow characteristics, I can’t lay off. We have to be in on this deal. And we will be in this deal.”
*

Tom Hill, watching and listening, thought Cohen’s notion a bit strange. Did Peter really think Henry Kravis would stay out of a $20 billion deal because of a conversation on a ski slope? He could see, in any case, that neither Cohen nor Kravis was going to budge. Each man seemed to believe it was his blood right to own Ross Johnson’s company. Hill tried to play the peacemaker, occasionally throwing in a “What can we do?” or a “How can we work that out?” He was getting nowhere. These two were just building up steam.

“I’d be very surprised if you end up buying this at seventy-five,” Kravis said.

“Why?” Cohen asked.

“We’ve been looking at this company for a long time, and we know it well. This bid is just cheap. It’s really very cheap.”

“This is really Ross’s deal,” Cohen said defensively. “We’re just financing it.”

“Well, you’re his partners now.”

“It’s Ross’s deal, and he’s very close to the board.”

Kravis didn’t miss Cohen’s message: Johnson had his board in his back pocket.

“What do you intend to do?” Kravis asked.

“What do
you
intend to do?” Cohen shot back.

“I don’t know what I’m going to do.”

“Well,” Cohen said, “what do we do about it?”

“Well,” Kravis said finally, “maybe there’s a role for both of us.” Kravis had anticipated this confrontation. There were, he suggested, three options. “We can compete,” he said. It was a notion neither Kravis nor Cohen relished. A drawn-out bidding battle could send the price of the company skyrocketing and, because higher purchase prices inevitably meant higher debt levels, would all but guarantee the winner a Pyrrhic victory.

Or, Kravis continued, Shearson and Kohlberg Kravis could team up in a joint bid for the company. Neither Kravis nor Cohen, their egos fully intact, relished that idea either. For his part, Cohen regarded a partnership with Kravis—or anyone else, for that matter—as an admission that Shearson couldn’t manage the deal itself. Selling off a piece of equity to an investor was one thing; he expected to do that. A fifty-fifty deal was another thing altogether. A partnership, at least between these two men, seemed unlikely.

Or, Kravis concluded, Shearson could sell RJR’s food businesses to Kohlberg Kravis, taking tobacco for itself.