Barbarians at the Gate (36 page)

At Lazard, Luis Rinaldini hustled into a colleague’s office that Saturday with a handful of studies. “Have you seen these?” the Argentinian asked in amazement. At his Chicago apartment, Ira Harris received the documents Saturday morning and was shocked by what he read.

Not a single valuation put RJR Nabisco’s value below $80 a share. Most were closer to $90. Dillon Read’s Project Tara put a price tag on RJR
Nabisco of $81 to $87 a share, an average of $2 billion more than Johnson’s $75 suggestion. Ruben Gutoff’s Project Reo noted that private market valuations of the company went as high as $96 a share. All the bankers knew RJR Nabisco had fat to cut—Johnson’s RJR Air Force was notorious on Wall Street—but they hadn’t expected to see valuations like this.

While the bankers sifted through Johnson’s data, a curious package was delivered anonymously to Charlie Hugel in Connecticut. Inside Hugel found an RJR Nabisco planning document, apparently generated by Dean Posvar’s people. Titled “Corporate Strategy Update” and stamped
CONFIDENTIAL,
it was dated September 29, just three weeks before Johnson addressed the board.

Hugel read the document carefully. It gave an overview of the stock problem, outlined ways to fight Philip Morris, and suggested tobacco liability concerns probably made the company an unlikely takeover candidate. But what drew his attention were the valuations put on the company. Step-by-step, the document built a case for placing a price tag on RJR Nabisco of as low as $82 a share and as high as $111 a share. “A strong case,” it concluded, “could be made for RJR Nabisco refusing to accept any offer below one hundred and eleven dollars per share.”

Hugel was confused.
As low as eighty-two?
If Johnson’s own people said the company was worth $82 to $111, what the hell was he doing bidding at $75?

Equally curious was the source of the document. There was no note attached, no clue to the sender’s identity. But one thing was clear: Someone, almost certainly a high-level RJR Nabisco executive with access to confidential documents, was out to get Ross Johnson.

Kravis smiled. Everyone in the crowded boardroom knew Wasserstein was waist-deep in the Philip Morris bid for Kraft.

On Sunday afternoon the investment bankers had trickled in in pairs, driving in from weekend homes or strolling through the leaf-strewn paths of Central Park to convene in Kohlberg Kravis’s boardroom at four o’clock. Kravis and his people had arrived by noon and had spent much of
the afternoon studying various analyses of the values locked inside RJR Nabisco.

From his seat at the side of the great table, Kravis surveyed the troops he had assembled for his assault. To his left, in his customary position, sat Dick Beattie, pale blue eyes steady, jaw firmly set. To Beattie’s left was Casey Cogut, the lawyer’s boyish second in command. Cogut supervised much of Kohlberg Kravis’s legal work at Beattie’s direction. The two lawyers had driven in together that morning from their Connecticut homes.

Next was Ted Ammon, a former lawyer, now a senior Kohlberg Kravis associate known for devising creative solutions to thorny financial problems. Wasserstein sat beside Ammon. Despite his genius, and the endless variety of ideas he brought to Kravis, Wasserstein had never been able to crack the inner circle at Kohlberg Kravis: Kravis and his aides found his meandering speeches tiresome. Some of them, especially George Roberts, were never quite sure where Wasserstein’s loyalties lay.

Beside Wasserstein sat Eric Gleacher, Morgan Stanley’s bantam merger chief. Two of the most prominent names in the takeover business, Gleacher and Wasserstein would prove to be an endless source of comic relief for Kravis and his aides. At meetings the pair took turns delivering the first speech, never forgetting who had gone first the last time. Inevitably they offered the same advice, sometimes so similarly that Kravis would roll his eyes. Beattie assumed the two conferred before each strategy session as, in fact, they had this day. George Roberts took to calling Wasserstein and Gleacher the “Siskel and Ebert of investment banking.”

On the table’s far side sat Steve Waters and Mack Rossoff, a baby-faced Wasserstein aide who had become a favorite of Kravis’s with his cracker-jack work during the recent Macmillan auction. Off to one side stood the Drexel contingent: Jeff Beck and Leon Black, the savvy financing expert who brought life to many of Mike Milken’s ideas. Paul Raether completed the circle, along with a pair of his hardworking junior associates, Scott Stuart and Cliff Robbins.

After bringing the meeting to order, Kravis briefed the group on the current situation. “We understand Shearson is trying to get commitments from major banks to lock them up,” Kravis concluded. “If that’s the case, we’ve got to do something right away to prevent that from happening.”

A lengthy debate ensued on the values inside RJR Nabisco that would come spilling forth in a successful leveraged buyout. There were no real
differences of opinion. Everyone knew there was money in Ross Johnson’s cookie jar. The question was how best to get at it. Cliff Robbins had laid out their options in a memo for the “Project Peach” team that day.

There were three. First was a so-called bear hug letter to the board. In it, Kravis would signal his interest to pay more than $75 a share but stop short of an outright offer. Under the “Advantages” column, Robbins noted, a bear hug would probably get them access to confidential RJR Nabisco financial information, a must if they weren’t bidding with a management team. It would also stall the management group’s drive to quickly sew up the deal. Under “Disadvantages,” Robbins worried that a threatening letter would only lead to an extended auction. Bidding, the memo noted, “would go to the edge of the envelope.” They might win, he concluded, but it could cost them billions in the process.

The second option was a meeting with Shearson and Johnson, perhaps to discuss a joint bid. “Shows weakness?” the memo asked. Third was a tender offer, the blitzkrieg approach counseled by Wasserstein. The upside: “Seizes timing advantage…stalls management deal.” The downside: “No information…hostile…financing hurdles.”

When it came time for the advisers to speak, Eric Gleacher went first. His speech was almost military in tone, the kind of talk one delivers to a boot camp or at halftime of a crucial football game. Gleacher, a jock and proud of it, had the macho intensity characteristic of some small men.

“You’ve got to do a tender offer,” Gleacher said. “The risk here is that Shearson’ll have some kind of contract with the board before we can do something. If you call ’em back and say, ‘Yeah, we’re interested,’ we end up getting pushed around. A tender offer puts us on even footing. We have to be firm here. It’s very important from a symbolic point…. We’ve got to move fast. We’ve got to blow ’em out of the water. Just blow ’em right away.”

Across the table Dick Beattie grinned. It was vintage Gleacher.

Wasserstein went next, essentially repeating the message he had given Kravis privately the night before. The discussion continued, with the pros and cons of each move pored over in detail. Drexel’s Leon Black sounded a cautionary note. “Gee, what’s the hurry? Why don’t we just wait and top it?”

“Then you’re the bad guys,” Gleacher said.

They talked further, but it was clear which way the group was leaning.

“What price?” Kravis asked.

“Maybe we should do it at seventy-five,” Gleacher suggested.

Wasserstein shook his head. “Somewhere in the nineties, I think.” Competitors joked that Wasserstein’s pocketbook was always open, at least when it was a client’s money he was spending. His clients regularly bid so high traders spoke of a “Wasserstein Premium.”

Kravis turned to Steve Waters, who knew Johnson better than anyone at the table.

“How do you read Johnson?” Kravis asked.

Waters rattled through Johnson’s track record, concluding, “Ross never bought anything. He’s always been a seller.” A $90 tender offer would immediately put him on the defensive. For one thing, he wouldn’t want to match it. But more important, compared to the $75 proposal already on the table, a $90 bid would make it appear Johnson was stealing the company. If so, they could hope to drive a crucial wedge between Johnson and his board.

“If we come on strong,” Waters added, “he might fold.”

Last, Kravis turned to the Drexel contingent. Could enough bonds be sold to buy RJR Nabisco? Was there enough demand in world markets? They all knew the bond offerings under consideration would dwarf the largest in Wall Street history. And there was still the consideration that a Drexel indictment could have disastrous consequences for both the takeover and the bond offerings.

“We can place the junk,” said Leon Black. “Don’t worry about our problems. We’ll be able to do it.” Black’s reputation was such that few were concerned that his routine assurances were hollow.

As the discussion wound down, Kravis took Paul Raether and the associates and retired to his office. It was decision time. Left behind, the advisers took the opportunity to raid the Kohlberg Kravis kitchen and order pizzas. As Kravis closed his office door, no one realized that a very similar meeting was taking place that moment, just six blocks north.

The meeting at his Fifth Avenue apartment that evening, Gutfreund
knew, could well be among the most important in his long and spectacular Wall Street career. Salomon Brothers was among Wall Street’s most powerful trading houses. Through its massive trading floor overlooking New York Harbor more than $20 billion in securities flowed daily, a sum greater than that of the New York Stock Exchange itself. But now, after three years of unfulfilled promises, Gutfreund was finally ready to move his firm away from the trading floor and to invest its hard-won capital in a major merchant-banking deal. And the way Gutfreund’s investment-banking department wanted to do it—and the amounts they proposed to use—would stagger all those who said Salomon would never amount to anything in the LBO business.

Gutfreund himself was a newcomer to the takeover world. Wall Street had always been split into two, sometimes warring, camps: investment bankers—smooth, dapper, trained at Andover and Harvard—and traders—red-faced Jewish and Irish kids who went to City College and made their living hollering at each other on the trading floor. By training and attitude, Gutfreund was a trader.

From his desk on the trading floor he had ruthlessly steered Salomon Brothers through a decade of growth, until it had become the largest and most profitable firm in its field. In 1985,
Business Week
crowned him “King of Wall Street.” To many involved in finance John Gutfreund
was
Salomon Brothers. His word was law inside the firm, and subordinates literally trembled when he stalked into a room, waving one of his giant cigars. Short and fond of dark, three-piece suits, Gutfreund had a round face, thick, sensuous lips, and a jack-o’-lantern smile that often looked forced. Ross Johnson, who knew him from Standard Brands days, called Gutfreund “Old Potatohead.”