Barbarians at the Gate (37 page)

At fifty-nine, Gutfreund had discovered a new life, marrying a second wife, fathering a son, and cutting a social profile that set tongues wagging across Wall Street. Susan Gutfreund, a former Pan Am stewardess in her early forties, had transformed her husband’s drab existence into a series of black-tie fund-raisers and society parties. Married in 1981, the Gutfreunds were soon fixtures in the social pages of
W
and
Women’s Wear Daily.
Susan had sealed their rise in New York society by snaring the honor of throwing a sixtieth birthday party for Henry Kissinger. Months later the guests were still talking about the green apples of spun sugar Susan’s chef had prepared for dessert.

When the Gutfreunds acquired an eighteenth-century mansion on Rue
de Grenelle in Paris, Susan spent more time in France, and Gutfreund began taking the Concorde back and forth on weekends. Not surprisingly, when Salomon Brothers first encountered problems in the mid-1980s, many thought Susan Gutfreund deserved some of the blame for diverting her husband’s attention from weightier matters. “It’s my theory that Susan Gutfreund has had a lot do with John’s problems,” a Wall Street friend told
New York
magazine in early 1988. “When older guys discover their sexual vitality, they’re gone.”

As Salomon grew, tensions had arisen between its dominant trading culture and its small investment-banking arm, long considered a neglected stepchild within the firm. By 1987 those tensions had erupted into something approaching open warfare, as the bankers demanded a greater voice inside the firm and, not incidentally, sought to push more aggressively into mergers and merchant banking. The intrigues hatched within Salomon spawned comparisons to a Florentine palace during the rule of the Medicis, with Gutfreund playing the role written by Machiavelli. A man who had ruthlessly frozen out his own mentor and who seemed to take pride in firing challengers to his power, Gutfreund found himself spending much of his time suppressing internal revolts. As he did, profits and morale plummeted. A series of ill-advised restructurings led to a spate of high-level resignations, including those of Chicago deal maker Ira Harris and economic guru Henry Kaufman. At his lowest point, Gutfreund narrowly escaped a takeover attempt by the investor Ronald O. Perelman.

For nearly two years Gutfreund leapt from crisis to crisis, his firm a simmering cauldron of unrest. Now, as he strolled with his son toward his home, Gutfreund, defying the doomsayers, seemed to have put the worst behind him. Many of the troublemakers inside Salomon had been purged, profits were again up, and Gutfreund and his wife had all but vanished from the pages of
Women’s Wear Daily.
For the first time Gutfreund, a man who sometimes referred to takeovers as “trades,” was taking an active interest in investment banking, even tagging along with bankers to pay courtesy calls on prospective clients. Trading was still profitable, but Gutfreund was learning what every other Wall Street chief executive had known for years: The real money these days was in merchant banking.

RJR Nabisco was to be the test of Gutfreund’s resolve. His entire investment-banking department, he knew, was pumped up to get a piece of the action Ross Johnson had created. Gutfreund was skeptical, attributing their passion to “deal heat,” the state that occurs when an investment
banker finds the takeover of a lifetime. In most “deal guys,” Gutfreund had observed, the symptoms cropped up every month or two. The bankers, Gutfreund recognized, believed they had stumbled on their Holy Grail: the deal that could Bring Us Back. RJR Nabisco was to be Salomon’s salvation, the deal that would, in one fell swoop, rewrite history, wipe out their past embarrassments, and instantly establish Salomon as a major force in the LBO field.

An admirable goal, Gutfreund thought, but an unlikely one. And certainly risky. From what Bill Strong had told him about RJR Nabisco, Ross Johnson’s company seemed attractive—good brand names, super cash flow. But Gutfreund had to look at the bigger picture. The amount of capital they would need—maybe several hundred million dollars—would place an enormous burden on the firm. Salomon’s trading operations used its funds to scoop up massive amounts of stocks and bonds, selling them at thin margins for huge profits. Any deep cut in the firm’s capital could cause the rating agencies to review Salomon’s credit ratings. Any downgrading could cost Gutfreund millions in higher trading costs. More important, a downgrading was just the kind of thing that could rekindle discontent in the ranks. Gutfreund couldn’t afford to delude himself: If he didn’t handle this right, he could have an open revolt on his hands.

After parking his car Bill Strong, and later a half-dozen other investment bankers, met Gutfreund at the threshold of his apartment. Inside they were escorted into a soaring, two-story foyer paneled with stone. To one side hung one of Monet’s water-lily paintings. The six-bedroom apartment had cost the Gutfreunds $6.5 million—before its top-to-bottom renovation—and every dollar seemed to be hanging on the walls. For their “public” rooms, the Gutfreunds favored a palatial eighteenth-century French atmosphere, including a plant-filled room adorned with antique painted panels and trellises. The society matrons at Mortimer’s loved to joke about how French Susan Gutfreund had become during her time in Paris. “
Bonsoir, Madame,
” she had said when introduced to Nancy Reagan.

The Gutfreunds had moved to Fifth Avenue after a dispute with their former neighbors at the posh River House. Susan insisted on having a twenty-two-foot Douglas fir as a Christmas tree. When the tree proved too large for the building’s elevator, she simply had a crane positioned on the roof and had it winched up—without, unfortunately, having obtained permission of the penthouse tenants. There was a nasty scene, followed
by a $35 million lawsuit. The Gutfreunds soon moved to larger quarters on Fifth Avenue.

After a guided tour of the sumptuous apartment, Strong’s group was shown into Gutfreund’s darkened, leather-walled library. “All right,” Gutfreund said, “tell me what I need to know about this thing.”

Strong was nervous. This would be the biggest presentation he had ever made, that he might ever make. He was asking Gutfreund for an unprecedented commitment, one that could reshape the entire future of the firm. Quickly he outlined the structure. It was simplicity itself, Strong explained. Salomon and Hanson would act as “pure partners,” splitting stock, costs, and control fifty-fifty. Salomon brought the financial expertise, Hanson a background in operations. What was unusual was how Strong proposed to wedge Salomon into the deal.

Working through the weekend, Strong’s Salomon team had come to the same conclusion as Henry Kravis. To make a move on RJR Nabisco one needed to move aggressively. Strong proposed that Salomon quickly and secretly accumulate a large position in RJR Nabisco stock—a toehold—with an eye toward launching an unsolicited takeover bid. This would give Salomon bargaining leverage, Strong argued. It had the added advantage that, even if Salomon failed to ultimately gain control of the company, the firm would almost certainly realize a massive gain on its stock holdings.

What Strong described was exactly the strategy that corporate raiders such as Boone Pickens and Carl Icahn had been using for years. For a major investment bank to try the same approach was unheard of, an order of magnitude beyond what Tom Hill and Shearson had sprung on Koppers that spring. But unusual deals, Strong argued, required unusual tactics. With Gutfreund’s approval, Strong wanted to begin acquiring RJR Nabisco stock on Monday morning and keep buying until they had spent $1 billion.

Strong didn’t make the suggestion lightly. All weekend the bankers had debated the point. The strategy seemed brilliant, the target a once-in-a-lifetime collection of name brands. It was exactly the kind of aggressive move they thought Salomon should be making. The more they discussed it, the more enthusiastic they became. Just one question remained on everyone’s lips: Would Gutfreund do it?

“No way: He’ll never do it,” a banker named Charles (“Chaz”) Phillips said. Gutfreund talked a good game, Phillips argued, but down deep didn’t
have what it took to push the button. Some of the bankers grew depressed. If Gutfreund wouldn’t approve the RJR Nabisco deal, they moaned, he would never approve anything. “If we can’t find a way to do this,” a veteran banker named Ronald Freeman said, “my fifteen years at Salomon mean nothing.”

Now, as Strong finished his presentation, Gutfreund attacked, a fighter firing jabs into their case, looking for any weakness. His style was to put the bankers on the defensive, make them justify the move a hundred different ways. Before he gambled a dollar on this deal, Gutfreund said, he wanted to hear everything that could possibly go wrong. “You guys are being pretty goddamn easy with my shareholders’ money,” he challenged. “What makes you think it’ll work?”

At first the bankers couldn’t tell whether he was hostile or simply asking the right questions. What about tobacco litigation? Gutfreund asked. “Not a problem,” the bankers assured. To Chaz Phillips: “Is the bond market large enough to handle all the paper?” “Yes,” Phillips shot back.

They went through it again and again until, after an hour, Gutfreund placed a call to one of Salomon’s most influential directors, Warren Buffett. Buffett was renowned as one of Wall Street’s most intelligent investors. His prognostications could move markets, and often did. He wasn’t a quick-buck artist—no raiding for Warren Buffett. Buffett invested the old-fashioned way: buy and hold. He had bought a 12 percent holding in Salomon the previous fall, rescuing Gutfreund from the hostile overtures of Ron Perelman.

When Buffett came on the line, Gutfreund put him on a speaker phone and laid out the situation in detail. What should they do?

Go for it, Buffett advised. Once one of RJR’s largest shareholders, he knew tobacco and liked it. “I’ll tell you why I like the cigarette business,” he said. “It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”

Would Buffett himself like to join forces with Salomon? No, the investor said, not this time. Cigarettes were a fine investment, but owning a tobacco company, with its social baggage and all that Death Merchant business, wasn’t a burden Buffett felt he was ready to bear. “I’m wealthy enough where I don’t need to own a tobacco company and deal with the consequences of public ownership,” he said.

To the bankers in Gutfreund’s library, Buffett’s blessing seemed to erase the last of their chairman’s doubts. If drastic action were required,
Gutfreund agreed, then drastic action would be taken.

The bankers left Gutfreund’s apartment that night in various stages of euphoria. One of Gutfreund’s doubters, Chaz Phillips, took the bus to his Fifth Avenue apartment feeling high. Phillips was sure he had just witnessed one of the single most important moments in the history of Salomon Brothers. He couldn’t believe it.

Gutfreund actually did it.

Into the wee hours the Salomon bankers exchanged congratulatory phone calls. None could believe their good fortune. Finally, after years of talk, Salomon Brothers was actually going to
do
something.

“We could do that,” Kravis said, “but by tomorrow it may be too late.”

Put on the speaker phone in Kravis’s office, Roberts had been caught off guard by the suggestion of an immediate tender offer. Although kept up to date on Kravis’s preparations, he hadn’t expected anything like this. Sitting in his home south of San Francisco, all Roberts had to whet his appetite was a single computer run sent out from New York two days earlier. Naturally cautious, Roberts wanted to hear a lot more before he committed to the first unsolicited tender offer in the firm’s history.

Kravis laid out all the reasons for expeditiousness. Banks were being locked up. The American Express board was meeting tomorrow, no doubt to approve the bridge loan necessary to cement the deal. If they didn’t move fast, Kravis said, Johnson could sew this deal up within days, if not hours. A tender offer, he argued, was the only way Kohlberg Kravis could be certain of getting its foot in the door. For one thing, it guaranteed a response from the board. Federal securities laws mandate that any target of a tender offer must formally reply to the offer within ten days. The board couldn’t ignore them then, Kravis said.

Moreover, he continued, it wouldn’t be an outright hostile bid. For one thing, Johnson had already put this company in play. And Kravis intended to make completion of the tender offer conditioned on approval of RJR Nabisco’s board. That way, he said, they obtained the time advantages of a tender offer without launching a full-fledged hostile bid.