Barbarians at the Gate (42 page)

As he pored over the papers that morning, the makings of a plan formed in Ted Forstmann’s mind. He recalled a conversation he had had four days earlier with his most trusted investment banker, Geoff Boisi of Goldman Sachs & Co. Boisi, one of Wall Street’s top deal makers, was attempting to arrange a consortium of Goldman’s blue-chip clients to mount a third-party bid for RJR Nabisco.

“Do you have a problem with owning a tobacco business?” Boisi had asked.

“Yeah, why?” Forstmann had replied.

“What’s the problem?”

Forstmann’s reply had been off-the-cuff. “I don’t want to be selling cancer.”

When Boisi had persisted, Forstmann had said he’d think about it. Afterward Forstmann had touched base with his partners and found that they, too, harbored a vague distaste for the tobacco business. His brother Nick, like Forstmann a reformed smoker, was chortling as he added up the money Shearson and others would make from Johnson’s deal. He
calculated that the fees alone would top the value of a $500 million buyout Forstmann Little was considering. “It’s like throwing a hundred pounds of bloody meat into a shark pool,” he mused.

Still, the prospect of tackling history’s biggest buyout was an undeniable attraction. To cover himself, Forstmann had phoned his longtime lawyer Stephen Fraidin at the lower Manhattan firm of Fried, Frank, Harris, Shriver & Jacobson. “Don’t do anything with anybody else before you talk to me,” Forstmann had said. He had left the matter unsettled when he left the office on Friday.

“Get me Jim Robinson,” he told his secretary.

“Look, Jim,” Forstmann said, when Robinson called back later that morning, “I don’t know what’s going on. But you know my reputation….” He was off on the Forstmann Little pitch.

Robinson interrupted before he got too far. “Teddy, I know all that,” he said. “I’ll have somebody call you.”

Forstmann was satisfied. It was a first step. The showdown was fast approaching; he could feel it. It was time to make a stand.

But there was something else, some other emotion Forstmann wasn’t proud of and whose existence he wouldn’t admit to himself until months later. Down deep, Ted Forstmann knew he wanted to hurt Henry Kravis.

Fuck them. This is not going to be the next KKR deal,
Forstmann vowed to himself.
I know Ross Johnson. I know Jim Robinson. Henry Kravis will not run off with this deal.

Johnson stalked in and took a seat at the long table in Shearson’s boardroom. Dumbstruck, he demanded an explanation for Kravis’s ambush attack. Wasn’t Cohen supposed to meet with him? What on earth could have propelled Kravis into this course of action?

“Something’s gone haywire here, Peter,” Johnson said, citing Cohen’s initial meeting with Kravis. “Somebody must have pissed off somebody. You don’t get from a meeting like that, franchise or no franchise, to a meeting scheduled on Monday unless somebody put their finger up somebody’s ass. I mean, there must have been something that happened at that meeting on Friday to make him do this.”

This was a different Ross Johnson than many at Shearson had seen. The shock of Kravis’s bid was evident on his face and in his voice. It was the first time Steve Goldstone had seen cracks in his client’s sunny facade. Hill thought Johnson “looked like he’d been hit by a load of bricks.”

“I thought everything was okay,” Johnson repeated. “I thought you were going to meet with the guy. What the hell happened?”

Cohen, after talking with Hill and Jack Nusbaum, thought he knew the answer: It was Bruce Wasserstein and the other Wall Street advisers. They must have pushed Kravis into a premature bid with harem-scarem tales about Shearson locking up the banks.

Each of Kravis’s advisers, Cohen explained to the group—Drexel, Morgan Stanley, and Wasserstein Perella—had its own reasons to want Shearson’s big deal crushed. The junk-bond offering to follow RJR’s buyout would no doubt be history’s largest, and could instantly turn Shearson into the greatest challenger yet to Drexel’s hammerlock on the junk-bond market.

No doubt Morgan Stanley similarly regarded Shearson’s bid as a challenge to its own growing power in the LBO market. Cohen was willing to bet that Steve Waters, bitter about his forced departure from Shearson, was gunning to embarrass his old partner Tom Hill. And Hill’s emergence as a major deal maker was a direct threat to Wasserstein’s reputation. “The fact of life here,” Cohen went on, “is that everybody who advised Henry probably told him to ‘go for it.’ It’s in everybody’s interest that we fail…. Those piranhas were probably nipping at his fingers and toes all weekend.”

Johnson didn’t particularly care about the intricacies of Shearson’s Wall Street rivalries. And as Cohen and Hill began plotting a counterattack, he was too shaken to listen. “Well,” Johnson said. “I guess this is over. This is the end. I mean, who can compete with that kind of offer?”

Steve Goldstone could tell it was time to explain some things to his client. Johnson’s interests weren’t necessarily the same as Shearson’s. If Johnson played his cards right, he might yet come out of this with a buyout he could live with. He had a number of options, including joining forces with Kravis, a fact Goldstone was sure Cohen was well aware of. There was another reason to spirit Johnson out of Shearson’s offices: He and Cohen appeared headed for a major blowup. Goldstone sidled up to Johnson and took him by the arm.

“Ross, look, let’s go back to Davis Polk,” the lawyer said. “There are things we need to talk about.”

For Johnson, the whole thing had become a bad dream. He couldn’t shake the feeling they had left the real world behind in Atlanta. They had stepped through the looking glass to a place where reality was suspended, where the old numbers, the old rules, the old financial reasoning, simply didn’t apply. Money was paper, and paper was money, and people got paid $25 million for lying to you.

At Davis Polk, Goldstone parked Johnson, John Martin, and Harold Henderson in a thirty-eighth-floor conference room and walked up to his office to retrieve something. He immediately drew a crowd of curious colleagues.
My God, what happened?
they clamored.
Steve, are you okay? What’ll you do now?

Goldstone stared out his office window north toward the art-deco spire of the Chrysler Building. “The outlook is not good,” he said slowly. “Everything has changed…. Either we’ll reach an agreement with Henry, or…” Or what, he didn’t know. Kravis had caught them totally off guard. To fight him would mean throwing out every financial and operating assumption of the $75 bid and starting over from scratch. He wasn’t at all sure Johnson was willing to do that.

When Goldstone returned he found Johnson pacing up and down. The group with him looked shell-shocked. The enormity of what had befallen them was sinking in. The prospect of instant riches had vanished, gone in the four-bell ring of the Dow Jones ticker announcing Kravis’s arrival on the scene.

“At this point, this is over,” Johnson was saying. “I mean, if this is right, this is ridiculous. If they’ve got the money, it’s all over.” Again and again he wondered what Cohen could have done to set Kravis off.

Goldstone tried to swivel Johnson’s focus from the past to the future. Kravis’s ambush drastically raised the stakes: If they were going to fight, they now would have to top $90 a share. Running a post-LBO company at $90 a share, Goldstone said, would be radically different than running one bought at $75. The added debt would require wholesale cuts of the kind Johnson dreaded. The planes, the Atlanta headquarters, even Premier, would have to be reassessed.

“Ross,” Goldstone said, “you’ve got to decide whether you are willing to operate this company above ninety. If you’re willing to do that, then the next decision is Shearson’s. The decisions are now Shearson’s to make. It’s not your money.”

First, Johnson said, he wanted to know a lot more about Henry Kravis’s
bid. What did Kravis really want? Could they get rid of him somehow? How on earth could Kravis get $90 of value, when Shearson only got $75? No, Johnson said, he wasn’t going to decide anything until he heard more from Kravis. Cohen would talk to him and find out what had happened. Then, and only then, would they decide their next move.

Goldstone emerged from the conference room at one point to find Tom Hill loitering outside. The lawyer smiled to himself. It was obvious Hill had come over to keep tabs on Johnson and make sure he didn’t do anything drastic.

Like talk with Henry Kravis.

In the days to come Dick Beattie would be Kravis’s most effective source of intelligence. Over the years the soft-spoken lawyer had built a loyal circle of Wall Street friends. His work with Shearson gave him especially good contacts among Cohen’s troops.

The best was Bob Millard, Shearson’s head of risk arbitrage trading. The two were old friends, and Millard was half-expecting Beattie’s call that afternoon. It was the first of many conversations the pair would have in coming weeks, and they would prove to be invaluable to Kravis. Millard, also a close friend of Cohen’s, would function as an unofficial conduit for the Shearson chief, passing on Cohen’s thoughts and threats in a cordial atmosphere with no risk of confrontation. Beattie, while arguing Kravis’s ideas, usually got a good sense of the Shearson group’s strategy. For security reasons, the lawyer never told Kravis of Millard’s identity.

That day the two spoke in the tones people sometimes use when attempting to reconcile mutual friends. “Peter says he’s got a winner because he’s got Ross Johnson,” Millard said.

“You know that’s not true,” Beattie retorted. “Bob, you have to explain to Peter that the best deal will win on this. It’s not who has Ross Johnson. Can’t he see Henry is ready to do this deal without Johnson?”

Millard had to agree. He had told Cohen the same thing the previous Thursday. But so far Cohen hadn’t listened. Both Beattie and Millard realized the obvious solution was for Kravis and Cohen to get together and divvy up Johnson’s company. A bidding battle could cost the winner billions of dollars and generate ugly publicity. But whether the egos
involved would permit a joint effort was another question.

Bob Millard suggested Beattie give Peter Cohen a call.

As information on Kravis’s bid trickled in that day, Cohen and Hill realized it wasn’t as formidable as they first had feared. For one thing, the bid wasn’t all cash. Kravis had put up just $79 a share in cash, with the remainder coming from securities Kravis valued at $11 a share. Cohen and Hill seized on the structure as a rallying cry. Look, they said, Kravis only topped our cash by $4 a share. Shearson, Cohen figured, could counter by adding “paper,” too. Johnson’s opposition to securities would have to be overcome, of course, but that shouldn’t be a problem if it presented their only recourse.

Amid the confusion, one other fact was becoming clear. Shearson couldn’t fight Kravis alone. A bid north of $90 would require an equity investment—a downpayment—in the neighborhood of $2.5 billion. Even with money from American Express, Cohen knew it wouldn’t be practical for Shearson to shoulder so large an investment itself.

That afternoon Cohen took a call from one of his closest friends, Thomas Strauss, president of Salomon Brothers. Strauss was the trading house’s number two executive behind John Gutfreund; his office overlooked its trading floor. The Strausses and Cohens often vacationed together, once sharing an African safari, and were frequent guests at each other’s homes. Strauss wondered whether there might be a role for Salomon in Shearson’s deal. Similar calls poured into Cohen’s office all day, but Strauss’s was among the few he accepted. They agreed to meet the next day for lunch.

The universe of possible partners, Hill advised Cohen, was small and shrinking fast. Already Kravis had snapped up the obvious ones: Merrill Lynch, Drexel, and Morgan. “We have a choice: Sally or First Boston,” Hill said. “Sally has more capital, but it’s not a factor in the LBO market. In fact, they’re a disaster in the LBO market. They don’t have much depth in their merger practice, either.” First Boston had better junk-bond operations and more merger depth, Hill said, even with the recent departures of Wasserstein and Perella. Hill preferred First Boston, but knew
it was a wasted exercise. Friendships counted for a lot on Wall Street, and Cohen wasn’t likely to pass up the chance to work with his buddy Tom Strauss.