Barbarians at the Gate (57 page)

“No reason for you to hang around that I can see,” the lawyer replied.

Exhilarated, Johnson returned to Nine West, wolfed down a sandwich, and briefed Sage and Horrigan on the evening’s events. Then he walked the two blocks to his apartment, showered and shaved, and threw on a sports coat. He prepared to head back to his office, where he planned to do some serious partying.

“Why don’t you come on over?” Johnson asked his wife, Laurie. “You’ve just got to come. It’ll be an interesting experience. You’ll have some fun.”

Darrow made it to RJR Nabisco’s offices in no time. He found the forty-eighth floor deserted except for a seething John Gutfreund. Salomon’s chairman was clearly in no mood to party. He was, in fact, as mad as Darrow had ever seen him.

“I don’t know what’s happening, Peter,” Gutfreund said. “There’s a meeting over at the Plaza. I’ve been excluded. I don’t know why. I want you to get into the meeting,
right now.
”

“Sure, John, no problem,” Darrow said, not having any idea how he would gain entrance to a closed meeting to which John Gutfreund hadn’t been invited. Gutfreund handed him a slip of paper with the room number of Kravis’s suite.

Darrow strode across Fifty-eighth Street and took an elevator to the hotel’s fifth floor. He checked twice for the room number Gutfreund had written down. It didn’t exist. Darrow found himself wandering aimlessly until he saw a very large man standing outside a pair of double doors.

“This is Henry’s suite?” Darrow said on a hunch.

“Yes sir,” the man said, opening the doors. “Go right in.”

Darrow walked in to find Tom Strauss in the middle of a heated discussion with Kravis and Roberts. He didn’t know it at the moment, but he was witnessing the first cracks in Ross Johnson’s carefully won $20 billion peace pact.

Strauss’s speech was impassioned, his plea direct. Salomon and Shearson simply must run these bond offerings, he said. Salomon was ready to run them, was willing to run them, had the expertise to run them, and demanded the right to run them. They had worked weeks in preparation, and to hand their assignment to Drexel wouldn’t be fair.

“We’ve just got to do this thing,” Strauss said. “Why don’t you try us?”

Irked, Kravis explained the importance he placed on Drexel’s handling the bonds. “Look,” he said, “Drexel has done a first-rate job for us every time. They did Beatrice when everyone said it couldn’t be done. They’re the best. They’re cheap. This is the biggest deal ever. We can’t afford to take any chances.”

Strauss may have been arguing for the sanctity of Salomon’s capital, but everyone in the room knew what he was really objecting to. Salomon hated Drexel. To lose history’s largest bond offering to its archrival would be a profound embarrassment to the firm. For five years Salomon, strong in every other kind of bond, had tried in vain to break into the highly specialized—and highly profitable—field of junk bonds. But its efforts, plagued by internal politics, had resulted in a series of disasters. Drexel’s hammerlock on the market was a source of continuing frustration to Gutfreund.

“Not to knock you, but you guys don’t really do this stuff,” Kravis told Strauss. “You guys haven’t done anything here.”

At one point, Strauss mentioned that Salomon had had sixty bond salesmen in over the weekend to hash out the best ways to sell these bonds. What am I supposed to tell them? he asked. Kravis and Roberts rolled their eyes. “So what if your guys were there all weekend?” Kravis said. “That doesn’t mean anything. We ought to go with the best, most qualified people.”

Peter Cohen found himself in an awkward position. Having more or less approved Drexel’s selection earlier, he row weighed in with what seemed a halfhearted endorsement of Strauss’s stance. Cohen, in fact, had his own reason to distrust Drexel. For five years Shearson had been locked in litigation with Drexel over tin contracts that Cohen believed Drexel had reneged on. Drexel’s refusal to make good on the contracts had forced Cohen to take a $50 million charge against his 1985 earnings. Drexel, he said, simply wasn’t the kind of firm Shearson felt comfortable betting its future on.

Soon both Kravis and Strauss were repeating themselves. As their debate wound down, no one was overly worried about Salomon’s newfound intransigence. In a deal this large there were bound to be some sticking points in the fine print. Surely they could reach a compromise later on. Besides, there was a more important matter to be dealt with: the management agreement.

Goldstone hauled out a copy and waved it in front of Kravis. “We’d like you to sign off on this,” the lawyer said.

“Show it to Dick,” Kravis said.

Beattie watched as Goldstone flipped through the pages and stabbed his thumb at the paragraph he was looking for. “This,” he said. “I want to make sure you see this and understand it.”

It was the control paragraph, stating that Johnson would have full control over the deal. Standing beside Goldstone, Beattie thought it an insignificant detail. If they struck a deal, he knew, Kravis was going to call the shots. It was as simple as that.

Without saying anything, Beattie took a copy of the agreement and retreated to a corner with Casey Cogut to scan it. Goldstone was nervous. “I want your word that you won’t use this document for any reason other than evaluating this transaction,” he said, “and that you won’t disclose it to anyone.”

After a few minutes, Beattie motioned to Kravis and Roberts, and, with Cogut, the four retreated into an adjacent bedroom. “You’re not going to believe this,” Beattie said. The lawyer had read the document quickly, but what he saw was incredible: The control, a veto in Johnson’s hands, and, most alarming of all, the astronomical returns Shearson was promising Johnson. “You can’t live with this thing, Henry,” Beattie said.

Cogut agreed. “If we sign up to this deal, Ross will run the whole thing. You’re not going to agree with that.”

Kravis was shocked. He knew Cohen was hungry to get into merchant banking. But giving Johnson control of the deal? It was unlike any LBO he had ever seen. “This is just crazy,” Kravis said. “How could Cohen do this?”

Cogut and the Salomon lawyer, Peter Darrow, were neighbors on a one-block street in Brooklyn Heights. They had joked that the RJR Nabisco drama would be “a good deal for the street,” meaning Garden Place, not Wall Street. Cogut emerged from the bedroom and, as the meeting showed signs of breaking up, motioned to Darrow. The Salomon lawyer slipped into the bedroom where Kravis and the others were caucusing.

“Have you seen this?” Beattie asked Darrow.

Darrow nodded.

“Are you on board with this thing?”

The Salomon lawyer had expected this. As soon as Goldstone brought out the agreement, he had called Gutfreund to ask how to handle it. Darrow had to walk a fine line. If Salomon were to be partners with Kravis, it was important to signal its discomfort with what Gutfreund called the “unseemly” agreement. But if the talks somehow fell through, Kravis would no doubt use Salomon’s displeasure as a club to publicly maul the management group.

Darrow conceded to Beattie that the document had “obvious problems” and would likely be rewritten. He mentioned that Gutfreund and Warren Buffett opposed it. It was all he had to say. A few minutes later, Beattie stepped back into the living room and took Goldstone aside.

“How many people did you say are involved in this?”

Only seven at the moment, Goldstone said, but Johnson had in mind that hundreds of employees would also share in the riches.

“Well, this is pretty rich, you know.”

“You should talk to Ross about that.”

“Well,” Beattie said, “we’ve obviously going to reserve opinion on this. We can’t say yea or nay until we have some time to look at this thing.”

Goldstone nodded, but suggested they consider the document closely. “You’ll need to get things resolved, because it’s very important.”

The meeting adjourned with plans to reconvene at RJR Nabisco’s offices an hour later. In the confusion, neither Goldstone nor Jack Nusbaum retrieved the management agreement from Beattie.

“They never asked for it,” said Casey Cogut. “So we kept it.”

Kravis and Roberts were escorted into Johnson’s office, the sight of their first tangle a week earlier. In fine spirits, Johnson offered the cousins a drink, which they declined. Beattie slipped Johnson’s secretary a draft agreement he had hastily scribbled out and asked that it be typed. There was no sign of Cohen or Strauss.

As Kravis and Roberts waited, they listened to Johnson ramble on about the businesses they were all about to co-own. In a wide-ranging soliloquy, Johnson—upbeat, casual, laughing—skittered through a number of subjects, including Premier, the Atlanta headquarters, and the outlook for Nabisco businesses they would sell. He was glad for the time to get to know his new partners. Jim Robinson and Ed Horrigan sat by, listening and chatting occasionally.

For nearly an hour they discussed the fine points of RJR Nabisco. At one point, Gar Bason, the terrierlike Davis Polk lawyer, poked his head into the room. “What are you doing in this room without another lawyer?” Bason challenged Beattie. He was merely being protective of his client, but it broke the mood.

Kravis noticed they had been waiting a long time. “What’s holding everything up?”