Barbarians at the Gate (66 page)

Gaping holes yawned in Stuart’s analysis, the result of key figures he hadn’t been able to obtain. In a perfect world, Stuart wouldn’t have even attempted projections without gathering all the relevant figures. But he had no choice: Time constraints dictated he come up with something. For three weeks Stuart had pestered the bankers at Dillon and Lazard for the figures, but to no avail. At first he thought they, too, were stonewalling him. Later he would realize the problems lay within RJR Nabisco. No one below its highest levels knew the whole picture. Those that did, like Ed Robinson, were giving only name, rank, and serial number.

By Monday, Stuart was growing panicky. Every day he searched for the missing numbers, shouting at Dillon Read, shouting at Lazard, shouting at his own accountants and lawyers crawling through the data room in Atlanta. Data room,
hah!
The concept made Stuart laugh. They got data all right: reams and reams of raw numbers that would take weeks if not months to fathom. It might as well have been Chinese.

The numbers he needed weren’t complicated: an estimate of RJR Nabisco’s available cash reserves, a total debt number, an estimate of payments due Johnson’s management group under its golden parachute severance packages. Basic stuff, Stuart thought, yet they formed the foundation from which Kravis and Roberts would determine their bid. Both his bosses, Stuart was uncomfortably aware, were growing impatient with his inability to put finished projections on their desks.

If missing figures weren’t bad enough, Stuart didn’t completely understand the ones he had. One number in particular puzzled them all. On the initial projections they had obtained from RJR Nabisco was a heading “Other Uses of Cash.” Beside it was a row of figures stretching out ten years, each year ranging from $300 million to $500 million. Stuart had no idea what the numbers meant. What the hell was “other uses”? Was it cash flowing in or out? Should he add it? Subtract it? Ignore it? Five hundred million dollars wasn’t the kind of sum Kravis liked his people to ignore. The swing between adding and subtracting it was nearly $1 billion, roughly the difference between a bid of $96 a share and $92 a share. For three weeks the figures lay like a row of mysterious coals glowing white on the darkened screen of Stuart’s IBM personal computer, a category no one could explain. When they asked Ed Robinson about it at The Plaza, he had pleaded ignorance. No one at the special committee knew what it was, either. The “Other Uses of Cash” now headed the list of mysteries Stuart had four days to solve.

Then, on Monday, Stuart took a call from a Dillon Read associate, Blair Effron. Would you be interested in spending any more time with John Greeniaus? Effron asked. Greeniaus had just finished speaking with the special committee. “I think,” Effron said, “this guy wants to give you the real story.”

Stuart took the offer to Paul Raether. “Sure, why not?” Raether replied. “They were the only guys who were helpful the first time around.”

A meeting was arranged that afternoon at a midtown hotel, the Carlton House. Raether led Stuart and another associate into the meeting room,
where they took seats at a round table. Greeniaus was already there, Larry Kleinberg in tow.

“Before we start,” Greeniaus began, “I’ve got a few things I’d like to ask you.”

“Fire away,” Raether said.

“Are you guys still having conversations with the management group?”

“No.”

“With Ross Johnson?”

“No.”

“Do you have any plans to have any more conversations?”

“Not as far as I know.”

“Good,” Greeniaus said. The coast was clear. “I’ve got a few things I’d like to tell you.”

The two-and-one-half-hour speech John Greeniaus embarked on was among the most startling Raether had heard in a decade of LBO work. In one fell swoop Greeniaus laid bare Nabisco operating secrets and strategies, its vulnerabilities and follies.

“Look,” he said, “nobody’s ever asked us how we’d run this business for cash. Let me tell you, there are a whole lot of things that can be done.”

Nabisco, Greeniaus stated confidently, could increase its operating income 40 percent in a single year if necessary. Profit margins could be taken to 15 percent from 11. Cash flow, he said, could be taken to $1.1 billion a year from $816 million.

“Come on—” Raether said in disbelief.

“No, you don’t understand,” Greeniaus replied. “Our charter is to run this company on a steady basis. There was really no good reason for the earnings in this group to go up fifteen or twenty percent. In fact, I’d get in trouble if they did. Twelve percent is about what I’m supposed to give every quarter. The biggest problem I’ll have next quarter is disposing of all the additional cash these businesses generate. The earnings are going to be too big. Christ, I’ve got to spend money to keep them down.” It was all done, Greeniaus explained, because Wall Street craved predictability.

Raether was dumbfounded. “What are you going to spend it on?”

“Product promotion, marketing.”

“Is that money well spent?”

Greeniaus chuckled. “No, not really.”

He mentioned Johnson’s $4 billion plan to modernize Nabisco’s bakeries.
“Technology for technology’s sake,” Greeniaus scoffed—an outlet for the tobacco cash Johnson didn’t know what to do with. “You don’t need to spend all this money,” he emphasized. “You’re just spending it for nothing.”

Greeniaus trotted out Johnson’s sacred cows and slaughtered them one by one. Team Nabisco: a waste. The golf tournaments: a travesty. “Should I spend ten million dollars each year on the Dinah Shore? Does that sell crackers? No. But it’s forced on me by corporate. It’s built into my overhead.”

Raether’s head was spinning as he left the meeting. This was the break they had been waiting for. “You guys better believe those numbers,” he told Greeniaus as they left, “because you may have to deliver them.” The implication was clear: If Kravis won, Nabisco would be managed, not sold. Greeniaus left the meeting on cloud nine.

Raether hustled back and reported the meeting to Kravis. “I assume we’re not being set up,” Kravis said. It crossed his mind that Greeniaus might be a Johnson plant.

“No, I think the guy’s real,” Raether said.

Kravis thought about what type of man Greeniaus must be. Traitor or hero? “I gotta give this guy a lot of credit,” he said. “This is the first chink in their armor.”

It was the first piece of good news the pair had heard in nearly two weeks. Raether wasted no time plugging Greeniaus’s assumptions into their buyout models. By the next day their impact was clear. If everything Greeniaus said was true, Kohlberg Kravis could boost its bid from the low nineties to nearly $100 a share.

“Ross,” the president said, “I can’t help but notice you seem to be getting some publicity lately.”

Johnson smiled. For once he didn’t have a ready quip. After posing for pictures, his group met with Kenneth Duberstein, the president’s chief of staff, and Colin Powell, the national security adviser. Both men asked
about the buyout. Johnson told some jokes about the ways of Wall Street.

But even schmoozing with the president failed to lift Johnson from his growing pessimism. Later, leaving for the plane to New York, he turned to Dwayne Andreas, chairman of Archer Daniels Midland and chairman of the committee. Andreas was a friend; Johnson said he wished they saw each other more often. “Well, Dwayne,” he said, “I might have a lot more free time in a couple of weeks.”

There was only one way to boost the returns enough to justify a bid. North of ninety, Forstmann could see, they could bid with the aid of a Goldman Sachs bridge loan, which would be refinanced through the sale of junk bonds. Forstmann cringed at the thought, but Geoff Boisi was pushing the idea hard. All week Forstmann, at Boisi’s behest, had suffered a crash course in junk bonds. Half the time he couldn’t understand what the young Goldman bankers were telling him. “I’m speaking English, and it’s like they’re speaking Turkish,” he complained.

But Forstmann understood enough to realize the risks such a loan entailed. For each quarter Goldman couldn’t sell the bonds to refinance the loan, the loan’s interest rate rose. And rose. If everything went well, Forstmann could repay the loan through RJR Nabisco’s cash flow. But if for any reason Goldman couldn’t sell the bonds, Forstmann Little was liable for the entire amount. In effect, Forstmann was forced to bet the entire deal on whether Goldman could unload the bonds, a risky wager given the firm’s spotty track record.

Boisi was practically feverish, he wanted the bridge so bad. He assured Forstmann it was safe. There was no more than a one in a thousand chance that Goldman couldn’t sell the bonds.

“Sure,” Forstmann said, “so write that in there,” meaning, in the contract.

“No, Teddy,” Boisi explained. “We have to have the right to get out of this thing in the event of an emergency.”

It was the worst part of a process with which Forstmann had become increasingly uncomfortable. Discussing tobacco left him feeling slimy. Debating future demand in the teen market made him feel like a drug pusher. At least the bank talks were going well. Sunday afternoon Forstmann had stood before a packed auditorium at Manufacturers Hanover in his blue jeans and exhorted a crowd of gray-suited bankers to put forward the $10 billion or more he would need. From all appearances, they would.

In the end, it always came back to junk bonds. They went round and round and round. At one point, Boisi threw up his hands.

“What are you, a priest?” he asked Forstmann. “Have you got some kind of religious conviction about this stuff?”

Forstmann tried to explain. “Geoff, there’s no place to go. I’m a fighter, but I just can’t do this stuff.” He pulled a copy of the article he had written for
The Wall Street Journal
and shook it at Boisi. “I really believe this stuff, you know.”

They were in the thick of debate Tuesday afternoon when Brian Little took Forstmann aside. “I think you and Nicky and I ought to talk.” The two men collared the younger Forstmann and retreated to Little’s office.

The three partners knew their position was bleak. The returns simply weren’t adequate unless they used junk bonds. None of them wanted to do that. But the simple truth was that, even if they had, they couldn’t. Forstmann’s antijunk diatribes had painted them into a corner. To go with a junk-bond–financed bridge loan at this point would invite public ridicule. “The reality is, it can’t be done without junk,” Little said.

Their mood was somber. “I guess we should just end this,” Ted Forstmann said.

He broke the news to Boisi and his three corporate partners. After the initial furor subsided, he wrote out a long press release citing in detail Forstmann Little’s reasons for backing out of the deal. It amounted to an attack on the auction process and on junk bonds; he planned to issue it the following morning. That evening he called Peter Atkins and read it to him.