Barbarians at the Gate (76 page)

“Yeah,” Cohen said. “I’m going to take a couple of days off, but probably not till next weekend. I think Karen and I are going to go out to East Hampton. I gotta get out of here. I’m really tired.”

After hanging up, Beattie looked at the phone a minute. He hadn’t lied. He hadn’t intentionally misled Cohen. It was true: Kravis didn’t know what he was going to do. On the other hand, he sensed no skepticism from
Cohen. If Cohen got the impression Kravis was out of the bidding, well, so be it.

Dick Beattie couldn’t know it would be the last civil conversation he and Peter Cohen would have for a very long time.

Far more worrisome was the poor showing by Kravis. His $94 bid left everyone scratching their heads. What could have gotten into them? Was Kravis
trying
to lose? Their Sunday evening press release, with its suggestion that no second bid might be forthcoming, seemed ominous.

From the beginning, the committee’s mission had been to keep alive two viable bidders. When it got two, it aimed for three, and so on. It tried anything, in short, to produce the highest possible value for shareholders. If both First Boston and Kravis failed to surface with second bids, the committee was left with one alternative: Ross Johnson.

That made Felix Rohatyn, the dean of the committee’s bankers, uneasy. Working with Dillon and Skadden in the days before Thanksgiving, Rohatyn marked out two paths of action. First, Kravis had to be saved. Whatever the cost, they needed him at the bidding table the following Tuesday. That meant plying him with data and advice that showed RJR Nabisco warranted a strong second-round bid. Second, the committee had to work hard to refine a recapitalization plan that, in the worst case, could be used as leverage in the event Johnson came to the bidding table alone. It would involve a big, one-time payout to shareholders financed by borrowings and asset sales.

The campaign to save Kravis began Monday. “What do you guys need to get back in the hunt?” Lazard’s Bob Lovejoy asked Paul Raether in a conference call that afternoon.

Raether, presiding over a growing mountain of computer runs, said he needed more information—real information—if Kravis could entertain the idea of bidding again. “We want to meet the tobacco guys, for one thing,” Raether said. “And we want Ed Horrigan there. We want to hear
his game plans. If there are really no savings here, we want to hear it from him.”

Raether had seen what John Greeniaus could do with Nabisco. He strongly suspected Horrigan and Johnson had an undisclosed plan for exacting similar savings from the tobacco business, and he said so. “Look,” Lovejoy said, “if there’s some master plan, we don’t know about it. If there is, they’re lying to us. They’ve sworn up and down they don’t have one.”

Monday night Lovejoy led a procession to Kohlberg Kravis’s offices to meet with Raether and Scott Stuart. A Lazard team had combed through every piece of information received from RJR Nabisco and, using what little new data they received from Johnson’s bid that weekend, compiled a revised, rosier set of projections for Kravis. Now the Lazard bankers bore in, making sure Kravis got the message that there was more inside Johnson’s company than met the eye.

Josh Gotbaum, a thirtyish Lazard banker who sported a peace-sign ring, suggested to Raether that an additional $150 million in annual savings could be wrung from the tobacco business. It was a powerful statement. Spread over ten years, that was $8 or $9 a share, enough to boost Kravis well over $100 a share. Lovejoy could tell from their expressions the message was sinking in.

In fact, Raether wasn’t totally convinced. He knew that the Lazard bankers had an interest in keeping Kravis at the table, so he took their advice with a grain of salt. On the other hand, he had to admit, their message made him feel better. At one point, a Lazard banker named Stephen Golub took Raether aside. Raether had known Golub for years and trusted him.

“I’ve never seen a company like this,” Golub said. “I’ve never seen a company waste so much money. I was at GM”—notable for overspending—“and these guys make GM look like paupers. There’s money lying on the floor for the taking here. Whatever you do, don’t be too conservative. Don’t be too cautious.”

Horrigan was in full battle dress for his interrogation by Kravis Tuesday morning. More than a dozen bankers and lawyers from Kohlberg Kravis and the special committee were arrayed around the cherry table at RJR
Nabisco’s New York offices. To a man it was clear that Horrigan was mad as hell, and it took less than a minute to find out why.

“I understand you fired me this morning,” Horrigan announced, tossing a newspaper article onto the table. That morning the
Greensboro
(N.C.)
News & Record
was reporting that Horrigan and Johnson would be “terminated” if Kravis won the bidding contest. If that wasn’t bad enough, the news had come during an interview with Paul Sticht, Horrigan’s sworn enemy.

“We don’t know anything about that,” Kravis said calmly.

“I know Paul Sticht talked,” Horrigan said. “I talked to the reporter.”

“I know nothing about it,” Kravis repeated. “That’s irresponsible and totally incorrect.”

Horrigan launched into a tirade against Paul Sticht: how he had ruined the tobacco company and how Horrigan’s troops had single-handedly resurrected it. “I wish you a lot of luck if you think that geriatric old fool is going to come riding back into town on a horse,” he said. “The horse had better know the way because the man is blind. You’ve made the wrong deal there.”

“That’s fine,” Kravis said. “But we came to talk about the business.”

Horrigan talked for a while about the tobacco industry and about Reynolds. When he was through, the Kravis contingent began peppering him with questions, but it was immediately apparent Horrigan wasn’t going to help.

“What can you do to cut costs?” Cliff Robbins asked.

“Nothing.”

“How will you and Ross run it?” Paul Raether asked. “What’re your plans? There have to be some savings here.”

“No,” Horrigan said, “there aren’t. We think we run a tight ship here, a very lean operation. We don’t piss away money.”

“Well,” Robbins said, “what about all these people, these head counts?”

“Oh, no. In corporate headquarters, we’ve got nobody.”

Horrigan was a stone wall. Kravis and others put the same questions to him four or five different ways, and each time Horrigan denied any cuts could be made.

“Well, let’s talk about your numbers,” Robbins continued, referring to the sketchy projections he had received. “Can you do any better with your numbers?”

“Oh, no.”

“You can’t do better?”

“No. We’re doing the best we can.”

“So your projections are your projections,” Kravis said.

“Absolutely,” Horrigan said. “There’s nothing we can do. That’s it. We won’t do better, we won’t do worse.” Horrigan launched into a speech about the importance of Premier and other projects he had underway.

“Is there any other analysis you’ve given the Shearson people?” Robbins asked. “Have you given them anything you haven’t given us?”

“No,” Horrigan said. “Nothing.”

When Robbins asked whether they could raise the price of the discount Doral brand, Horrigan snapped, “You do that, and the goddamn floor will drop right out of the bottom of it.” He refused to take any more questions from the young associate.

“You know,” Kravis said at one point, “this is really fascinating. You can’t do any better at all. Boy, and you can’t cut anything here. Well, if that’s the case, I got to tell you, I think we overbid at ninety-four. If you can’t cut anything out of here, if you can’t cut anything at all—”

“Nope,” Horrigan interjected. “I sure can’t.”

“Well, that’s just great. We made our first offer too high then. I just don’t see how we can offer any more.”

Over spaghetti Mel Klein talked in glowing terms about RJR Nabisco and its cash flows. He talked for a while about First Boston’s tax strategy and how they hoped it would work. The only way to improve their effort, Klein suggested, was if the Pritzkers could team up with Henry Kravis.

“What about First Boston?” Kravis asked.

“They’ll be happy whatever happens,” Klein said.

“Fine,” Kravis said. “On what basis would you like to work?”

“We’ll just be partners,” Klein said. “Fifty-fifty.”

Kravis shook his head. “That’s never going to happen. If we even have an interest, which I don’t think we do, it would be for you to have less than twenty-five percent. You guys could make an investment with us. But we’re going to run the thing and be in control.”

“No,” Pritzker said. “That’s never going to work. We just don’t have any interest in that.”

It was clear there was little room for compromise. From their interest in joining him, Kravis gleaned that the Pritzkers were less than confident in their chances of victory. After lunch Kravis called Dick Beattie, laughing as he related details of the meeting.

“Those guys,” Kravis said, “are nowhere.”