Barbarians at the Gate (85 page)

Put on the speaker phone at Willkie Farr, Goldstone pressed his case. Atkins wasn’t willing to reopen the auction, he said. “Decide your best bid and put it in now. Wait for them to invite you in, and it’ll be over…. Guys, actions speak louder than words. Forget about sending letters. Just bid!”

“Wait a minute,” John Gutfreund said. “We don’t know what’s going on. We don’t want to bid against ourselves.”

Gutfreund, like Cohen, wanted to win as badly as anyone, and worse than most. But with billions of dollars at stake, the two CEOs weren’t willing to boost their offer while they were flying blind: For all they knew, Kravis was only a dollar ahead. Johnson had been wrong before. If they raised their bid five dollars a share—more than $1 billion—on a hazy tip from Johnson, they risked wasting it. They would look like fools and would leave themselves open to criticism from their own boards, not to mention
lawsuits. “Look, we’re not going to bid until we know what we’re bidding against,” Gutfreund repeated.

Gutfreund didn’t believe for a moment that Kravis had come in at $105 or $106. It was too high. The Salomon chairman, frustrated for six weeks by Goldstone’s inability to discern the committee’s needs, also suspected that Johnson knew more than he was letting on.

“I am very concerned that Davis Polk is conspiring with Ross Johnson to withhold information from us,” Gutfreund told Goldstone. “Ross knows what the bid is. And I’d like to know it. Now ask him.”

“No, he doesn’t,” Goldstone responded. He wasn’t lying; Johnson hadn’t told him full details of his conversation with Hugel. “Listen, you’ve just got to bid.”

“Steve,” Tom Hill interjected, “we have to know what Henry bid.”

“It’s unlikely we’ll ever find that out,” Goldstone countered. “And while we’re trying, KKR is going to spend all night negotiating a merger agreement. We have to move now.”

As the arguments dragged on, Goldstone realized the only way he could push Shearson and Salomon into bidding was to find out what Kravis bid. He called Atkins. This time he was practically shouting into the phone.

“This is outrageous! You have to tell us what the other side bid!” Goldstone insisted. “The bids are so close, we have to know before we can bid again.”

“Look,” Atkins said, “why don’t you talk to Ross Johnson. I’m not going to tell you anything. Talk to Johnson. He’s talked to Hugel.”

Goldstone hung up, confused. Why was Atkins suggesting he call Johnson? Johnson didn’t know anything. Or did he?

Goldstone reached Johnson before he left Nine West. “Ross, what happened when you talked to Hugel?” he asked. “What’s going on here?”

Johnson, still protecting Hugel, ducked the question. He repeated what he had said earlier about “a four- or five-dollar spread.”

“Steve, it’s over,” he said.

Hanging up, Goldstone dreaded calling the group at Willkie Farr. He could hear the edge in Gutfreund’s voice; the Salomon executives’ contempt for him was evident. Nevertheless, he called one last time. “Look, you don’t need to know the exact number,” Goldstone said. “Just bid.”

In the end, he got nowhere. When he put down the phone for the last time, Goldstone realized Dennis Hersch was still on the speaker phone. Hersch had been sitting in his pajamas, drinking coffee and listening to
Goldstone’s rantings all night. “Jeez, you’re not in the Supreme Court, Steven,” he said. “But nice try.”

By three o’clock the group at Willkie Farr was exhausted. Drawn faces had replaced their fighting spirit. By sunrise, they knew, Kravis would probably have a merger agreement. Maybe, they said, shaking their heads, it really was over. Slowly, people began to leave.

Gutfreund approached Cohen. “Peter, it was a great partnership we had here,” he said. “We worked well together. We enjoyed it, and we learned a lot. Let’s get the next one.”

“We’ll get the next one,” Cohen said.

As the hours wore on, they grew restless. What was taking so long? Then, shortly after midnight, Bruce Wasserstein jumped up to take a call from his partner, Joe Perella, who was in Tokyo. “That global bank, Wasserstein Perella, has a bulletin for us,” joked Roberts.

The joking stopped when Wasserstein got off the phone. Perella had just seen a wire story carrying details of Kohlberg Kravis’s bid. Wasserstein passed the phone to Kravis, who listened, stone faced, as Perella read the story. Within minutes he was faxed a copy.

The story, an early version of what would appear in the next morning’s
Wall Street Journal,
had the management group’s bid pinned at $101 a share and speculated the Kravis bid was at $103 a share or higher. It suggested Johnson might bid again.

“What do you mean, they’re going to bid again?” Kravis said. “The bids are closed!”

Roberts hit the roof. Someone, probably on the special committee, was leaking details of their bid, no doubt in an effort to spur a higher bid from the management group. The auction was supposed to be over. Neither Kravis nor Roberts would tolerate being trifled with.

The Kravis contingent stalked into the conference room where the board’s bankers were still working out kinks in the bid’s securities. “Goddamn
it,” Roberts said, passing around the story. “We’re being jerked around, and I don’t like it.”

The bankers from Lazard and Dillon threw up their hands. Dick Beattie grabbed Casey Cogut and went in search of Atkins. This was a serious breach of security: If Perella had seen the story in Tokyo, so, too, in all probability, had Shearson and Salomon. If the management group wanted to come back fighting, Beattie worried, they now had an idea what price they had to beat.

Beattie and Cogut were followed upstairs by a pair of the committee’s bankers, Bob Lovejoy of Lazard and Fritz Hobbs of Dillon Read, who were also irritated at the leak. For nearly half an hour the four men waited outside Atkins’s office. A Skadden lawyer, Mike Gizang, was guarding the door and refused them entrance.

Finally Lovejoy and Hobbs barged past Gizang and into Atkins’s office. Inside, nearly a dozen Skadden lawyers stood around the room in the thick of a debate. Atkins sat behind his cluttered desk. Quickly the two bankers were briefed on Goldstone’s increasingly rancorous protests.

Lovejoy, an ex-lawyer himself, was well acquainted with the lawyers’ propensity for fingernail biting. He was far more concerned with the angry George Roberts he had left behind. “What the fuck are you talking to the management group for? We’re not supposed to be communicating with them. We’re supposed to be doing a deal with KKR. These threats seem silly. Why are you taking them so seriously?”

Atkins didn’t say much in response. He rose to go downstairs and deal with Kravis and Roberts.

What’s going on?

Beattie thought he knew.

“The other side giving you a hard time?” he probed Mike Gizang. From Gizang’s expression Beattie knew Shearson must be counterattacking. When Atkins walked out a few minutes later, Beattie confronted him.

“We have a few problems,” Atkins said, motioning back to his office. “We have some people a little crazed.”

Atkins followed the Kravis lawyers downstairs to the conference room
where Kravis, Roberts, and the others waited. Kohlberg Kravis simply wouldn’t tolerate leaks that might encourage Shearson, Beattie said. “Our bid is not supposed to be shopped. It’s outrageous, and we won’t stand for it any more.”

While upstairs Beattie had overheard the board’s secretary, Ward Miller, calling directors and alerting them to be at either a seven-thirty special committee meeting or the eleven o’clock meeting of the full board.

“Look,” Raether now said, “fuck this seven-thirty stuff. Get ’em up, and get ’em on over here. Let’s sign this thing up. This is just crazy.”

“We can’t do that,” Atkins said firmly. “These guys are asleep.”

Kravis was furious. “We played by the rules. Now goddamn it, somebody has taken our bid, and we’re being used.”

“You’re not being used,” Atkins said. “You’re absolutely not being used.”

“But we are!” Kravis said, brandishing a copy of the story. “I mean, look at this. How can this be?”

Unsatisfied, Kravis and Roberts retreated to a conference room to ponder their next move. As they did, Wasserstein ambled up as if to enter the room. Casey Cogut, knowing Kravis no longer trusted Wasserstein, closed the door in front of the famed strategist. “Sorry, Bruce, this is privileged,” Cogut said in earnest. Raether cracked up in laughter.
*

The danger of a Shearson counterattack was real, the Kravis group decided. It was, after all, what they themselves would do. It was impossible to stop Cohen from bidding, Kravis and Roberts realized, but they could hope to hurry the board by placing a deadline on their bid. They settled on one
P.M.,
just two hours after the board meeting the next morning. It gave the management group an eight-hour window in which to attack. With any luck, Kravis bet, they had already given up.

When Cohen woke that morning, every bone in his body screamed to rejoin the fight for RJR Nabisco. He called Andrea Farace, who confirmed what Cohen already suspected: By adding “paper” and cutting cash, they could boost the face value of their bid without boosting the actual money
they would pay out. Cohen touched base with Tom Strauss and found the Salomon executives ready to fight.

Next he dialed Nusbaum at the lawyer’s home. “What’s to stop us from making another bid?” Cohen asked.

“Nothing.”

“This is what I want to do…”

It was a quarter to eight, Wednesday morning, November 30. As the directors trickled into Skadden Arps, Atkins gathered them in a windowless conference room on the thirty-fifth floor. Nondescript modern art adorned the white walls at both ends of the room. Charlie Hugel took a seat at the head of a long, horseshoe-shaped, oak conference table dotted with buckets of sharpened pencils. He seemed to be in a good mood; he had picked up an apple from a street cart to calm his growling stomach.

To Hugel’s right sat Marty Davis, to his left Atkins, Bill Anderson, Albert Butler, and John Macomber. Four other outside directors were also present: Bob Schaeberle, Juanita Kreps, Vernon Jordan, and John Medlin. At the far end of the table the bankers from Dillon Read and Lazard found seats. Beyond the bankers a buffet table was piled high with croissants, bagels and cream cheese, pitchers of orange juice, and pots of coffee.

“We must try,” Atkins was saying, “to reach a decision in the best interests of shareholders. There will be charges about the process. There will be litigation, including perhaps from the bidders.” Atkins went on, underscoring what he called “one fundamental caution: ‘No comment’ is the only proper response to any inquiry” about what was about to happen. “Secrecy must be maintained at all costs.”

Atkins then began updating the directors on the previous night’s
events: Jack Nusbaum’s letter was read aloud, and details of Goldstone’s frantic calls were aired. The quick demise of the First Boston bid was recounted. Negotiations on Kravis’s securities were also detailed, as were his complaints about a leak after the Dow Jones story surfaced in Tokyo.

“They’ve given us an ultimatum,” Atkins said. “If their bid is not acted on by one o’clock, they will withdraw it.”

Felix Rohatyn could see on the directors’ faces their relief at being able to select Kravis the winner. Everyone could hear the murmurings among directors as they gathered for the meeting and compared horrified reactions to the
Time
cover….
Looks awful. How could they have been so stupid…. Had to know he might say just anything…. Why didn’t they send him to Patagonia
…

Ross Johnson had become a national symbol of greed. No one in this room wanted to hand this company to him. If he had come in as the far-and-away high bidder, they would have no choice but to declare him the winner. But many were secretly glad their choice was clear.

For three hours the board and its advisers reviewed the events of the last ten days. Lazard and Dillon went over the bids in detail, focusing especially on the esoteric characteristics of both sides’ securities. Ron Grierson, on the speaker phone from London, asked dozens of nit-picking questions, all fueled, everyone knew, by his fear of lawsuits. As the meeting wound down a few minutes before eleven, Hugel alerted his fellow directors to a few bits of news. After a short break, he said, Henry Kravis and George Roberts would be invited in to address the board.

Oh, and one more thing, Hugel said.

“Ross Johnson is here.”

Around nine o’clock Johnson walked across the plaza to his office. He hadn’t been there long before Cohen called, sounding excited. “We’re going to make another bid. What do you think about going higher?” he said, mentioning a figure based on low cash, high PIK. “All the numbers work…. Would you go along?”

Johnson had long since lost his capacity for disbelief. Nothing coming from the mouth of a Wall Street executive would ever surprise him again. “Are you telling me those numbers will work the same as ninety, six, and four?” he asked, referring to the components of their earlier bid.

“Absolutely,” Cohen said. “From your perspective running the company, you’ll actually be better off because we’ll be using less cash.”

Johnson thought for a second. “What the hell,” he said. “If you want to go in there and raise hell, go in there and raise hell.” His only caveat, Johnson added, was that he could no longer guarantee his team could make the budget cuts necessary to make the deal profitable at these levels.

“Don’t expect miracles,” Johnson told Cohen. “Because we are now in the land of miracles.” Johnson hung up feeling like a mourner at his own funeral. This was Shearson’s game now.

Johnson arrived at Skadden for the board meeting a few minutes before eleven o’clock, with the new Merry Men—Horrigan, Harold Henderson, Jim Welch and Bob Carbonell—in tow. Even though he was sure they had lost, Johnson was enjoying himself. He looked forward to watching the fireworks when Cohen lobbed in his grenade. After a month of being pilloried as a symbol of corporate greed, Johnson welcomed the opportunity to watch his directors sweat. “It’ll be fun to see them pin the tail on the donkey on some other donkey for a while,” he chuckled on the drive over! “Let’s watch ’em squirm.”

Cohen’s team was ready, too. Jack Nusbaum was to meet Johnson a few minutes before eleven in the lobby at Skadden Arps. He had brought a second threatening letter—they hadn’t received an answer from the one the night before—demanding that the auction be reopened. Together, Nusbaum and Johnson would march into the board meeting and attempt to pry open the auction.

But when Nusbaum arrived, Johnson was nowhere to be found. He waited ten minutes before heading upstairs. There he found Johnson’s group cooling their heels in a thirty-second-floor conference room, three floors below where the board was assembled.

Johnson was upbeat, laughing and cracking jokes as he waited to be admitted into the boardroom. “Isn’t this crazy?” he asked Nusbaum. Johnson didn’t know what to expect, but he promised Nusbaum one thing. “We’re going to get our pound of flesh back.”

Nusbaum was in no mood for joking. As they waited, he paced nervously. He looked at his watch. It was eleven-fifteen, and if the board
began on schedule, it might already be voting on a deal with Kravis. He couldn’t afford to wait any longer. Time was running out.

He called Atkins’s office. His message was simple: If the directors wouldn’t let Johnson into his own board meeting, they would send the letter in without him. Nusbaum hung up and waited another fifteen minutes. Atkins didn’t return the call.

Nusbaum dialed Cohen at Shearson. His voice was uncharacteristically tense.

“Look, Peter, we’re being stonewalled. Ross isn’t being allowed in. The meeting’s going on without us. If we’re going to go with a higher bid, we’d better damn well do it now.”

Cohen listened. “I’ll call you back.”

The four had arrived at Skadden that morning at 9:45, expecting to sign a merger agreement and buy RJR Nabisco. Instead, they had been shown to seats in a reception area. By and by the team’s investment bankers began arriving. Wasserstein was there. Gleacher came in, angry that he hadn’t been invited the night before. Jeff Beck, back from his exile, was also there. After a while, Casey Cogut went in search of an empty office where Roberts, Kravis, and Raether could consult out of earshot of their talkative bankers.

All three men were getting nervous. That morning the papers reported that Johnson’s group hadn’t backed out of the bidding. So far there was no sign of them. As they waited, they wondered anxiously what had become of the board. Finally Hugel came in and asked them to address the directors.

Now, as they entered the boardroom, Kravis and Roberts were all business. This was not the occasion to complain about Johnson or anything else. If ever they were to win over the board, this was the time. Davis, Hugel, Macomber, all of them—each had to be convinced the Kohlberg Kravis bid was safe, secure, and in the best interests of employees and shareholders.

As the directors fell silent, Roberts outlined their strategy. Kohlberg Kravis wasn’t here to bust up RJR Nabisco, he said. If successful, they intended to keep the company as intact as possible. Roughly 20 percent
of the company’s assets would be sold. Shareholders would be able to share in their profits through a 25 percent equity stake to be distributed in the form of warrants. Roberts emphasized that he wanted this to be a safe deal. The largest buyout in Wall Street history was no time to gamble with thin coverage ratios. They would take special care of employees. Kohlberg Kravis companies employed more than 300,000 workers, Roberts said, and the firm knew the value of keeping them happy.

It was a solid presentation, tailored to soothe. For another fifteen minutes Roberts and Kravis took questions. What would Paul Sticht’s role be? Purely an interim chief, Roberts said.

“How firm is one o’clock?” a director asked.

“Very firm,” Roberts said.

“Let’s stick as close to one as possible,” Kravis said.

Afterward Hugel and Atkins followed the Kravis contingent into another room. Hugel was adamant that before a final vote was taken, a number of issues be negotiated. They were so-called Schedule Two items, dealing with employee benefits, such as moving expenses. For twenty minutes they plodded through an intricate negotiation dealing with items as esoteric as how far an employee had to move before becoming eligible for reimbursement—what an amazed Raether described as “incredibly chickenshit stuff.” To one side, Roberts looked to Kravis and rolled his eyes.

Weighty matters like moving expenses put away, Beattie deposited Kravis and Roberts in an empty office to await the board’s final vote. The office they chose was strategically well situated, around a corner barely twenty feet from the boardroom. By standing at the corner itself, one could easily see all traffic passing through the boardroom doors. After a few minutes Beattie emerged from the small office, walked past a seven-foot Kenthia palm in a large white pot, and took a post at the strategic corner.

For half an hour he watched a steady stream of lawyers and bankers file in and out of the board meeting. A friend to many of them, Beattie managed to collar a lawyer here, an investment banker there. A few minutes before noon he noticed a surge of activity. Lawyers with anxious expressions shuttled in and out like ants. As they passed, Beattie grabbed
one by the arm. “What’s going on?” he asked.

“Ross and Nusbaum are here,” the lawyer said, scurrying on.

Beattie cursed. He was angry but unsurprised. Atkins and the committee had been dragging their heels for more than twelve hours now. It was only a matter of time before Johnson put in another bid. Beattie trotted back into the small office where Kravis and Roberts waited restlessly.