Barbarians at the Gate (87 page)

We’re prepared to extend our deadline, Kravis said, on one condition: Pay our expenses to date, and we’ll stay another hour. It made sense. Kravis believed he was in a position of strength; he knew the management group’s securities hadn’t been negotiated, as his had. He saw no reason to panic and boost the bid; they would have the opportunity to do that later, if needed. This way they kept pressure on the board, at the same time making sure that, no matter what happened, they came out with something.

How much are your expenses? Atkins asked. Raether had done the arithmetic. Their total expenses approached $400 million, but Raether, careful not to push too hard, asked for only $45 million.

“I think I can sell that to the special committee,” said Hugel, who had stepped into the room. He returned minutes later with the board’s approval. The agreement was scribbled on a yellow legal pad. Beattie smiled. No matter what happened, he was getting paid.

Forty-five million dollars to wait sixty minutes. Incredibly, Atkins and Company thought it was a good deal.

Then, a few minutes past one, he took a call from Atkins.

In lobbing in the $108 bid, Nusbaum had emphasized that all its components were negotiable. Now, Atkins said, it’s time to end this thing, once and for all. “We want your highest and best bid,” the lawyer said. “We’d like it in fifteen minutes if you can.”

“It might take a little longer.”

“Well, do the best you can.”

In seconds Nusbaum was on the line with Cohen. “The bidding’s reopened,” he said. “We’re back in. They want our best bid.”

“How long do we have?”

“Fifteen minutes.”

“That’s not very much time.”

“I know.”

Down the hall, Johnson applauded the invitation for another bid. He
had long since stopped worrying about the bidding levels. To Nusbaum he said, “Let her rip.”

For the second time that day, he was entering uncharted waters. He still had no idea where Kravis’s bid was. Quickly he conferred with Hill and the others in his office, then called Gutfreund at Salomon. He was surprised when Gutfreund demanded a more aggressive bid. Cohen had to think fast. Whatever level they went to, they would need more money from the management agreement. A concession from Johnson was a must.

He called Goldstone. “We could go as high as one-fifteen,” Cohen told the lawyer. “I really think that’s what we ought to do. I want to be preemptive. It’s time to end this thing.”

Goldstone wanted to pinch himself.

One-fifteen?
Just six weeks ago Shearson was telling Johnson this company was worth seventy-five.

What Shearson needed in order to proceed, Cohen explained, was for Johnson to chop two more points off the management agreement, to 4 percent, almost half what he was to have received. “Now,” Cohen said, “I want to know if Ross will accept that.”

Goldstone thought the number and the request were absurd. But he relayed them to Johnson who, when he heard what Cohen had in mind, was reduced to helpless giggles.

“My God, that’s crazy!” he exclaimed. “How could this be a good investment? I don’t think he ought to do it, do you?”

Goldstone thought it was time for some Merger 101.

“Listen, Ross, they have their reasons for doing this other than just buying the company,” he explained. He mentioned the $200 million in upfront fees Shearson would reap from a successful deal. He talked about the unmatched franchise benefits it would reap from having completed history’s largest LBO. Johnson’s problem was that he insisted on thinking in terms of the real world, real money, real investments. In effect, Goldstone said, this wasn’t the real world. This was Wall Street.

“Well, to me, that’s crazy,” Johnson protested.

There’s something else, Goldstone said. “If you’re prepared to agree,” he went on, “they’re going to want significant new adjustments in your compensation. Will you do it?”

This is the moment of truth,
Goldstone thought.

“Sure, why not?” Johnson said with an ironic laugh. He had given everything else away. The management group’s cut had started at 8.5 percent with an eye on 20 percent. Now it was down to 4 percent. “But if we go any further,” Johnson said, “we’re going to be owing them money.” He chuckled. “And Steve…”

“Yes?”

“Remember. We can’t go below zero.”

Goldstone hung up and dialed Cohen. “You got it. Go.”

Jack Nusbaum, Wharton Business School, Columbia Law, senior partner of one of New York’s largest law firms, had a succinct reaction to Peter Cohen’s new bid.

“Ho-ly shit.”

He hung up and relayed the news to Atkins: Ross Johnson, Shearson Lehman, and Salomon Brothers were boosting their bid to $112 a share. He didn’t have time to do the math. On its face, the bid was $25.76 billion. At 1:24 Atkins delivered the news to the board.

Shearson’s new bid seriously complicated Atkins’s life. On one hand, he had Kravis at $106 a share. Because Kravis’s securities had been negotiated, the advisers were comfortable the bid’s values were close to what Kravis said they were. It was good. It was solid. It was also second.

On the other hand, he had the management group at $112 a share. Not only weren’t Cohen’s securities firmed up to the point of Kravis’s, the management group seemed to have paid little attention to the advice they had received from Dillon and Lazard just the day before. Their securities remained “soft,” that is, they included no “reset” mechanism that would guarantee they would trade where Shearson said they would. Cohen valued his bid at $112 but, for all Atkins knew, it was worth $105. To determine its precise value would take time. And, with thirty minutes until Kravis’s two o’clock deadline, time was a luxury Atkins didn’t have.

Sure, Atkins told himself, Kravis could be bluffing. But with $25 billion at stake, could he really afford to take that chance? Somehow, he knew, they had to push the Kravis deadline back again.

Inside, the advisers were locked in debate. “You’ve got to give KKR some goodies,” argued Dennis Block, a lawyer working with the board’s investment bankers. “You have to protect what is already on the table. We don’t want to be left without any bidder.”

They had to find a way to keep Kravis at the table while they negotiated the management group’s securities. Already they had given Kravis $45 million in expenses. What more did they have to offer?

Ira Harris came up with the idea: Give Kravis a merger agreement. Make him extend his deadline one week. Give him all his expenses—nearly $400 million—plus $1 a share, or another $230 million, in a so-called breakup fee, payable if Johnson’s group managed to top the Kravis bid during the one-week extension. At that point, Kravis would still have the right to bid once more.

“Yeah,” Block said. “That way we keep KKR on the reservation.”

Mike Mitchell, the Skadden litigator, wasn’t so sure. “Look, one-oh-eight is already on the tape. KKR will know it. They’ll think we’re just using them to get a higher bid out of Shearson.”

Mitchell’s worry aside, it seemed the only solution. For Kravis, it seemed like a no-lose situation. He got a merger agreement and expenses, and gave away nothing. But the best reason of all was apparent on every man’s wrist: They were running out of time.

A few minutes before two o’clock, Atkins led a small procession into the office where Kravis and Roberts waited. Atkins thought the two cousins looked as if they’d been carved from blocks of ice. Their jaws were tightly clenched, their expressions grim.

Mitchell explained the proposal. Would they take it?

“Absolutely not,” Kravis said. “What the fuck are you talking about? We’re here to buy this company. We want a deal. If we leave this office, we’re gone. You can kiss us good-bye.”

As always, Beattie was the voice of reason. “Where’s the other side?” he asked. “Are you proposing something like this to them?”

No answer. Beattie should have known better.

“We saw on the tape management has gone to one-oh-eight,” Beattie asked. “Is that right?”

Atkins knew his answer had better be precise. In no way could he let on that Cohen had charged ahead to $112.

“You shouldn’t assume anything,” he said.

Beattie indicated they would need a few minutes to think about the proposal, and Atkins & Co. departed.

Kravis thought Atkins was bluffing. Of course Cohen was still at $108. Why on earth would he have boosted again? Atkins was engaging in brinkmanship, Kravis decided, trying once more to squeeze the last penny out of him. If they matched the management bid of $108, Kravis felt they would win.

“We’re going to win in a tie,” Kravis said. “We’ve got better paper. And you know we’ve got better credibility than Johnson. You know the board is pissed at him after this
Time
thing. A tie will win.”

If they pressed hard now, Kravis was willing to bet, the board would be forced to capitulate. Their bid was the bird in hand, and the board couldn’t risk losing it.