BARBARIANS
AT THE GATE
The Fall of RJR Nabisco
Bryan Burrough AND John Helyar
HarperBusiness Essentials
To my wife, Marla Dorfman Burrough,
and to my parents, John and Mary Burrough
of Temple, Texas —JBB
To my wife, Betsy Morris,
and to my parents, Richard and Margaret Helyar
of Brattleboro, Vermont —JSH
The officer of every corporation should feel in his heart—in his very soul—that he is responsible, not merely to make dividends for the stockholders of his company, but to enhance the general prosperity and the moral sentiment of the United States.
ADOLPHUS GREEN, founder, Nabisco
Some genius invented the Oreo. We’re just living off the inheritance.
F. ROSS JOHNSON, president, RJR Nabisco
This business, on a legitimate basis, is a fraud.
Not that it’s a fraud. You need money to be in this business. But not a lot. You need more money to open a shoe-shine shop than you do to buy a $2 billion company, let’s be honest about it. But to buy a shoe-shine store, if it costs $3,000, you need $3,000. If you don’t got it in cash, you need to bring it by Thursday.
But if it’s an LBO, not only do you not have to bring it, you don’t have to see it, you don’t know where you’re going to get it, nobody knows where they got it from. The whole situation comes from absolutely nothing.
But the more you need, of course, the less money you need. In other words, if there’s money involved, you don’t get involved in this business. This is a business for people who don’t have money, but who know somebody who has money, but who doesn’t put it up either…
JACKIE MASON, “What the Hell is an LBO?”
Contents
Epigraphs
Introduction
The Players
Prologue
1. Ross Johnson was being followed. A detective, he guessed, no…
2. If not for the RJ Reynolds Tobacco Company, the modest…
3. Ross Johnson’s rise to the helm of RJR Nabisco had…
4. On October 19, 1987, the stock market crashed. Like the…
5. Outside the Metropolitan Museum that blustery September evening, there was…
6. As his sleak Gulfstream jet descended through the clouds over…
7. Johnson rose early the next morning, the memory of Wednesday…
8. Friday afternoon Tom Hill sat mired in another interminable Pillsbury…
9. Theodore J. Forstmann slipped into his white terry cloth bathrobe…
10. Pandemonium reigned at Shearson Monday morning. Amid the Audubon prints,…
11. The peace talks off, Cohen’s troops prepared for war. With…
12. In one way, an LBO is a lot like buying…
13. The RJR Nabisco directors who gathered at Skadden Arps on…
14. On Monday morning, in an upstairs conference room at Skadden…
15. Ross Johnson and Henry Kravis weren’t the only ones interested…
16. An eerie stillness descended over Wall Street as the bidders…
17. Spirits were high in the Shearson camp.
18. “It is important,” Peter Atkins began, “that today be as…
Author's Note
Searchable Terms
About the Author
Praise for Barbarians at the Gate
HarperBusiness Essentials
Copyright
About the Publisher
Introduction
This book arose from the authors’ coverage in The Wall Street Journal of the fight to control RJR Nabisco in October and November 1988. Our goal in pursuing the story behind those public events has been to meet the standard of accuracy and general excellence that the Journal sets for journalists everywhere.
Ninety-five percent of the material in these pages was taken from more than 100 interviews conducted between January and October 1989 in New York, Atlanta, Washington, Winston-Salem, Connecticut, and Florida. In large part due to contacts we made while working at the Journal, we were able to interview at length every major figure involved in the story as well as scores of minor ones. No more than a handful of people mentioned in this book declined to grant interviews.
Among the first we spoke with were the long-shot suitors, Jim Maher of First Boston and Ted Forstmann of Forstmann Little & Co., who made himself available in his New York office as well as on his private jet. At Kohlberg Kravis, Henry Kravis, George Roberts, and Paul Raether were interviewed together and separately for more than twenty hours; much of the interviewing was done in RJR Nabisco’s former New York offices, where Kohlberg Kravis briefly relocated after a fire. Kravis himself sat for a half-dozen tape-recorded sessions, all but one in Johnson’s former anteroom.
The last to consent to be interviewed was Ross Johnson. He was understandably gun-shy; he had taken a beating in the press and wasn’t eager for further pummeling. Eventually he spent thirty-six hours in one-to-one talks with the authors. Several all-day sessions were held in his Atlanta office, where Johnson smoked cigarillos and wore sports jackets with no tie; a marathon evening session was held in his New York apartment, where Johnson donned a pair of gray RJR Nabisco sweatpants and shared pepperoni pizza and beer with the authors.
Due to the cooperation of the participants, we have managed to reconstruct dialogue extensively. By necessity this involves calling on sometimes selective memories. It is important to remember that, as Ken Auletta wrote in his definitive Greed and Glory on Wall Street, “no reporter can with 100 percent accuracy re-create events that occurred some time before. Memories play tricks on participants, the more so when the outcome has become clear. A reporter tries to guard against inaccuracies by checking with a variety of sources, but it is useful for a reader—and an author—to be humbled by this journalistic limitation.”
We couldn’t agree more. However, it should be noted that, in reconstructing critical meetings, we often were able to interview every person in the room at the time. In many cases, that amounted to as many as eight or nine people. Where their memories have differed significantly, it is noted in the text or a footnote. Where a thought or impression is conveyed in italics, it was supplied by the person in question.
A word about significance: Those looking in these pages for a definitive judgment on the impact of leveraged buyouts on the American economy will no doubt be disappointed. It is the authors’ contention that some companies are well suited for the rigors of an LBO, while others are not. As for RJR Nabisco, it is important to remember that an LBO is a creature of time. In most cases its success or failure can’t be determined for three, four, five, even seven years. The events in this book constitute the birth of an LBO; at this writing, the reborn RJR Nabisco is barely a year old. The baby looks healthy, but it’s too soon to predict its ultimate fate.
We would like to thank Norman Pearlstine, The Wall Street Journal’s managing editor, who gave his blessings for a leave to do this book. We are immensely grateful to our editor, Richard Kot of Harper & Row, for his keen eye and unflagging encouragement in helping us negotiate our first journey into publishing; his assistant, Scott Terranella; Lorraine Shanley, who brought our project to Harper & Row’s attention; our agent, Andrew Wylie, who isn’t nearly as nasty as people think; his colleague, Deborah Karl, for plenty of on-call hand-holding; and Steve Swartz of The Wall Street Journal, who provided invaluable advice on shaping the narrative. RJR Nabisco and numerous players in the RJR drama were helpful in supplying photos. Thanks are also due John Huey who, as The Wall Street Journal’s Atlanta bureau chief in 1988, gave John Helyar rein to delve into RJR. As editor of Southpoint magazine in 1989, he allowed
him to finish this book before reporting for duty.
The unsung heroes of a project like this are our wives. Betsy Morris served double duty. As a Wall Street Journal colleague, she was among the first to “discover” Ross Johnson and chronicle the emerging RJR Nabisco story. As John Helyar’s wife, she put up with long weeks’ absences and long days’ writing. Likewise, Marla Burrough was the manuscript’s first reader, copy editor, and a source of unlimited support and patience. Their advice and guidance are marked on every page of this book.
Bryan Burrough
John Helyar
October 1989
The Players
The Management Group
At RJR Nabisco
F. Ross Johnson, president and chief executive
Edward A. Horrigan, Jr., chairman, RJR Tobacco
Edward J. Robinson, chief financial officer
Harold Henderson, general counsel
James Welch, chairman, Nabisco Brands
John Martin, executive vice president
Andrew G. C. Sage II, consultant and board member
Frank A. Benevento II, consultant
Steven Goldstone, of counsel
George R. (“Gar”) Bason, Jr., of counsel
At American Express
James D. Robinson III, chairman and chief executive
At Shearson Lehman Hutton
Peter A. Cohen, chairman and chief executive
J. Tomilson Hill III, merger chief
James Stern, investment banker
Robert Millard, risk arbitrage trading
Jack Nusbaum, of counsel
At Salomon Brothers
John Gutfreund, chairman
Thomas Strauss, president
Michael Zimmerman, investment banker
Charles (“Chaz”) Phillips, investment banker
William Strong, investment banker
Peter Darrow, of counsel
At Robinson, Lake, Lerer & Montgomery, & public relations counsel
Linda Robinson
Kohlberg Kravis Roberts & Co.
At Kohlberg Kravis
Henry Kravis, general partner
George Roberts, general partner
Paul Raether, general partner
Theodore Ammon, associate
Clifton S. Robbins, associate
Scott Stuart, associate
Richard I. Beattie, of counsel
Charles (“Casey”) Cogut, of counsel
At Drexel Burnham Lambert
Jeffrey Beck, “The Mad Dog”
At Morgan Stanley & Co.
Eric Gleacher, merger chief
Steven Waters
At Wasserstein Perella & Co.
Bruce Wasserstein
The Third Parties
At Forstmann Little & Co.
Theodore J. Forstmann, senior partner
Brian D. Little, general partner
Nick Forstmann, general partner
Stephen Fraidin, of counsel
At Goldman Sachs & Co.,
Forstmann’s investment banker
Geoff Boisi, investment banking chief
The First Boston Group
James Maher, merger chief
Kim Fennebresque, investment banker
Brian Finn, investment banker
Jerry Seslowe, Resource Holdings
Jay Pritzker, investor
Thomas Pritzker, investor
Harold Handelsman, of counsel
Melvyn N. Klein, investor
The Special Committee
The Directors
Charles E. Hugel, chairman of Combustion Engineering
Martin S. Davis, CEO of Gulf + Western
Albert L. Butler, Jr., Winston-Salem businessman
William S. Anderson, former chairman, NCR Corp.
John Macomber, former chairman, Celanese
The Advisers
Peter A. Atkins, Skadden, Arps, Slate, Meagher & Flom
Michael Mitchell, Skadden, Arps, Slate, Meagher & Flom
Matthew Rosen, Skadden, Arps, Slate, Meagher & Flom
John Mullin, Dillon Read & Co.
Franklin W. (“Fritz”) Hobbs IV, Dillon Read & Co.
Felix Rohatyn, Lazard Freres & Co.
J. Ira Harris, Lazard Freres & Co.
Robert Lovejoy, Lazard Freres & Co.
Luis Rinaldini, Lazard Freres & Co.
Joshua Gotbaum, Lazard Freres & Co.
Others
Smith Bagley, RJ Reynolds heir
J. Paul Sticht, former RJ Reynolds chairman
J. Tylee Wilson, former RJ Reynolds chairman
H. John Greeniaus, president, Nabisco Brands
Prologue
For hours the two men sat on the back porch talking.
It was as peaceful an afternoon as the younger man, a lawyer just down from New York, had ever seen. On the horizon, the sun was a sinking red ball. Below, delicate snowy egrets poked through the reeds of the Intracoastal Waterway.
It seemed a shame, Steve Goldstone thought, as a warm Florida breeze tousled his thinning brown hair, to introduce black clouds into such a postcard landscape. He took no pleasure in the dire predictions he was about to spin. But it was his job to play devil’s advocate. No one else seemed willing to do it.
Someone has to tell him.
They sat for a few moments in silence. Goldstone took another sip from his gin and tonic and glanced at the older man sitting in the patio chair beside him. Sometimes he wished he knew Ross Johnson better. They had met barely three months before. Johnson seemed so open, so trusting, so—how to describe it?—yes, naive. Did he realize the forces he was on the verge of unleashing?
Johnson was clad casually in slacks and a light blue golf shirt adorned with RJR Nabisco’s corporate logo. His silvery hair was worn unstylishly long. A gold bracelet dangled from his left wrist. Goldstone knew Johnson was pondering a move that would change his life—maybe all their lives—forever.
Why are you doing this? Goldstone had asked. You’re chief executive officer of one of America’s great companies, you don’t need any more money. Yet you’re about to start a transaction in which you could lose it all. Don’t you realize all the pain and suffering you’ll cause?
So far his arguments hadn’t swayed his client. Goldstone knew he had to press harder. “You could lose everything,” he repeated. The planes. The Manhattan apartment. The Palm Beach compound. The villa in Castle Pines. The lawyer paused to let it sink in.
Don’t you understand? You could lose everything.
That doesn’t change the merits of the transaction, Johnson answered simply. It doesn’t change the basic situation. “I really have no choice,” he said.
Goldstone bore in once more. The minute you do this, he argued, you’ll lose control of your company. Once you start this process, you are no longer CEO. You turn over the reins to the board of directors. I know you think these directors are your friends, he said.
Johnson nodded at that. After all, hadn’t he chauffeured them around the world in his corporate jets? Hadn’t he given them lush consulting contracts?
As soon as you start this, Goldstone went on, they’re not your friends anymore. They can’t be. Don’t expect favors from them; they won’t come. They’ll be under the control of Wall Street advisers, people you don’t even know. They’ll be sued by thirty different people for millions of dollars. The pressure will be intense, the lawyer insisted, and they will resent you for it.
Goldstone stopped then, and looked out at the vivid streaks of blue and red searing the western sky. No matter how dark he painted the picture, Johnson seemed unmoved. He wasn’t sure how much of this was penetrating. In five nights, he knew, they would all find out.
Later, as the two men boarded the Gulfstream jet north to Atlanta, Goldstone sensed Johnson had made up his mind. He looked hard at the president of RJR Nabisco, America’s nineteenth largest industrial company, a man who held in his hands the fates of 140,000 employees, a man whose products—Oreos, Ritz cracker
s, Life Savers, Winston and Salem cigarettes—filled every pantry in the country.
He’s so willing to look on the bright side, Goldstone worried, so trusting. God, he believes everyone is his best friend.
And he’s going to do it, the lawyer thought. He’s really going to do it. The Atlanta air was cool and clear that October evening as the black Lincoln Town Cars began pulling up outside the Waverly Hotel. The Waverly anchored a green, suburban office park of the type common in Sun Belt cities: nearby was a multiscreen movie theater; an upscale shopping mall, The Galleria, with its array of fountains, and wide, inviting walkways; and a cluster of tall, gleaming office buildings.
Stepping from the limousines were the directors of RJR Nabisco, whose headquarters took up eleven floors in a glass tower several hundred yards away. Each had been spirited to Atlanta in a familiar RJR Nabisco jet. Through the hotel’s atrium lobby, up a glass elevator and into an upstairs meeting room they went; inside, they stood in circles, drinks in hand, waiting anxiously for the evening’s meeting to begin. The small talk was of their trips down, the World Series, and the presidential election, less than a month away.
It was the night before the company’s regular October board meeting, normally an occasion for the directors to dine informally with their chief executive, Ross Johnson, and get an update on corporate affairs delivered in Johnson’s unique, freewheeling style. But tonight the atmosphere was markedly different. Johnson had called every director and urged him or her to attend the dinner, which wasn’t usually mandatory. Only a few knew what loomed before them; the others could only guess.
Some directors were introduced to Steve Goldstone and walked off with puzzled looks. What was an outsider doing here? wondered Albert Butler, a balding North Carolina patrician. Juanita Kreps, the former secretary of commerce, pulled aside Charles Hugel, the chairman of Combustion Engineering, who served as RJR Nabisco’s titular chairman. “What’s Ross doing?” she asked. “What’s going to happen?” Hugel knew, but wouldn’t say. Instead he ducked out to tell the catering people to hurry along with dinner. They had a crowded agenda tonight.
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