Through the milling directors Johnson circulated, vodka-and-soda in hand, a broad smile and deep-throated laugh never far from his lips. A man who had survived his share of boardroom coups, Johnson prided himself on his ability to sway corporate directors. He was a master of disarming tense situations with the strategic joke, the well-thrown wisecrack, a veritable pied piper of the boardroom. He was always the same old breezy Ross, never taking himself or his business too seriously. Tonight, against the wishes of his new Wall Street partners, he was flying by the seat of his pants.
Ed Horrigan hoped Johnson would be at the top of his form. Horrigan, head of RJR Nabisco’s largest unit, Reynolds Tobacco, had enthusiastically signed on with the plan Johnson would announce tonight. He was a squat, combative Irishman who brought to business the same hell-for-leather approach that led him to single-handedly storm a machine-gun nest during the Korean War. Unlike Johnson, who never seemed to have a care in the world, Horrigan was tense. He had known and distrusted these directors for years before Johnson came on the scene; he had seen firsthand their little putsches. He knew Johnson thought he had won them over with fat consulting contracts and other favors. But Horrigan wasn’t so sure. They might yet fire Johnson on the spot for his grand scheme.
In the midst of Horrigan’s reverie, a man walked into the room whom he didn’t know. He was dressed in a suit straight out of Gentleman’s Quarterly, every salt-and-pepper hair in place, gazing about icily. Horrigan was reminded of the old westerns where a stranger strides through the saloon doors. A few minutes later, he was introduced to the man, a Wall Street lawyer named Peter Atkins. Atkins, Horrigan was told, was there to advise the board of its rights and duties.
“Hello, Mr. Horrigan,” Atkins said coolly as the two shook hands.
Oh God…, Horrigan thought.
Dinner was being cleared away from the long, T-shaped table when, at eight-thirty, Johnson rose to speak. He discussed some minor housekeeping matters, reminded members of the compensation committee that they would meet first thing tomorrow, and went over the agenda for the regular board session. “As you all know, we’ve got another item on the agenda tonight,” Johnson said. “I think we’ll turn to that now, and that’s the future direction of the company.”
Taking puffs from one of the tiny cigarillos he loved, Johnson reviewed his two-year tenure at RJR Nabisco’s helm: profits up 50 percent, sales up as well. The problem, as they all knew, was the stock, which had been sinking since a year before, when it had peaked in the low seventies. Nothing they had tried since the stock-market crash a year ago had gotten it back up. Even after the buy back that spring—here Johnson emitted a sharp, descending whistle, a bomb falling—the stock had sagged back down into the forties. Even after the tobacco industry escaped unscathed from its toughest legal challenge in years, it hadn’t budged. Everyone in the room knew the story well, although none had ever seemed as concerned about it as Johnson.
“It’s plain as the nose on your face that this company is wildly undervalued,” Johnson said. “We tried to put food and tobacco businesses together, and it hasn’t worked. Diversification is not working. We are sitting on food assets that are worth twenty-two, twenty-five times earnings and we trade at nine times earnings, because we’re still seen as a tobacco company. As a result, we have studied alternative ways of increasing shareholder values.” Here, he paused. “The only way to recognize these values, I believe, is through a leveraged buyout.”
There was a crashing silence.
Everyone in the room knew about leveraged buyouts, often called LBOs. In an LBO, a small group of senior executives, usually working with a Wall Street partner, proposes to buy its company from public shareholders, using massive amounts of borrowed money. Critics of this procedure called it stealing the company from its owners and fretted that the growing mountain of corporate debt was hindering America’s ability to compete abroad. Everyone knew LBOs meant deep cuts in research and every other imaginable budget, all sacrificed to pay off debt. Proponents insisted that companies forced to meet steep debt payments grew lean and mean. On one thing they all agreed: The executives who launched LBOs got filthy rich.
“The wolf is not at the door,” Johnson said. No corporate raider was forcing him to do this. “This is simply the option that I think is best for our shareholders. I believe it is a doable transaction, and it can be done at prices much higher than the present stock price. We’re not far enough along this road to make firm conclusions or make a proposal at this point, though.”
Johnson stopped a moment and looked at each of the directors: mostly current and retired chief executives, their median age was sixty-five. They had given him a free hand running RJR Nabisco, and hadn’t objected when he wrenched it from its century-old North Carolina home and transformed it into a monument to nouveau-riche excess. But they had struck down his predecessor for lesser transgressions than the one he was now committing.
“I want you to understand one thing,” Johnson continued. “You people will have to decide. If you think this isn’t the answer or there’s a better idea, there will be no hard feelings. I just won’t do it. There are other things I can do, and I’ll do them. We’ll sell food assets. We’ll buy back some more of our stock. I have no problem walking right back upstairs, going to work on plan B, and no hard feelings.”
Silence.
Vernon Jordan, the civil rights leader cum Washington lawyer, was the first to speak. “Look, Ross, if you go ahead with this thing, there’s a real likelihood this company is going to be put in play. Somebody might come along and buy this company for more than you can pay. You might not win. I mean, who knows what could happen?”
“That’s my point, Vernon,” Johnson said. “This company should be in play. It should be sold to the highest bidder. If somebody wants to offer eighty-five dollars [a share] or more than we can pay, then we’ve all done an even better job for our shareholders. The management of this company is not dedicated to retaining its jobs at the expense of the shareholders.”
“What stage are you at?” asked John Macomber, the former chairman of Celanese. Macomber had been a thorn in Johnson’s side for years.
“In order to preserve the confidentiality here,” Johnson said, “we really haven’t gone very far with the banks. We haven’t got a nickel. But if the board agrees with us on this proposal, we will move forward quickly.”
After a few moments, Juanita Kreps spoke. “You know, it seems a shame [that] we’re forced to take steps like these, breaking up companies like this,” she said. “On other boards I’ve been on there have been the same complaints about the stock languishing. The scenario elsewhere has been different. Managements look more to the future and beyond the immediate discounting of the stock. Why is it different here? Is it an issue of tobacco, with the decline in sales and the problems with the industry?”
“Juanita, I hear a lot of CEOs complaining about their undervalued stock, but I don’t see them doing anything about it,” Johnson said. “This is something you can do about it. The other guys are afraid to do anything about it.”
It all sounded so sensible, so reasonable: No one could spin an explanation like Ross Johnson. But the directors might have asked a few more questions had they known of Johnson’s plans for the company, of the favors he had doled out behind their backs, or of the unprecedented cut of the LBO’s expected profits he had wrung from his hungry Wall Street partners at Shearson Lehman Hutton. But those and other matters would only come to light at the most inopportune moments for them all.
Charlie Hugel scanned the room: No more questions seemed forthcoming. He suggested Johnson and Goldstone leave so the board could caucus. “Who else here would be involved in the management group?” he asked.
Johnson ticked them off: Horrigan; Jim Welch, the Nabisco chairman; Harold Henderson, the general counsel; and an outside director and consultant, Andrew G. C. Sage II. Hugel suggested they leave, too.
When Johnson left, the directors took a quick break.
Albert Butler came over to Hugel. “Did you see that?” he asked. “Andy Sage is part of it.”
Hugel nodded.
“Ross wants us to double his consulting contract to five hundred thousand dollars,” Butler said. “It’s on the agenda for the comp committee meeting, but I don’t think we can do that now.”
No, said Hugel, they couldn’t. He was uneasy. Johnson was his friend, but several events in the past three days had given him pause to reconsider the man he thought he knew so well. There was something here that just didn’t feel right.
Other directors headed for the men’s room in silence. Each knew the enormity of the decision they confronted. As each of the titans of industry sidled up to the urinals, a voice echoed over a stall: “We’ve got to find out if this is frivolous.” Men nodded as they washed their hands and returned to the boardroom.
Inside, Hugel turned the floor over to Atkins, who walked the directors through their obligations under the law of Delaware, where RJR Nabisco and so many large public corporations were chartered. When he finished, Hugel told the others how Johnson had phoned him in South Korea the week before and mentioned the LBO idea. Hugel didn’t voice his private concerns or the curious offer Johnson had made him just two days earlier.
As the directors caucused, Johnson paced an upstairs suite, passing the time with Horrigan and the others, including a Shearson team. He hadn’t been waiting long before a message came that the board wanted to see him. Taking Goldstone with him, Johnson nervously returned to the boardroom.
“Ross,” Hugel said, “it’s the strong sense of the board that we’re prepared to let you go forward.” The board’s debate had, in fact, been anticlimactic: If Johnson had gone this far, they had no choice but to let him continue. If he was planning a serious bid for the company, under Delaware law it was their fiduciary duty to allow shareholders to entertain it. “But,” Hugel continued, “we want to make sure that the number you were thinking about is not frivolous.”
“Well, you’ll have to define frivolous for me,” Johnson said.
“The number has to be north of the highest price the company’s stock has ever traded.”
“Fine, I can do that.”
“In that event, the board is prepared to have you proceed. If you wish to proceed, the board will have to issue a press release tomorrow morning.”
“Peter, do you have a draft?” Goldstone asked Atkins. “Would you read it?”
Atkins did, and agreed to Goldstone’s request that he and Johnson be allowed to take it upstairs to review it.
The press release was a worrisome development, although one Goldstone had anticipated on learning Atkins had been brought along by Hugel. Lifting the veil of secrecy was ordinarily enough to kill a developing buyout in its cradle: Once disclosed, corporate raiders or other unwanted suitors were free to make a run at the company before management had a chance to prepare its own bid. Still, Johnson and his partners hadn’t panicked when the prospect of an announcement was raised. RJR Nabisco was so big that no one in the world seemed likely to top their bid—and certainly not without a friendly management team to lead the way.
Upstairs, Goldstone and Johnson searched for the team from Shearson Lehman. Tom Hill, the cool chief strategist, and Jack Nusbaum, his lawyer, had vanished from the suite. Goldstone raced downstairs and spotted the pair in the lobby, where they had returned from a short trip to RJR headquarters with their aides. “Jack,” Goldstone cried, “where the fuck have you been?”
A press release was being prepared, Goldstone explained, and Johnson badly wanted to insert the price they were considering. Without a number, Johnson feared the stock would rise out of control, perhaps forcing his group to bid more than it wanted to. They returned to the suite, where Hill repeated his earlier suggestion: $72 a share in cash and $3 a share in preferred stock. Johnson shook his head.
“None of that,” he said. “Fellows, it’s got to be seventy-five cash. You can’t put paper on the table. It looks low class.”
Johnson didn’t need to do the arithmetic to get nervous. Seventeen billion dollars. The largest corporate takeover in history, three times greater than the largest LBO ever attempted. They hadn’t seriously considered bidding much higher; with no competition in sight, there seemed no need.
Johnson, as usual, won the argument. As the clock was about to strike’ midnight, Goldstone was sent down to the boardroom with the revised press release.
Suddenly, after all the weeks of planning, after all the behind-the-scenes negotiations, it was all real. They were actually going to do it. “Holy shit,” Johnson told the group milling about the suite. “Now we’ve got to find seventeen billion dollars.”
Again Johnson thought of the press release. They had so hoped this could remain their little secret with the board. A public announcement would mean publicity, lots of it, and the specter of competing bids—and all the very next morning. Johnson thought he had braced himself for this, but now the full impact hit him. “Things,” he warned an aide in a postmidnight phone call, “are moving faster than we thought.”
Chapter
1
Ross’s philosophy is, “We’re going to have a party, a very sophisticated, complicated party.”
—O. C. ADAMS, consulting psychologist to RJR Nabisco*
Ross Johnson was being followed. A detective, he guessed, no doubt hired by that old skinflint Henry Weigl. Every day, through the streets of Manhattan, no matter where Johnson went, his shadow stayed with him. Finally he had had enough. Johnson had friends, lots of them, and one in particular who must have had contacts in the goon business. He had this annoying problem, Johnson explained to his friend. He’d like to get rid of a tail. No problem, said the friend. Sure enough, within days the detective vanished. Whatever the fellow was doing now, Johnson’s friend assured him, he was probably walking a little funny.
It was the spring of 1976, and at a second-tier food company named Standard Brands, things were getting ugly. Weigl, its crusty old chairman, was out to purge his number two, Johnson, the shaggy-haired young Canadian who pranced about Manhattan with glamorous friends such as Frank Gifford and “Dandy” Don Meredith. Weigl sicced a team of auditors on Johnson’s notoriously bloated expense accounts and collected tales of his former protégé’s extramarital affairs.
Johnson’s hard-drinking band of young renegades began plotting a counterattack, lobbying directors and documenting all the underlying rot in the company’s businesses. Rumors of an imminent coup began sweeping the company’s Madison Avenue headquarters.
Then tensions exploded into the open: A shouting match erupted between Johnson and Weigl, a popular executive dropped dead, a board of directors was rent asunder. Everything came to a head at a mid-May board meeting. Weigl went in first, ready to bare his case against Johnson. Johnson followed, his own trap ready to spring.
As the hours wore on, Johnson’s aides, “the Merry Men,” wandered through Central Park, waiting for the victor to emerge. Things were bound to get bloody in there. But when it came to corporate politics, no one was ready to count out Ross Johnson. He seemed to have a knack for survival.
Until the fall of 1988 Ross Johnson’s life was a series of corporate adventures, in which he would not only gain power for himself but wage war on an old business order.
Under that old order, big business was a slow and steady entity. The Fortune 500 was managed by “company men”: junior executives who worked their way up the ladder and gave one company their all and senior executives who were corporate stewards, preserving and cautiously enhancing the company.
Johnson was to become the consummate “noncompany man.” He shredded traditions, jettisoned divisions, and roiled management. He was one of a whole breed of noncompany men who came to maturity in the 1970s and 1980s: a deal-driven, yield-driven nomadic lot. They said their mission was to serve company investors, not company tradition. They also tended to handsomely serve themselves.
But of all the noncompany men, Johnson
cut the highest profile. He did the biggest deals, had the biggest mouth, and enjoyed the biggest perks. He would come to be the very symbol of the business world’s “Roaring Eighties.” And he would climax the decade by launching the deal of the century—scattering one of America’s largest, most venerable companies to the winds.
The man who would come to represent the new age of business was born in 1931 at the depth of an old one. Frederick Ross Johnson was raised in Depression-era Winnipeg, the only child of a lower-middle-class home. He was always “Ross,” never Fred—Fred was his father’s name. The senior Johnson was a hardware salesman by vocation, a woodworker by avocation, and a man of few words. Johnson’s petite mother, Caroline, was the pepper pot of the household—a bookkeeper at a time when few married women worked, a crack bridge player in her free time. Young Ross owed an early knack for numbers and the gift of gab to her; an early entrepreneurial bent he owed to the times. The Johnsons weren’t poverty-stricken, but neither did they own their own bungalow until Johnson was eight years old.
Around that period young Ross began working at a variety of after-school jobs. He used the money he earned for serious things, like buying clothes. He started with standard kid tasks, such as delivering magazines around the neighborhood and selling candy at the circus, then branched into more innovative ventures, such as renting out comic books from his collection. When he grew older, he sold certificates for baby pictures door-to-door. It was an enterprise he would turn to whenever he needed a buck during his years in college.
Johnson wasn’t the best student in his high school, ceding that honor to his friend Neil Wood, who would go on to head the huge Cadillac Fairview real estate firm. Johnson was the kind of teenager who could rank in the upper quarter of his class, as he did, without appearing to try very hard, which he didn’t. Nor was he the best athlete in school, although he was a rangy six feet three inches by the time he graduated. He was far better at memorizing baseball statistics in The Sporting News than hitting a fastball.
Barbarians at the Gate Page 2
