It had been a long flight from Zurich, where Cohen had ended a two-week European business-and-pleasure trip, and he was tired. Cohen was a short man, his skull gripped by a tight cap of brown hair. He liked to joke about writers’ descriptions of him: always small, dark, and, a real favorite, intense. Institutional Investor once compared his looks to those of Al Pacino as Michael Corleone in the The Godfather, Part II. Cohen looked like a tough guy, and for years that’s pretty much what he was. As a longtime aide to one of Shearson’s founders, Sandy Weill, he had earned a reputation as a hatchet man. If he were an animal, Cohen would be a wolverine.
Turning forty and taking the reins at Shearson had mellowed him, or so it seemed. Friends talked of how much Cohen had “grown” in recent years, meaning he no longer referred to a tiny competitor like Dillon Read as a “peanut,” as he had in one published interview. Nor he did he publicly label critics “assholes,” as he once had. At the urging of Jim Robinson, his boss at American Express, Cohen had taken strides to become more statesmanlike, making the rounds in Washington, talking loftily of the globalization of the securities industry, and nurturing friendships with heavy hitters like European industrialist Carlo De Benedetti.
He had taken pains to hone his sharp edges. Gone from his office was the sculpted chain saw and the statue of two pin-striped legs cut off at the calves. In their place were family pictures and his children’s finger paintings. Years before it became faddish, Cohen was making an effort to present a kinder, gentler image.
The son of a clothing manufacturer, Cohen grew up on Long Island and attended public schools and Ohio State University. As a teenager he loved poring through the Fortunes and Dun’s Reviews to which his father subscribed. The elder Cohen bought his son T. Rowe Price mutual funds, and Cohen had been fascinated by the stock market ever since. He worked odd jobs through high school, and at Ohio State made a small fortune brokering kegs of Colt 45 beer to the fraternities.
If hustling came naturally to Cohen, school didn’t. As a finance major he was a solid C student. At Columbia Business School, Cohen haunted the midtown brokerage offices, watching the market and investing the proceeds from his beer-brokering days. He canceled plans to enter the family business when his father wouldn’t pay him what Cohen thought he was worth. Instead he headed to Wall Street.
Cohen had married young, at twenty-two, and by his late twenties had two children. As Weill’s assistant he was the one who stayed late, his office light burning deep into the night. He was an administrator, never a trader or an investment banker. In tough negotiations it was Cohen who played the bad cop. He was good with threats. He had no time to learn about wine, art, travel, and the other fine things Wall Street executives seemed bred for. For years he traveled the world’s great cities ignorant of all but their airports. Now, when in Rome or Madrid, Cohen tried to take half a day to take in the things he had missed. At forty he discovered the Louvre, the Musée d’Orsay, the National Museum in Taipei. He improved his tennis and golf games. Friends thought Cohen worked very hard to learn how to relax.
In the early 1980s Shearson, the successor to a long line of smaller houses, had been a scrappy, fast-growing wirehouse; that is, it made its money handling transactions for individual investors by wire. It had no investment banking arm to speak of. But just a year after taking over from Weill in 1983, Cohen stunned Wall Street by buying its oldest partnership, Lehman Brothers Kuhn Loeb, a topflight, blue-blooded investment bank that had all but disintegrated after a civil war among its quarreling partners.
It was a strange marriage. Lehman was sterling silver cigarette boxes, fresh flowers, Impressionist paintings, and dusty bottles of Petrus and Haut-Brion in the wine cellar. Shearson was empty pizza boxes, half-empty cartons of Chinese noodles, and coffee in a Styrofoam cup. “Shearson taking over Lehman,” an old Lehman partisan quipped, “is like McDonald’s taking over ‘21.’” Much like its chairman, the combined firm of Shearson Lehman came to be marked by a peculiar blend of elegance and streetwise chutzpah: brass knuckles in a velvet glove. Amid the cultured quiet of its nineteenth-floor executive offices, tastefully decorated with Audubon prints and Oriental rugs, visitors were greeted by a gentleman named Gus, who, while leafing through the New York Daily News, gave directions in a thick New York accent: “Go true dose dubble dohrs,” he would say.
Backed by the tremendous firepower of American Express, which had acquired majority control of Shearson in 1981, Cohen had looked for ways to put his firm’s capital to work for years. By the mid-1980s competitors such as Morgan Stanley and Merrill Lynch were thrusting into LBOs and, in efforts to compete with Drexel’s junk-bond capabilities, had begun lending their own money in interim takeover financings known as “bridge loans.” These loans were typically refinanced, or bridged, by the later sale of junk bonds. The trend was collectively known as merchant banking, a highfalutin term that basically meant investment banks were putting their money where their mouths had been for years.
Shearson’s entry into merchant banking had been both late and lackluster. Lehman’s active takeover business gave Cohen access for the first time to a wealth of investment opportunities. But for all its eagerness, Shearson backed into the LBO business. After the Lehman merger, a number of senior Lehman partners jumped to other firms, and Cohen was determined not to lose any more. In late 1984 he flew to England with a proposition for the chief of Lehman’s London office, Stephen W. Bershad. His idea was intriguing: Would Bershad come back to New York and devise a means to generate profits to line top executives’ pockets? “The idea was, let’s get these guys richer,” Bershad recalled. “Just make money however you can.”
Bershad came up with an answer: LBOs. But after a number of false starts, he managed only one buyout of any size, and that proved a nightmare. Six months after the $482 million buyout of Sheller-Globe, a Toledo-based auto parts maker, news accounts reported that Cohen and fourteen Shearson executives had been slapped with subpoenas as part of an insider-trading probe by the Securities and Exchange Commission. Cohen denied any wrongdoing, and an investigation never turned up any, but it was a mortifying experience. “The deal that’s dragging Shearson into the spotlight,” Business Week called it.
It was a tough introduction to LBOs. “Cohen had never really been around corporate finance,” recalled Bershad, who resigned after a tiff with Cohen during Sheller-Globe. “Peter knew what he read in the magazines, but he had about as much experience in investment banking as my father,” who had advised Bershad to stay away from Wall Street.
Bershad’s replacement, hired in June 1986, was a controversial figure named Daniel Good, who as merger chief at E. F. Hutton had built a thriving business backing corporate raiders. Good, so boundlessly optimistic he was sometimes called “Dan Quixote,” didn’t back four-star investors like Carl Icahn or Boone Pickens. His clients were little-known “wanna-be” raiders, third-tier greenmailers such as Asher Edelman, a Fifth Avenue arbitrager, and Herbert Haft, the pompadoured scourge of the retail industry.
Instead of LBOs, Cohen chose to funnel Shearson’s money into bridge loans for Good’s raiders. With a wink and a shrug they could call this merchant banking, but for the most part, Good’s clients were interested only in hounding Corporate America’s sick and wounded until they either bought back their shares or sought a merger elsewhere. Either way Shearson profited.
A number of Shearson executives were violently opposed to Good’s hiring, especially the M&A team, Hill and Waters, who considered Good a glorified shakedown artist. Good’s raider clients, Hill argued, would stain Shearson’s reputation and prevent it from establishing contacts with the blue-chip corporate giants it needed to build its traditional merger-advisory business. Hill campaigned tirelessly against Good, a crusade that didn’t stop even when he joined the firm; he and Waters took to keeping a list of Good’s mistakes. “Hill,” said a colleague, “was out to cut off Dan’s balls from the beginning.”
But after Good’s first deal—Paul Bilzerian�
�s 1986 raid on Hammermill Paper—produced a fat $6 million fee, Cohen’s doubts vanished. It was the easiest money Shearson had ever made. “Jesus,” enthused George Sheinberg, a Shearson vice chairman, “this is great!” For fifteen months Good’s clients kept fees pouring into Cohen’s coffers, as Shearson backed raids on several companies, including Burlington Industries and Telex.
Over time, though, Cohen began to lose confidence in Good. The sale of junk bonds is normally among the most profitable aspects of merchant banking. But because Good’s raiders rarely bought anything, Shearson’s junk-bond department sat idle, atrophying. When Asher Edelman finally managed to snag a company—the steakhouse chain, Ponderosa—Shearson’s junk-bond offering was a disaster, and the firm took steep losses. Cohen steamed. Good took the blame.
The final run of Shearson’s raider express began on Black Monday, October 19, 1987. As the market crashed, scores of pending takeovers unraveled, and Cohen and Sheinberg panicked. For the first time they realized that the firm could actually lose the hundreds of millions of dollars it was lending. When a buoyant Dan Good appeared before the investment committee a week later seeking approval for a Bilzerian raid on Singer, the former sewing-machine maker, he received a rude shock. Instead of the $100 million down payment he had expected, Cohen demanded Bilzerian put up $250 million. “If he can’t come up with it, fuck him,” Sheinberg said. “I don’t give a shit. The rules of the game have changed.”
No one was more shocked than Cohen when Bilzerian came up with the money, dragging Shearson kicking and screaming into its last great corporate raid. When Singer quickly capitulated, Bilzerian was forced for the first time to raise the money to buy a company, not an easy task given Wall Street’s postcrash sobriety. It was a long, uphill fight, and before it ended Sheinberg and Good nearly came to blows. At one point, Good fled New York for a Caribbean vacation, and Sheinberg brought in his sworn enemy, Tom Hill, to bargain with Bilzerian. With what one imagines must have been unparalleled glee, Hill began to play hardball with Good’s best client. “When the deal started falling apart,” Hill would later boast, “I had to come in and break Bilzerian’s legs.”*
Eventually Bilzerian acquired Singer, but the deal was Good’s Waterloo. Although Singer generated well over $30 million in fees, he had lost all credibility within the firm. “Good already had two guns at his head,” Hill recalled. “And then Peter Solomon put one in his mouth.”
Solomon, formerly Good’s superior as cohead of investment banking, was a boisterous, bullying Lehman veteran who coveted Good’s domain as a way to exert control over the latest evolution in Shearson’s merchant-banking drive: an LBO fund. Cohen’s long-overdue decision to raise a fund was a reaction to competitors’ success with similar funds and to Black Monday. Investing other people’s money, any fool could see, was far safer than investing one’s own.
Cohen and Solomon, however, had wholly different visions of the fund, which was to raise more than $1 billion. At other firms, LBO funds are semiautonomous, but friends say the ambitious Solomon saw Shearson’s as a chance to establish a personal fiefdom and get rich at the same time. He sought to claim a sizable piece of the fund’s profits, something to which Cohen was staunchly opposed. Cohen regarded the fund as just another Shearson department, and couldn’t see why Solomon should receive “a special deal.” Both men were headstrong and temperamental, and by the spring of 1988 they were barely speaking. Bob Millard, Shearson’s suave head of arbitrage trading, became the reluctant conduit through which they communicated. It was hardly an auspicious start for Shearson’s drive into LBOs.*
With Solomon and Cohen at loggerheads, Tom Hill was riding to his greatest glory. Four days before Steve Waters’s resignation that March, Hill unveiled his flashiest takeover attempt yet, a $1.27 billion hostile tender offer by a British firm, Beazer PLC, for a sleepy Pittsburgh company named Koppers Co. But this particular deal had a twist: Shearson owned 45 percent of the acquisition vehicle, Beazer just less than half. Never before had a major investment bank taken a high-profile position in a hostile takeover vehicle. Shearson was stepping over an invisible line, and Hill was practically giddy at the prospects the innovative deal might have for his business and, presumably, his reputation. He was convinced the deal would be an easy victory—“a slam dunk,” in Wall Street parlance.
He couldn’t have been more wrong. Koppers’s defense became a cause célèbre in Pittsburgh. Shearson and American Express were publicly attacked by everyone from Pittsburgh’s mayor to the Pennsylvania State treasurer, who cut off all state business with both firms. Koppers employees posed for pictures cutting their American Express cards in half, and sent letters to other companies denouncing American Express’s support for the bid.
No one was angrier than Jim Robinson, who felt he hadn’t been adequately consulted about the move. “It created a lot of heat for Jim Robinson, and heat from Jim Robinson shoots through from the fifty-first floor to the nineteenth floor pretty fast,” said a Cohen confidante. “It was a painful experience for Peter.”
Although its client ultimately won the battle, the Koppers deal had a profound effect on Shearson’s merchant-banking effort. Suddenly hostile deals, the backbone of its recent successes, were badly out of favor. That summer Cohen turned down the chance to back a pair of hostile takeover attempts, the Rales brothers’ raid on St. Louis-based Interco and underwear magnate Bill Farley’s run at a Georgia textile concern, West-Point Pepperell.
At the same time, Shearson’s earnings began to sag. The entire securities industry suffered in Black Monday’s wake, but few firms more so than Shearson, which had dramatically increased its overhead by acquiring a faltering brokerage, E. F. Hutton. Although there had been layoffs—and Cohen planned more—he badly needed a fresh stream of profits. Merchant banking had become Wall Street’s most active and profitable business; now more than ever, it was critical that Shearson plunge into it. And with hostile deals all but ruled out, that meant one thing: LBOs.
When Ross Johnson switched course and began contemplating LBO scenarios, it looked like the answer to Cohen’s prayers. An $18 billion buyout could wash away a lot of problems. The mere fact they had carried it off, the largest LBO in history, would instantly catapult Shearson into the top ranks of merchant banking firms. Afterward anyone considering a major LBO would have to consider working with Shearson. It would be a magnificent debut for the fund. The residual benefits for Hill’s merger business would be tremendous. The bonds Shearson would sell to finance the deal could, in one fell swoop, revive Cohen’s moribund junk-bond department. And all before they took a single fee.
Oh, the fees! The upfront fees alone—for advising and money lending and a “success fee,” maybe $200 million in all—would be a gigantic boost to Shearson’s flagging earnings. And it wouldn’t stop there. For years afterward the money would continue to stream in. There would be fees for refinancing, fees for advice, and fees for simply minding the shop. M&A alone could count on tens of millions in fees from the divestitures they planned as RJR Nabisco’s unwanted businesses were chopped up and sold to meet debt payments. And all before they even thought about returns on their investment: Hill was projecting an annual return of at least 40 percent. On a $500 million investment, that was $200 million a year—for five years or more!
It was enough to make Cohen’s head swim. Even though he had masterminded Shearson’s own acquisitions, Cohen had worked on only one LBO in his entire career, Sheller-Globe, which until RJR Nabisco remained Shearson’s largest. But Johnson’s friendship with Jim Robinson, combined with the deal’s potential impact on Shearson, compelled him to take an active interest in the current deliberations. Johnson was dangling before his eyes a dream deal, quite literally the deal of a lifetime. And as his plane touched down in Atlanta that evening, it was all within Peter Cohen’s grasp.
Saturday morning Cohen had breakfast at the Waverly with Tom Hill and Jack Nusbaum, Shearson’s lead attorney. One of Cohen’s closest advisers, Nusbaum, a com
mon-sensical counsel with the face of an angst-ridden bulldog, had learned of the brewing deal while on vacation in Morocco. He had flown to Atlanta two days early to hear a presentation on tobacco liability from Ed Horrigan and Harold Henderson and came away convinced the legal quandary wasn’t bad enough to prevent an LBO. Hill and a veteran Shearson banker named Jim Stern went down a day early, laying the groundwork for Saturday’s meeting and letting Johnson’s people know what to expect if they went forward. So far, so good, both men agreed. Johnson seemed to be on track.
After breakfast, the Shearson team shuttled across the parking lot to headquarters in twos and threes to avoid arousing suspicion. Upstairs, they settled into Johnson’s office overlooking a sea of Georgia pines. Johnson, accompanied by Horrigan, Sage, and Henderson, had brought along the newest member of his team, Steven Goldstone of the Wall Street firm of Davis, Polk & Wardwell.
At forty-two, Goldstone was a curious choice to advise the RJR Nabisco executives. Slight and balding, the New York-raised son of a lingerie merchant, he was a rarity among Wall Street lawyers. Most specialized in advising merger clients or litigating court cases, but Goldstone did both. As a tactician he was virtually unknown. For a decade he worked on the bread-and-butter underwriting and mid-size acquisitions on which the securities industry is built. He had met Johnson when Davis Polk helped install RJR Nabisco’s poison pill that summer.
As a litigator, Goldstone had gained notoriety for his role in what American Lawyer called “the most talked-about district court ruling” of 1987. Defending the Wall Street firm Donaldson Lufkin & Jenrette in a San Diego lawsuit, Goldstone inexplicably defied a court order to produce a key witness, prompting the judge to declare a default judgment against his client, a move that left Donaldson Lufkin vulnerable to a $100 million loss. Adding insult to injury, claims against three codefendants were thrown out four months later. Hiring Goldstone had been Henderson’s idea.
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