Barbarians at the Gate

by Bryan Burrough

  “The lawyers felt it was far enough along,” Cohen said, “and the board concluded that they had to put out an announcement.”

  It wasn’t an auspicious beginning, but neither man was too worried. They weren’t expecting any trouble.

  October 20 dawned clear and cool on Wall Street. Two blocks north, commuters hustled from the bowels of the World Trade Center, past the corner Burger King and down Broadway to the brokerage offices beyond. Talk on the street that morning was of the presidential elections just two weeks away and the World Series, which the Los Angeles Dodgers were poised to win.

  A year after Black Monday, Wall Street was still nursing its postcrash hangover. The disastrous downturn so widely predicted hadn’t materialized, but neither had a recovery. Instead, Wall Street was mired in a funk. A malaise pervaded the executive suites, and brokerage earnings were down. Investors who had fled the market in droves showed no sign of coming back; securities transactions of all types were down 22 percent.

  Since the crash, some 15,000 Wall Streeters had lost their jobs. Shearson wasn’t alone in contemplating layoffs; rumors swept the Street daily of impending purges at other firms. Those who weren’t scared were bored. On trading floors across lower Manhattan traders swapped bad jokes more often than shares of stock. The only thing flying high was paper airplanes.

  As it had been all year, the lone source of optimism remained the merger business, especially merchant banking. Peter Cohen was not alone: Merchant banking was on the minds of every Wall Street chief executive. Merrill Lynch bragged that its LBO portfolio generated returns of 100 percent a year. “Not since the heyday of J. P. Morgan,” Business Week noted in a June cover story, “has Wall Street been buying so many corporations.”

  The Street’s lingering slump lent a new edge of desperation to the merchant-banking game: Windfall profits from LBOs and bridge loans were the fastest way to shore up a brokerage’s sagging profits. A single deal could generate upfront fees of $50 million or more, enough to save a firm’s quarter. In June, Morgan Stanley posted a $120 million pretax gain from the sale of its 10 percent stake in a Texas chemical company; the entire firm posted record profits of $230 million in the entire year of 1987. With those kinds of numbers being thrown around, even the laggards in merchant banking—firms such as Goldman Sachs, trading colossus Salomon Brothers, and little Dillon Read—began scanning the Street for investment opportunities.

  At the vanguard of merchant banking was the merger crowd. Most every investment bank has a merger department, and its inhabitants are a close and incestuous lot. Their predecessors in investment banking had forged decades-long friendships with their corporate clients, attending to private placements and underwritings in a tidy, gentlemanly fashion. In the late seventies, with the proliferation of hostile takeovers, there rose a new breed of investment banker. They were mercenaries, warriors clad in $2,000 Alan Flusser suits, form-fitted Turnbull & Asser shirts, Bulgari watches, and Hermes silk ties from the airport shops at Paris and Brussels. To men like Shearson’s Tom Hill and to their cousins the takeover lawyers almost any takeover is a good takeover, for every takeover produces a fee. To say Wall Street’s merger advisers have shifting allegiances is a misstatement. They have no allegiances, period—except to their firms and themselves.

  “All these guys,” says the chairman of one of Wall Street’s largest firms, “have three balls. Loyalties one, two, and three are to themselves. Loyalties four and five are to their buddies in the deal business. Loyalty six or so is to their client.”

  In their world, takeovers are “deals,” and the top producers are “players.” The top players juggle work on several deals at once. At any given time, on any number of deals, they may be simultaneously teamed with and opposed by their closest friends. While the merger makers are often compared to mercenaries, cynics might find a more apt comparison in professional wrestling: a squad of high-priced grapplers traveling from venue to venue, leaving onlookers wondering whether all that spitting and fighting was actually for real.

  At the merger crowd’s core is an elite clique of a dozen or so top deal makers who have been fast friends and competitors for more than a decade. When they call themselves anything, it’s simply The Group. They grew up together, their careers intertwined in hundreds of now-forgotten takeover contests. Most graduated from college in the late 1960s, became friends while pioneering merger work in the mid-1970s and threw surprise fortieth birthday parties for one another in the late 1980s, as players in the white-hot crucible of the decade’s largest deals.

  In addition to Hill, The Group’s members are Bruce Wasserstein and Joseph Perella, the first superstars of the merger era, who left their longtime firm, First Boston, in a huff to form their own merger boutique, Wasserstein Perella & Co., in early 1988; Eric Gleacher, the bantam merger chief at Morgan Stanley; Donald Drapkin, a former attorney who became vice chairman of takeover-minded Revlon Group; Michael Goldberg* and Morris Kramer, a pair of attorneys at Skadden Arps; Jim Maher, a Wasserstein intimate who replaced him as First Boston’s new merger chief; Stephen Schwarzman, the fast-talking president of The Blackstone Group, another leading merger boutique; and Allen Finkelson, an attorney at Cravath Swaine & Moore. “These guys are all guys I would stake my life, my entire career, on,” says Drapkin. “We all have a habit of finishing each other’s sentences.”

  Although its members are scattered among several Wall Street firms, The Group sprang almost entirely from a pair of investment banks, First Boston and Lehman Brothers, and a pair of major law firms, Skadden Arps and Cravath Swaine & Moore. Most were run-of-the-mill underwriting specialists or mortgage attorneys who longed for something exciting; they thrived on the adrenaline they found in corporate combat.

  In one regard, American corporate merger activity can be viewed as a running chess game between these old friends. Wasserstein, in many ways the center of the group, is the acknowledged grandmaster; the brother of playwright Wendy Wasserstein, he introduced innovations in merger strategy and tactics that could fill volumes. For years Gleacher, who first rose to prominence in the Bendix-Martin Marietta battle, was his chief rival. By 1989 he had ceded that position to Hill, who had left First Boston a decade earlier rather than face a power struggle with Wasserstein.

  “In almost any deal,” said Hill, “one of these guys is going to be there. Our lives are constantly crisscrossing. We’re able to cut through a lot of the dancing that takes place.” Says Mike Goldberg: “You see Tom Hill and Joe and Bruce and First Boston on every deal. You know each of these people and what they might do in a given situation. And believe me, you don’t want to be the new man at a poker game that’s been running for years.” Adds Allen Finkelson, who made his career on legal work doled out by Wasserstein: “People ask me, what do I account for my success? It’s a certain amount of coming of age, turning forty. The other thing has to be with my whole group coming of age. All of us are turning forty. And we help each other.”

  The Group’s patriarch is Joseph Flom, a takeover lawyer of legendary proportions on Wall Street. Most of The Group learned the merger business at Flom’s elbow; to several he remains a father figure. Semiretired, gnomelike, Flom is adviser to practically all The Group’s members on matters professional and private, the moderator of their disputes, and, from time to time, their toughest competitor. “The fact that it’s a small fraternity is good for discipline,” Flom says. “I see this in small-town legal bars. You fight harder because, it’s like, who’s going to win the chess game? It keeps you honest because everybody knows each other. Everybody knows what everybody’s doing. There are no secrets.”

  That kind of inbred thinking helped spawn the insider-trading scandals that swept Wall Street in the late eighties. To The Group, the investigations represented a jarring wave of McCarthyism. Almost without exception those convicted were their friends and colleagues. The first to be named in the scandal, a high-flying Drexel Burnham investment banker named Dennis Levine, had been hired and supervised by G
leacher after leaving Smith Barney under the disapproving gaze of its merger chief at the time, Tom Hill. By far the toughest blow was the indictment of investment banker Martin Siegel, a close friend of Wasserstein’s and several other group members. Unlike Levine, a fast-talking upstart, Siegel was respected, Harvard trained, one of them. “Everybody who’s not in The Group,” jokes Gleacher, “is in jail.”

  Does The Group’s friendship come at the expense of their clients? Only a grand jury would know for sure. Even when on opposing sides in a billion-dollar takeover contest, its members are constantly talking to one another; these “back-channel” communications have become a staple of their deals. For all the camaraderie, though, the evidence indicates they are competitors first and friends second. Men like Hill, Wasserstein, and Gleacher, the first to proclaim themselves great friends, are also the first to spread gossip about the others’ failures. Their multimillion-dollar bonuses often depend on knowing and beating each other.

  There are, of course, other important deal makers in Wall Street circles outside The Group: Felix Rohatyn, the conservative dean of establishment bankers at Lazard Freres; Ira Harris, Chicago’s Lord of LaSalle Street; Jeff Beck, the Mad Dog of Drexel; Geoff Boisi, the investment banking chief at Goldman Sachs. Like several members of The Group, they would each be drawn into the vortex of RJR Nabisco.

  It had been a hectic week for Kravis.

  Philip Morris’s sudden attack on Kraft presented him with a perfect opportunity to ride to the Chicago company’s rescue. He had been bird hunting in Spain but had managed to get a call through to Kraft’s chairman, John Richman. Kravis offered his services should Kraft seek a friendly merger, and Richman had seemed interested without appearing threatened. Even now Kohlberg Kravis associates were running the numbers on a Kraft LBO. It could be the largest in history, topping $13 billion. Kravis was also eyeing Pillsbury, which had begun talking to possible merger partners to fend off Grand Met. That afternoon Kravis was scheduled to take in a presentation on Pillsbury’s financial situation at Skadden Arps.

  But as busy as Kravis’s week had been, it was about to get far busier. He was on the phone in his corner office, which overlooked Grand Army Plaza forty-two floors below, when his secretary put a note in front of him.

  “RJR going private at 75 a share.”

  Kravis nearly dropped the receiver. For a second he was speechless. It couldn’t be true.

  Paul Raether, Kravis’s right-hand man, wandered in moments later. “Have you heard?” Kravis asked quickly.

  “Heard what?”

  “Ross Johnson is going private at seventy-five.”

  Raether paused for a moment as the enormity of the news sank in. “Holy Christ,” he said. A second thought raced through Raether’s mind: That’s too cheap.

  Kravis began to grow angry. “I can’t believe this,” he fumed. “We gave them the idea! He wouldn’t even meet with us!”

  High above Radio City Music Hall, Eric Gleacher’s corner office was lined floor-to-ceiling with green-framed photos of his family. Their pastel clothes and rough-hewn good looks made his walls appear to be one big advertisement for Ralph Lauren’s Polo clothing line. A humidifier percolated behind a green plant in one corner.

  Gleacher was leaning back in his desk chair when he saw the headline cross his computer screen. In a flash he swung forward and stabbed at his telephone console. “I don’t give a shit what you’re doing,” he barked. “Get down here right now.”

  Steve Waters was in Gleacher’s office within seconds. Both men were stunned as they stared at the screen.

  RJR? A deal? Without Morgan Stanley?

  Look at the price, Gleacher said. At $75, they quickly agreed, Johnson was stealing the company.

  That morning Gleacher and Waters acted as if by reflex. Both men knew the drill, the questions that had to be answered: Was this a done deal? Who was advising Johnson? Who was advising the special committee? And, most important, how could Morgan Stanley get a piece of the action?

  Before they could move, however, Waters had to dart down the hall to answer his ringing phone.

  “What the hell is going on?” Paul Raether demanded.

  “I don’t know, Paul. As soon as we find out, I’ll get back to you.”

  The moment Waters replaced the receiver, the phone rang again. This time it was Kravis himself.

  “What the hell is going on?”

  “Henry, you’ll know as soon as we do.”

  “Who is it? Who’s doing the deal?”

  “I don’t know. We’re trying to find out. It could be Shearson.”

  Gleacher and Waters hit the phones. After several minutes, during which news of Shearson’s involvement crossed his screen, Gleacher reeled in the first fish: Andy Sage. Gleacher knew this was no time to come on strong. “Hey, Andy,” he joshed, “what are you gonna to do with all that money?”

  Sage mumbled something noncommittal.

  “I gotta tell you,” Gleacher said. “I was a little surprised we didn’t get a chance to represent the special committee. Did Shearson do something to prevent us from getting hired?”

  No, Sage said. Andy Sage was a pro, and Gleacher got little out of him. Later Gleacher reached Jim Welch. Welch vaguely assured him that Morgan would somehow get its foot in the door. Down the hall, Waters managed to collar Dean Posvar, Johnson’s planning chief. Posvar told Waters the deal was all but finished. “We’re just fleshing this out,” he said. “We’re rushing it as fast as we can, and it ought to be a done deal by the middle of next week.”

  A window of opportunity existed, Waters concluded, but not a big one. Anyone who wanted this company would have to move fast.

  Jeff Beck was at Skadden Arps when he heard the news.

  For weeks Beck and a small army of strategists from four separate investment banks had been devising defenses for Pillsbury to fend off Grand Met. That day he and other Pillsbury bankers were holding talks with a number of potential merger partners.

  Beck was floored by Johnson’s announcement.

  An LBO? Without Drexel? Without me? It made no sense.

  He rode downtown in a car with John Herrmann, a Shearson banker he knew from their days at Lehman. Herrmann was beaming, going on about what a coup the deal was for Shearson.

  “This is going to be the greatest deal ever,” he said as Beck stepped out of the car at his lower Wall Street office.

  The Drexel banker could barely contain his anger. “I don’t think so, John. I don’t think so.”

  Upstairs, Beck took a call from Kravis. “What the hell is going on?” Kravis said.

  “I don’t know, Henry. You know we wanted to meet with them. Let me call and get the lay of the land and I’ll get back to you.”

  Beck quickly called Johnson in Atlanta but was stopped by Johnson’s secretary, Betty Martin. “They’re all in a board meeting,” she said.

  Beck was fuming. Lock and load! He simply had to talk to Johnson. “Betty, if you don’t get these guys out of that boardroom, you know, I’m just taking names at this point. This goes beyond being urgent.”

  Minutes later, Johnson came to the phone.

  “Hey man, what’s going on?” Beck asked, the exasperation clear in his voice.

  “Well,” Johnson said. “We’re going to buy the company.”

  “You know, it’s nice to read about it on the tape, Ross. I don’t understand you.” Beck wasn’t even trying to hide his irritation.

  It was Johnson’s turn to show his irritation. “We’ve already got our primary partners on this, Jeff. And that’s that.”

  The Mad Dog had been muzzled.

  One of the first calls Kravis took that morning was from Dick Beattie. In the merger world, Beattie was known as Kravis’s consigliere. For fifteen years he had been one of his most trusted outside advisers. Having held positions in the Carter administration, Beattie was also a fixture in New York Democratic circles, a friend of Mayor Ed Koch and, more than a few of the city’s movers and shakers be
lieved, a possible future candidate for mayor himself. A former Marine fighter pilot, at forty-nine Beattie had the sandy hair, baby-blue eyes, and soft voice of a kindly uncle, yet the steely gaze of an ex-Marine.

  Kravis’s interest in RJR Nabisco was no secret to Beattie. For more than a year his firm had been compiling analyses of tobacco litigation to fathom its impact on the company.

  “Did you see this?” Beattie asked.

  “I sure as hell did,” Kravis said.

  “I don’t believe it. We’ve got to find out what the hell is going on.”

  “Dick, I don’t understand it. We talked to Ross. Why didn’t he come to us? This doesn’t make any sense. I gave him the idea.”

  “I know,” Beattie said. “It’s crazy.”

  “Why in the world is he doing this with Shearson, of all people? They’ve never done a deal.”

  Dick Beattie knew that all too well. After Kohlberg Kravis, his second largest client was Shearson Lehman Hutton.

  Bob Millard, Shearson’s arbitrage chief, wasn’t over his initial shock at the announcement when he took a phone call from Peter Cohen. Cohen had spent the morning in his office, pacing back and forth, watching the headlines on his Quotron. RJR Nabisco stock was skyrocketing; it would finish the day at $77.25, up more than twenty-one points.

  “God, Peter,” Millard said, “this is really terrific.”

  But the trader, who made his living following takeovers, was curious why Cohen had chosen this approach. Why hadn’t Shearson tried to sew up the deal before its public disclosure, as Morgan Stanley and others so artfully did? “Why are you leaving yourself so vulnerable?” Millard asked.

  “Well,” Cohen replied, “it had to be done this way.”

  “What makes you so sure no one else is going to top it?”

  No other company has the muscle, Cohen said.

  “What about other financial buyers? What about KKR?”

  “KKR won’t do it,” Cohen said. “Henry won’t give Ross Johnson the deal we gave him.”