Next was Ted Ammon, a former lawyer, now a senior Kohlberg Kravis associate known for devising creative solutions to thorny financial problems. Wasserstein sat beside Ammon. Despite his genius, and the endless variety of ideas he brought to Kravis, Wasserstein had never been able to crack the inner circle at Kohlberg Kravis: Kravis and his aides found his meandering speeches tiresome. Some of them, especially George Roberts, were never quite sure where Wasserstein’s loyalties lay.
Beside Wasserstein sat Eric Gleacher, Morgan Stanley’s bantam merger chief. Two of the most prominent names in the takeover business, Gleacher and Wasserstein would prove to be an endless source of comic relief for Kravis and his aides. At meetings the pair took turns delivering the first speech, never forgetting who had gone first the last time. Inevitably they offered the same advice, sometimes so similarly that Kravis would roll his eyes. Beattie assumed the two conferred before each strategy session as, in fact, they had this day. George Roberts took to calling Wasserstein and Gleacher the “Siskel and Ebert of investment banking.”
On the table’s far side sat Steve Waters and Mack Rossoff, a baby-faced Wasserstein aide who had become a favorite of Kravis’s with his cracker-jack work during the recent Macmillan auction. Off to one side stood the Drexel contingent: Jeff Beck and Leon Black, the savvy financing expert who brought life to many of Mike Milken’s ideas. Paul Raether completed the circle, along with a pair of his hardworking junior associates, Scott Stuart and Cliff Robbins.
After bringing the meeting to order, Kravis briefed the group on the current situation. “We understand Shearson is trying to get commitments from major banks to lock them up,” Kravis concluded. “If that’s the case, we’ve got to do something right away to prevent that from happening.”
A lengthy debate ensued on the values inside RJR Nabisco that would come spilling forth in a successful leveraged buyout. There were no real differences of opinion. Everyone knew there was money in Ross Johnson’s cookie jar. The question was how best to get at it. Cliff Robbins had laid out their options in a memo for the “Project Peach” team that day.
There were three. First was a so-called bear hug letter to the board. In it, Kravis would signal his interest to pay more than $75 a share but stop short of an outright offer. Under the “Advantages” column, Robbins noted, a bear hug would probably get them access to confidential RJR Nabisco financial information, a must if they weren’t bidding with a management team. It would also stall the management group’s drive to quickly sew up the deal. Under “Disadvantages,” Robbins worried that a threatening letter would only lead to an extended auction. Bidding, the memo noted, “would go to the edge of the envelope.” They might win, he concluded, but it could cost them billions in the process.
The second option was a meeting with Shearson and Johnson, perhaps to discuss a joint bid. “Shows weakness?” the memo asked. Third was a tender offer, the blitzkrieg approach counseled by Wasserstein. The upside: “Seizes timing advantage…stalls management deal.” The downside: “No information…hostile…financing hurdles.”
When it came time for the advisers to speak, Eric Gleacher went first. His speech was almost military in tone, the kind of talk one delivers to a boot camp or at halftime of a crucial football game. Gleacher, a jock and proud of it, had the macho intensity characteristic of some small men.
“You’ve got to do a tender offer,” Gleacher said. “The risk here is that Shearson’ll have some kind of contract with the board before we can do something. If you call ’em back and say, ‘Yeah, we’re interested,’ we end up getting pushed around. A tender offer puts us on even footing. We have to be firm here. It’s very important from a symbolic point…. We’ve got to move fast. We’ve got to blow ’em out of the water. Just blow ’em right away.”
Across the table Dick Beattie grinned. It was vintage Gleacher.
Wasserstein went next, essentially repeating the message he had given Kravis privately the night before. The discussion continued, with the pros and cons of each move pored over in detail. Drexel’s Leon Black sounded a cautionary note. “Gee, what’s the hurry? Why don’t we just wait and top it?”
“Then you’re the bad guys,” Gleacher said.
They talked further, but it was clear which way the group was leaning.
“What price?” Kravis asked.
“Maybe we should do it at seventy-five,” Gleacher suggested.
Wasserstein shook his head. “Somewhere in the nineties, I think.” Competitors joked that Wasserstein’s pocketbook was always open, at least when it was a client’s money he was spending. His clients regularly bid so high traders spoke of a “Wasserstein Premium.”
Kravis turned to Steve Waters, who knew Johnson better than anyone at the table.
“How do you read Johnson?” Kravis asked.
Waters rattled through Johnson’s track record, concluding, “Ross never bought anything. He’s always been a seller.” A $90 tender offer would immediately put him on the defensive. For one thing, he wouldn’t want to match it. But more important, compared to the $75 proposal already on the table, a $90 bid would make it appear Johnson was stealing the company. If so, they could hope to drive a crucial wedge between Johnson and his board.
“If we come on strong,” Waters added, “he might fold.”
Last, Kravis turned to the Drexel contingent. Could enough bonds be sold to buy RJR Nabisco? Was there enough demand in world markets? They all knew the bond offerings under consideration would dwarf the largest in Wall Street history. And there was still the consideration that a Drexel indictment could have disastrous consequences for both the takeover and the bond offerings.
“We can place the junk,” said Leon Black. “Don’t worry about our problems. We’ll be able to do it.” Black’s reputation was such that few were concerned that his routine assurances were hollow.
As the discussion wound down, Kravis took Paul Raether and the associates and retired to his office. It was decision time. Left behind, the advisers took the opportunity to raid the Kohlberg Kravis kitchen and order pizzas. As Kravis closed his office door, no one realized that a very similar meeting was taking place that moment, just six blocks north.
John Gutfreund closed his grip around his three-year-old son’s tiny hand and stepped off the curb onto Madison Avenue. Father and son had been out shopping, and Gutfreund clasped a package under one arm. Across the way, he could see Bill Strong and another Salomon investment banker trying in vain to locate a parking place. Gutfreund waved.
The meeting at his Fifth Avenue apartment that evening, Gutfreund knew, could well be among the most important in his long and spectacular Wall Street career. Salomon Brothers was among Wall Street’s most powerful trading houses. Through its massive trading floor overlooking New York Harbor more than $20 billion in securities flowed daily, a sum greater than that of the New York Stock Exchange itself. But now, after three years of unfulfilled promises, Gutfreund was finally ready to move his firm away from the trading floor and to invest its hard-won capital in a major merchant-banking deal. And the way Gutfreund’s investment-banking department wanted to do it—and the amounts they proposed to use—would stagger all those who said Salomon would never amount to anything in the LBO business.
Gutfreund himself was a newcomer to the takeover world. Wall Street had always been split into two, sometimes warring, camps: investment bankers—smooth, dapper, trained at Andover and Harvard—and traders—red-faced Jewish and Irish kids who went to City College and made their living hollering at each other on the trading floor. By training and attitude, Gutfreund was a trader.
From his desk on the trading floor he had ruthlessly steered Salomon Brothers through a decade of growth, until it had become the largest and most profitable firm in its field. In 1985, Business Week crowned him “King of Wall Street.” To many involved in finance John Gutfreund was Salomon Brothers. His word was law inside the firm, and subordinates literally trembled when he stalked into a room, waving one of his giant cig
ars. Short and fond of dark, three-piece suits, Gutfreund had a round face, thick, sensuous lips, and a jack-o’-lantern smile that often looked forced. Ross Johnson, who knew him from Standard Brands days, called Gutfreund “Old Potatohead.”
At fifty-nine, Gutfreund had discovered a new life, marrying a second wife, fathering a son, and cutting a social profile that set tongues wagging across Wall Street. Susan Gutfreund, a former Pan Am stewardess in her early forties, had transformed her husband’s drab existence into a series of black-tie fund-raisers and society parties. Married in 1981, the Gutfreunds were soon fixtures in the social pages of W and Women’s Wear Daily. Susan had sealed their rise in New York society by snaring the honor of throwing a sixtieth birthday party for Henry Kissinger. Months later the guests were still talking about the green apples of spun sugar Susan’s chef had prepared for dessert.
When the Gutfreunds acquired an eighteenth-century mansion on Rue de Grenelle in Paris, Susan spent more time in France, and Gutfreund began taking the Concorde back and forth on weekends. Not surprisingly, when Salomon Brothers first encountered problems in the mid-1980s, many thought Susan Gutfreund deserved some of the blame for diverting her husband’s attention from weightier matters. “It’s my theory that Susan Gutfreund has had a lot do with John’s problems,” a Wall Street friend told New York magazine in early 1988. “When older guys discover their sexual vitality, they’re gone.”
As Salomon grew, tensions had arisen between its dominant trading culture and its small investment-banking arm, long considered a neglected stepchild within the firm. By 1987 those tensions had erupted into something approaching open warfare, as the bankers demanded a greater voice inside the firm and, not incidentally, sought to push more aggressively into mergers and merchant banking. The intrigues hatched within Salomon spawned comparisons to a Florentine palace during the rule of the Medicis, with Gutfreund playing the role written by Machiavelli. A man who had ruthlessly frozen out his own mentor and who seemed to take pride in firing challengers to his power, Gutfreund found himself spending much of his time suppressing internal revolts. As he did, profits and morale plummeted. A series of ill-advised restructurings led to a spate of high-level resignations, including those of Chicago deal maker Ira Harris and economic guru Henry Kaufman. At his lowest point, Gutfreund narrowly escaped a takeover attempt by the investor Ronald O. Perelman.
For nearly two years Gutfreund leapt from crisis to crisis, his firm a simmering cauldron of unrest. Now, as he strolled with his son toward his home, Gutfreund, defying the doomsayers, seemed to have put the worst behind him. Many of the troublemakers inside Salomon had been purged, profits were again up, and Gutfreund and his wife had all but vanished from the pages of Women’s Wear Daily. For the first time Gutfreund, a man who sometimes referred to takeovers as “trades,” was taking an active interest in investment banking, even tagging along with bankers to pay courtesy calls on prospective clients. Trading was still profitable, but Gutfreund was learning what every other Wall Street chief executive had known for years: The real money these days was in merchant banking.
RJR Nabisco was to be the test of Gutfreund’s resolve. His entire investment-banking department, he knew, was pumped up to get a piece of the action Ross Johnson had created. Gutfreund was skeptical, attributing their passion to “deal heat,” the state that occurs when an investment banker finds the takeover of a lifetime. In most “deal guys,” Gutfreund had observed, the symptoms cropped up every month or two. The bankers, Gutfreund recognized, believed they had stumbled on their Holy Grail: the deal that could Bring Us Back. RJR Nabisco was to be Salomon’s salvation, the deal that would, in one fell swoop, rewrite history, wipe out their past embarrassments, and instantly establish Salomon as a major force in the LBO field.
An admirable goal, Gutfreund thought, but an unlikely one. And certainly risky. From what Bill Strong had told him about RJR Nabisco, Ross Johnson’s company seemed attractive—good brand names, super cash flow. But Gutfreund had to look at the bigger picture. The amount of capital they would need—maybe several hundred million dollars—would place an enormous burden on the firm. Salomon’s trading operations used its funds to scoop up massive amounts of stocks and bonds, selling them at thin margins for huge profits. Any deep cut in the firm’s capital could cause the rating agencies to review Salomon’s credit ratings. Any downgrading could cost Gutfreund millions in higher trading costs. More important, a downgrading was just the kind of thing that could rekindle discontent in the ranks. Gutfreund couldn’t afford to delude himself: If he didn’t handle this right, he could have an open revolt on his hands.
After parking his car Bill Strong, and later a half-dozen other investment bankers, met Gutfreund at the threshold of his apartment. Inside they were escorted into a soaring, two-story foyer paneled with stone. To one side hung one of Monet’s water-lily paintings. The six-bedroom apartment had cost the Gutfreunds $6.5 million—before its top-to-bottom renovation—and every dollar seemed to be hanging on the walls. For their “public” rooms, the Gutfreunds favored a palatial eighteenth-century French atmosphere, including a plant-filled room adorned with antique painted panels and trellises. The society matrons at Mortimer’s loved to joke about how French Susan Gutfreund had become during her time in Paris. “Bonsoir, Madame,” she had said when introduced to Nancy Reagan.
The Gutfreunds had moved to Fifth Avenue after a dispute with their former neighbors at the posh River House. Susan insisted on having a twenty-two-foot Douglas fir as a Christmas tree. When the tree proved too large for the building’s elevator, she simply had a crane positioned on the roof and had it winched up—without, unfortunately, having obtained permission of the penthouse tenants. There was a nasty scene, followed by a $35 million lawsuit. The Gutfreunds soon moved to larger quarters on Fifth Avenue.
After a guided tour of the sumptuous apartment, Strong’s group was shown into Gutfreund’s darkened, leather-walled library. “All right,” Gutfreund said, “tell me what I need to know about this thing.”
Strong was nervous. This would be the biggest presentation he had ever made, that he might ever make. He was asking Gutfreund for an unprecedented commitment, one that could reshape the entire future of the firm. Quickly he outlined the structure. It was simplicity itself, Strong explained. Salomon and Hanson would act as “pure partners,” splitting stock, costs, and control fifty-fifty. Salomon brought the financial expertise, Hanson a background in operations. What was unusual was how Strong proposed to wedge Salomon into the deal.
Working through the weekend, Strong’s Salomon team had come to the same conclusion as Henry Kravis. To make a move on RJR Nabisco one needed to move aggressively. Strong proposed that Salomon quickly and secretly accumulate a large position in RJR Nabisco stock—a toehold—with an eye toward launching an unsolicited takeover bid. This would give Salomon bargaining leverage, Strong argued. It had the added advantage that, even if Salomon failed to ultimately gain control of the company, the firm would almost certainly realize a massive gain on its stock holdings.
What Strong described was exactly the strategy that corporate raiders such as Boone Pickens and Carl Icahn had been using for years. For a major investment bank to try the same approach was unheard of, an order of magnitude beyond what Tom Hill and Shearson had sprung on Koppers that spring. But unusual deals, Strong argued, required unusual tactics. With Gutfreund’s approval, Strong wanted to begin acquiring RJR Nabisco stock on Monday morning and keep buying until they had spent $1 billion.
Strong didn’t make the suggestion lightly. All weekend the bankers had debated the point. The strategy seemed brilliant, the target a once-in-a-lifetime collection of name brands. It was exactly the kind of aggressive move they thought Salomon should be making. The more they discussed it, the more enthusiastic they became. Just one question remained on everyone’s lips: Would Gutfreund do it?
“No way: He’ll never do it,” a banker named Charles (“Chaz”) Phillips said. Gutfreund talked a good game, P
hillips argued, but down deep didn’t have what it took to push the button. Some of the bankers grew depressed. If Gutfreund wouldn’t approve the RJR Nabisco deal, they moaned, he would never approve anything. “If we can’t find a way to do this,” a veteran banker named Ronald Freeman said, “my fifteen years at Salomon mean nothing.”
Now, as Strong finished his presentation, Gutfreund attacked, a fighter firing jabs into their case, looking for any weakness. His style was to put the bankers on the defensive, make them justify the move a hundred different ways. Before he gambled a dollar on this deal, Gutfreund said, he wanted to hear everything that could possibly go wrong. “You guys are being pretty goddamn easy with my shareholders’ money,” he challenged. “What makes you think it’ll work?”
At first the bankers couldn’t tell whether he was hostile or simply asking the right questions. What about tobacco litigation? Gutfreund asked. “Not a problem,” the bankers assured. To Chaz Phillips: “Is the bond market large enough to handle all the paper?” “Yes,” Phillips shot back.
They went through it again and again until, after an hour, Gutfreund placed a call to one of Salomon’s most influential directors, Warren Buffett. Buffett was renowned as one of Wall Street’s most intelligent investors. His prognostications could move markets, and often did. He wasn’t a quick-buck artist—no raiding for Warren Buffett. Buffett invested the old-fashioned way: buy and hold. He had bought a 12 percent holding in Salomon the previous fall, rescuing Gutfreund from the hostile overtures of Ron Perelman.
When Buffett came on the line, Gutfreund put him on a speaker phone and laid out the situation in detail. What should they do?
Barbarians at the Gate Page 28
