Barbarians at the Gate

by Bryan Burrough

  Bringing Salomon into the deal as a full partner topped Cohen’s list of priorities Wednesday morning. Johnson slept late that day, then hustled down to Shearson’s offices in Battery Park City to meet with Cohen and the Salomon chieftains, Gutfreund and Strauss. Afterward, Cohen asked Johnson for permission to bring Salomon into the fold.

  “I have to rely on you for this.” Johnson asked, “What do they bring to the party?”

  “They bring a lot to the party,” Cohen replied, principally $3 billion in capital. The bidding was reaching heights where the equity alone was more than Shearson could safely assemble itself. If Johnson’s team won, Salomon could also prove valuable in the critical sale of bonds to finance the bid.

  “Any objections to them coming in?” Cohen asked.

  “No, not at all,” Johnson said. “And you need the money.”

  If Forstmann Little and Shearson were to join forces, a lot of work had to be done. That evening Nick Forstmann strode across Grand Army Plaza to RJR Nabisco’s offices to begin what he hoped would be a profitable partnership.

  Nicky Forstmann, eight years his brother’s junior, movie-star handsome, and well tanned year-round, shared his brother’s distaste for junk bonds and Henry Kravis. He was walking toward Nine West’s glass-enclosed lobby when he spotted Kravis and Roberts inside, coming toward him. Kravis saw Forstmann and smiled; he knew where Nicky was going. As Forstmann entered the revolving doors, Kravis suddenly held them, temporarily trapping the younger man. Kravis wore a wide smile; he loved toying with his rivals.

  Released a moment later, a red-faced Forstmann stepped into the lobby. “What are you doing here, Nicky?” Kravis chided him. “What do you want to be involved in this thing for?”

  Kravis snickered as he watched Forstmann head for an elevator bank far from the one to Johnson’s floor. Kravis thought he was trying to throw them off. “He should know better than that,” Kravis said, smiling. *

  On Wednesday evening Johnson emceed a benefit honoring Charlie Hugel as Boys Club’s Man of the Year. Johnson had worked with the charity since his early years in New York; he had suggested Hugel for the award.

  Johnson was the perfect dinner speaker, cracking jokes and needling Hugel, the man whose committee would determine the future of Johnson’s buyout effort. A number of those involved in the deal were there: John Greeniaus and Jim Welch from RJR Nabisco, Ira Harris of Lazard Freres, Marty Davis of Gulf + Western. “Welcome to the special committee meeting,” Johnson said, opening the dinner.

  Afterward, Johnson retired to Jim and Linda Robinson’s apartment, where the two men talked late into the night. Looking down on the city below, Johnson, a drink cradled in his hand, enjoyed a moment of rest. He hadn’t been comfortable bidding in the low eighties; now that they were looking at bids in the low nineties, he was having a hard time generating enthusiasm for the work. At those levels the debt payments would be crushing. Atlanta, Premier, the apartments, the planes—he shuddered to think. If winning meant giving up everything he loved about corporate life, he would rather lose.

  “How high is this thing going?” Johnson wondered aloud. “We’re talking serious money here, now. Jimmy, you know, basically, the business can only produce what the business can produce. No matter how good it is, if you pay too much, you’ll lose.”

  When Johnson had shared his fears with Steve Goldstone, the lawyer had tried to break the truth about Shearson to him gently. “Ross, it’s their money,” Goldstone said. “If they want to spend it, let them spend it.”

  Now, as he sipped his drink and hashed out things with Jim Robinson, Johnson couldn’t shake the feeling he was losing control of his Great Adventure. “Jimmy,” he asked the chairman of American Express, “how much insanity is there?”

  Plenty.

  As Johnson’s troubled mind wound down, a scene of minor chaos was being played out at RJR Nabisco’s forty-eighth-floor offices. There, investment bankers from Shearson and Salomon met with Nick Forstmann and a Goldman Sachs team led by Geoff Boisi. After a month of work, Tom Hill had definite notions about how to proceed, about what businesses should be sold, about what Johnson would and wouldn’t do. Boisi, it was clear, had his own ideas. More assets should be sold off, he said, and quicker. Hill bridled. The two bankers’ voices took on edges, and soon sparks were flying.

  Nick Forstmann could tell the room wasn’t big enough for both bankers’ egos. Boisi was trying to bully Hill. And Hill was threatened that a competitor was trying to run his deal. Forstmann rose and took Hill aside.

  “Look, Tom,” he said, “this thing is not a turf issue, all right? It’s about how we can get this thing done.” Forget the intramural squabbling, Forstmann suggested.

  Later, when Forstmann took the elevator down with Boisi, it was clear the Goldman banker was incensed by the ex parte conversation with Hill. “What did you do that for?” Boisi demanded. “What did you tell him?”

  Forstmann had no patience for investment bankers’ macho mind games. “Geoff, this is not a turf thing,” he repeated. “The idea is to get the deal done.”

  Thursday morning Tom Strauss was in John Gutfreund’s art-deco office off Salomon’s trading floor, talking with a pair of his investment bankers about RJR Nabisco. Gutfreund had flown to Madrid the night before to open a branch office, leaving Strauss the senior Salomon executive on the deal. The takeover game was new to Strauss, a man who made his career trading government bonds. Most days he sat near Gutfreund in a desk on the trading floor. There, among the shouting men moving billions of dollars in bonds, Strauss felt most at home. These days he was relying heavily on his bankers’ advice.

  Gutfreund’s phone rang. “It’s Henry Kravis,” a secretary said. Before Strauss could take the call, a second line rang. It was Gutfreund himself calling from Europe.

  Strauss hollered that he would take Gutfreund’s call first. He picked up the phone expecting to hear the chairman’s gruff voice but instead heard Henry Kravis. Somehow he had picked up the wrong line.

  Before Kravis said a word, Strauss knew it would be an unpleasant conversation. The two men had known each other for twenty years, but these days their friendship was strained. In the 1970s Tom and Bonnie Strauss had been close friends of Henry and Hedi Kravis. “When Henry divorced Hedi,” says one of Strauss’s closest friends, “Tom and Bonnie lived through the whole thing. They stayed close with Hedi. When Henry remarried, there was a break.” As a result, the friend says, “Henry felt betrayed by Tom and Bonnie.”

  In hindsight, Strauss acknowledged the breach, saying, “It’s natural for the wives to stay close in these things.” He downplayed its effect on his performance in the RJR Nabisco deal, saying, “I think Henry’s too big for that.”

  Friends of both men disagree. The tension between Strauss and Kravis was to have an effect on several of the deal’s key negotiations. “When the deal was over, a lot of broken friendships were mended,” says one observer. “But the relationship between Tom and Henry will never be the same.”

  That morning Kravis wanted something from his old friend Tommy Strauss. He was smooth and conciliatory, every inch the old pal.

  “Tom, I understand you all are thinking about getting in the middle of this thing,” Kravis began. “I’d appreciate your not doing that. We’re good friends, and I’d sure like it if you didn’t complicate things.”

  Strauss couldn’t believe Kravis’s gall. RJR Nabisco represented Salomon’s best chance yet to make the leap into merchant banking. And hadn’t Kravis just hired four separate investment banks for the deal—not one of them Salomon? Strauss’s irritation went beyond RJR Nabisco, of course. “KKR had shit on Salomon for years,” recalled Chaz Phillips. “They’ve given out five hundred million dollars of investment-banking fees, and Salomon’s gotten about one percent of it. And what Salomon got, the others didn’t want.”

  Strauss was too much of a gentleman to curse Kravis that morning. “This looks like a transaction that makes a lot of sense for us, Henry,” he said
briskly. “It doesn’t preclude our doing something with you.”

  Strauss beat a retreat as fast as he could. Gutfreund was still holding on the other line.

  Ingrate, Kravis said to himself, putting down the phone.

  Here he had channeled several major projects to Salomon in recent years, and Strauss wouldn’t give him the time of day. Strauss wouldn’t even afford him the courtesy of a call before entering battle against him.

  Kravis tried to put it out of his mind. He had more important things to worry about. His tender offer would officially begin the next day, Friday. It wouldn’t be long, Kravis knew, until Cohen and Johnson regrouped and put their own bid on the table. When that happened, Kravis would have to be ready to bid higher. Before he did, he needed to know a lot more about Johnson’s company. And without Johnson in his camp, Kravis remained at a severe disadvantage. What he needed was someone who knew RJR Nabisco. A wise man.

  A few days earlier he had taken a call from Jim Walter, founder of a Tampa company Kravis had acquired in 1987. Walter sat on the board of Anchor Glass with Tylee Wilson and suggested to Kravis that Wilson might be of help analyzing RJR Nabisco. Kravis hesitated; he didn’t know Wilson. But as the week wore on and the chances of joining forces with Johnson diminished, he changed his mind.

  He now dialed Wilson in Jacksonville, Florida, where the former RJR chief had moved after his ouster. “Oh, I know he’ll want to talk to you,” Wilson’s secretary said, promising that the executive would return the call immediately.

  Minutes later Wilson ducked out of an American Heritage board meeting to return Kravis’s call. “Maybe we could get together,” Kravis said after introducing himself. “It could make sense.”

  “That’s great,” Wilson said. A meeting was arranged for Friday morning at ten o’clock.

  Smith Bagley wasn’t easily moved to rage. The most prominent member of the R. J. Reynolds family’s scattered remnants, he was an affable patrician who moved comfortably in the civilized circles of Georgetown salons and Nantucket beach houses. He compensated for his imposing six-foot, six-inch height by walking slow, talking slow, and stooping slightly so, it seemed, as not to alarm anyone. His hair, just now turning to gray, was perennially tousled, like a schoolboy’s.

  But now Bagley was mad. As the grandson of R. J. Reynolds and the owner of more than 1 million shares of RJR stock, he saw himself as the inheritor of the Reynolds family mantle. Damned if he was going to sit by and watch Ross Johnson steal the company his family worked so hard to build. Wednesday afternoon Bagley strode around his lawyer’s office, waving his arms and violating the dignified hush of Arnold & Porter’s Washington office.

  “Those little bastards; those little managers,” Bagley shouted. “This little guy could take the company from the shareholders to make all that money for himself. That money belongs to the shareholders. It’s so wrong. We have to do something.”

  But what? Until now, Smith Bagley hadn’t exactly taken an active interest in the company. He had grown up in Greenwich, Connecticut, a few doors down from Ted Forstmann’s family. He hadn’t cared much for Winston-Salem, which he considered a cultural backwater. For much of his life, Bagley had steered clear of the business world. His experiences in it hadn’t been pleasant; in the seventies, he headed a company named Washington Group, but it wound up in bankruptcy proceedings and Bagley, in court, charged with stock manipulation. Acquitted, Bagley became a philanthropist, active in the affairs of foundations that used the proceeds from their RJR stock. He had been president of the Z. Smith Reynolds Foundation. He was also vice chairman of the Democratic National Committee’s finance committee and, as such, in the thick of the final weeks of the Dukakis presidential campaign. Johnson’s power grab couldn’t have come at a worse time.

  But Bagley was determined to derail him. It was, he felt, his duty as a Reynolds. His mother, Nancy Reynolds, R. J.’s third child, had cared deeply for the company long after severing formal ties to it. In the early seventies she had fought a proposal to take “Reynolds” out of the company name, writing letters to board members that said, in effect, “Over my dead body.” In the mid-1980s she pressured Tylee Wilson’s people to publish an authoritative company history that had been gathering dust for twenty years. Some had thought the book a bit too authoritative and suppressed it, but Nancy Reynolds lived to see it published in 1985, the year she died.

  Like his mother, Bagley made it a point to get together with the company’s reigning chief executive from time to time to talk. He had lunched with Tylee Wilson about once a year and liked him. After a year of trying to arrange a meeting, Bagley had finally met Johnson at the Democratic National Convention that summer. He wasn’t impressed. “That bastard,” Bagley cried now. “He moved the company to Atlanta and now he’s cashing out.”

  But what to do? Bagley had already conferred with a lawyer in Winston-Salem about blocking the LBO legally, but was told he had a better chance of organizing a competing bidding group. Now he sorted through the possibilities with Arnold & Porter lawyers. RJR Nabisco employees and retirees held maybe 5 percent of the stock. Could they be rallied into an anti-Johnson block? Possibly, the lawyer said. What about the family? Reynolds family members controlled another 5 to 8 percent. The idea of marshaling those shares into a family-backed bid appealed to Bagley, although he knew it would never happen. Aside from the dabblings of Bagley and his mother, the family hadn’t been active in the company’s affairs for decades.

  Bagley didn’t want the company sold at all, although he confessed to mixed feelings as he watched the stock soar. But if it were to be sold, he wanted it to be at the best price for shareholders, not at the best price for Johnson. In that regard, Johnson’s publicly disclosed flirtation with Henry Kravis was downright scary.

  Bagley had met Kravis years before and had a favorable impression of him. If he could bring Kravis the imprimatur of the Reynolds family and the aid of a man who knew the company inside and out, could he forestall a sweetheart deal with Johnson? It was a long shot, but Bagley had little to lose.

  He returned to his office and quickly got through to Kravis in New York. What are you up to? Bagley wondered.

  “Well, I’m doing some work with the family company,” Kravis said, and they agreed to meet for breakfast on Saturday in New York.

  Next Bagley called his friend Tylee Wilson in Jacksonville. “Look, we’ve got to get involved in this,” Bagley said. “Would you have any interest in seeing me and my lawyer?”

  Was Tylee Wilson interested? The man who had sat atop a $15 billion corporation now ran two things: a one-man consulting firm and a faltering marina. For two years Wilson had taken phone calls from his old corporate allies whispering about Johnson’s latest escapades. It galled Tylee Wilson to see that breezy playboy trashing a fine American company.

  Wilson had come to rationalize his sacking as a principled refusal on his part to play corporate politics with the board. “I wouldn’t kiss their ass in Macy’s window,” he told friends. He had used a portion of his severance pay to buy a new boat he named The Integrity. Now the folly of installing Johnson had been laid bare. It gave him some grim satisfaction. It would give him a lot more satisfaction to ride back in, the man given up for dead, and save the kingdom from this corrupt reign.

  Was Tylee Wilson interested? So bad he could taste it.

  “How about tomorrow?” he asked Bagley.

  Bagley agreed. There was just one logistical question.

  “Will you have a limo?” Wilson asked.

  “Ah, sure,” Bagley replied.

  Bagley and his lawyer flew to Jacksonville the next day, arriving en limo at six. Wilson greeted them in shirtsleeves and a tie and, it being cocktail hour, asked if they would like a drink. A few minutes later, Kravis called to say he would send a jet for Wilson in the morning. That night the two men dined at Wilson’s club, and Bagley got an earful from RJR’s former chief. Wilson went on and on about the waste under the Johnson regime: The words appalling and
sickening were used a lot. “It’s a great company with great traditions that’s being run down,” he said.

  “Kravis needs you as a credible manager,” Bagley said. “You could give him the management, and I could give him the family. We could beat Johnson.”

  An alliance was formed. That night, Bagley returned to Wilson’s house, where Tylee’s wife, Pat, joined them. Into the night they drank and swapped old Reynolds war stories. Wouldn’t it be great, they mused, to strap on the guns again.

  Friday morning, as he waited for Wilson to arrive in New York, Kravis was startled to read in The Wall Street Journal that Kohlberg Kravis had hired Wilson as a special consultant.

  “Where the hell could this have come from?” he asked Roberts. Neither man had a clue. As far as they knew, Wilson was already on a jet heading north. The airplane pilot, maybe?

  Kravis and Roberts were still puzzling over the leak when a call came in from Charlie Hugel. Kravis put him on the speaker phone. Hugel had just read of Wilson’s hiring, too.

  “Henry,” Hugel said, “if you’re really going to do that, let me tell you one thing. Don’t. If you do, everybody will quit. They’ll go right out the door. If you’re worried about management, there’s a lot of good people in this company. I’ll even help you find them. But you’re making a big mistake hiring Tylee Wilson.”

  Kravis thanked Hugel for the tip. Later that morning he and Roberts met with Wilson for two hours. They found his knowledge of the company outdated and his zest for revenge apparent. The leak, they concluded, had come from Wilson himself. Leaks! Kravis was sick of them and wanted no part of a chief executive who wasn’t. When Wilson left, Kravis and Roberts quickly made up their minds to wash their hands of the man. Tylee Wilson’s career as a Kohlberg Kravis consultant was over before it started. *

  Thursday afternoon Peter Cohen slipped into a limousine and swung by to pick up Tom Strauss for a trip uptown to see Ted Forstmann. Salomon had agreed to join the Shearson group as a fifty-fifty partner; an announcement would go out that afternoon. On the way uptown, Strauss related in mock wonder his call from Kravis.