Barbarians at the Gate

by Bryan Burrough

  At nine-thirty the first executive, John Polychron, president of Planters, appeared. When Kravis shook Polychron’s hand he noticed a second man behind him, one of Harold Henderson’s lawyers. Kravis, alert for signs of tampering or intimidation by Johnson, was immediately suspicious. Was the man a spy? Was he sent along to intimidate those interviewed and prevent them from spilling secrets? Kravis couldn’t tell, and after a few moments the man departed, leaving Polychron on his own.

  The next pair, John Greeniaus, the Nabisco head, and Bill McKnight, an aide, arrived at one o’clock. Kravis went through his speech, trying to make the pair comfortable. He was surprised when Greeniaus remarked, “Look, you gotta understand, I’m not part of the Ross Johnson group. I’m not one of these seven guys.”

  “Watch this guy,” Kravis told Raether as he escorted Greeniaus into the interviewing room. “Maybe there’s a wedge here we can use. He just might be helpful.”

  Raether was hopeful as Greeniaus seated himself at the interview table. But just as they began, a young Lazard associate came in with a message. “When you’re finished,” he told Greeniaus, “you’re supposed to go across the street to the forty-eighth floor.” It broke the mood. Raether suspected that the message from Johnson was meant to intimidate Greeniaus. It was all a mind game. Greeniaus, like Polychron before him, went on to answer questions politely and appeared helpful—but not too helpful.

  Harold Henderson was scheduled to be questioned at five o’clock. Henderson, with his detailed knowledge of tobacco litigation, could be especially useful. A few minutes before five, Kravis and Dick Beattie ran into him in the hall outside the interview room. The lawyer introduced himself and shook Kravis’s hand.

  “Can I talk to you, Mr. Kravis, a minute?”

  The two men stepped into a vacant suite while Beattie waited outside. Kravis emerged from the room a minute later and watched Henderson walk off down the hallway.

  “That’s the damndest thing I’ve ever heard.”

  “What?”

  “The guy made it absolutely clear: I’m with Ross, win, lose, or draw. He won’t talk to us. That’s the first time that’s ever happened.”

  By Monday evening Raether was growing irritated. Johnson’s men seemed to be suffering from collective memory loss. The easy questions they answered. But when Raether probed for a judgment, an opinion on where a budget could be cut, they clammed up with an “I’ll get back to you on that.”

  The parade of Johnson executives continued on Tuesday. That afternoon a trio of senior executives led by the domestic tobacco chief, Dolph von Arx, came in. Von Arx had been quoted in The Wall Street Journal the day before saying he would leave the company in the event of a Kravis takeover. As a result, Kravis had little use for the man.

  “You’ve undoubtedly heard most of what I have to say in these speeches,” Kravis said. “And well, Mr. von Arx, there’s not a lot to talk about with you. You’re leaving, or so I read in the paper, along with your top eight guys.”

  “Oh, no,” von Arx protested. “Reread that quote. I’m not speaking for them; they have to make their own assessment.”

  “Are you gone if I buy this company?” Kravis asked.

  “I’m loyal to management, as you would expect,” said von Arx. “But I would have to reassess my position.”

  Interesting, Kravis thought, how quickly these people switched allegiances. As for the others, a few, such as Bob Carbonell of Del Monte, were pleasant and mildly cooperative. Others couldn’t seem to remember their names.

  Ed Robinson was the worst. Johnson’s chief financial officer should have been a treasure trove of information. His intimate knowledge of the company’s European and offshore funding operations could have been invaluable.

  Shown in on Tuesday at five o’clock, Robinson clearly wanted nothing to do with Kravis. Hostility radiated from the man like summer heat from a city street.

  “Do you want to hear what I have to say?” Kravis asked.

  “No,” Robinson said. “I know enough.”

  In the interview room, Robinson was openly antagonistic. To most questions he either pleaded ignorance or said he would find the answer and send it on later. At one point, Raether asked about the company’s leasing subsidiary, whose existence he had learned of only through an unsolicited letter to Kravis offering to buy it.

  “What leasing company?” Robinson said.

  And so it went. After a series of particularly evasive answers, one of Raether’s aides, Scott Stuart, threw up his hands. “Do we want to continue this charade,” he asked Raether, “or can we go home now?”

  Robinson was issued out. The last to be questioned, Dean Posvar, the planning chief, was little better. It was like interrogating prisoners of war, Raether thought, and he half expected Posvar to give his name, rank, and serial number. When the last session ended, Raether stormed out.

  “This is useless,” he muttered to Josh Gotbaum, a Lazard Freres banker monitoring the interviews. “These guys aren’t saying anything.”

  After making farewell phone calls to Cohen and Gutfreund Monday morning, Forstmann told himself he wasn’t sorry things hadn’t worked out. Dealing with Shearson had been as frustrating as any experience of his career. Working with junk bonds made him want to wash his hands. His only regret was that, without a serious challenger, Kravis would probably waltz off with the largest prize in history. Shearson couldn’t stop him. The two sides would probably end up as a team, Forstmann figured. Good riddance; they deserved each other.

  Then Geoff Boisi called Boisi wasn’t about to give up on RJR Nabisco. He had three of Goldman’s best clients chomping at the bit to get a piece of this deal. Procter & Gamble badly wanted RJR’s biscuits business. Ralston Purina of St. Louis coveted a host of food brands. And David Murdock, the chief of Castle & Cooke, parent of Dole fruits, was dying to get his hands on Dole’s archrival, Del Monte. As seriously as his clients sought pieces of Johnson’s company, no one wanted this deal more than Boisi.

  Much like Shearson, Goldman Sachs was about to unveil a multibillion-dollar investment fund. The Goldman fund, though, was to be earmarked for bridge loans. For the first time it would allow staid old Goldman to compete head-to-head with moneyed megafirms such as Shearson and Merrill Lynch. The fund was Boisi’s baby; an RJR Nabisco bid would be its debut.

  The consortium Boisi envisioned would be a dream team. All he needed to complete it was someone interested in buying the tobacco operations. That someone was going to be Ted Forstmann. Forstmann just had to be convinced. And Boisi knew all the right buttons to push.

  All that day he hammered at Forstmann, reminding him of the reasons they had attempted this deal in the first place. Kravis had to be stopped, Boisi insisted, before he jeopardized every Fortune 500 company. “If KKR wins this, there’ll be no stopping them,” he argued. “They’ll be bigger than Boone Pickens, Carl Icahn, and all the raiders wrapped into one.”

  Corporate America would stand up and cheer a challenger to the junk-bond cartel, Boisi told Forstmann. Whoever beat Kravis would emerge the true hero of this mud-wrestling match. That hero, Boisi suggested, had to be Ted Forstmann. Only Forstmann had the right combination of skill and power to pull it off.

  “You don’t realize how strong you are,” Boisi said. Forstmann Little’s “cheap” money gave it an edge over all other competitors. “You just don’t realize how powerful your money is. It’s the key to the whole deal.”

  Soon Forstmann began to nibble at Boisi’s bait. The lure of striking a blow against Kravis and the junk-bond junkies was too strong. And no one could deny the appeal of working with blue-chip companies such as P&G. Forstmann allowed himself to think out loud.

  “If we do our due diligence, and this really is economically viable, these guys you’ve rounded up are going to be aggressive participants,” he mused. “Everybody is a real money player. Nobody comes from the other world. No one’s part of the cartel. Boy…wouldn’t that be a wonderful thing?”

  Yes, B
oisi said, and it wouldn’t have to be risky. “I know you’re not going to do anything risky. I know your parameters. But think of this: If this deal could meet your standards, think of what we could accomplish. These junk-bond guys have had their way for three, four years. We could turn the tide.”

  Forstmann found himself thinking of the Revlon deal. The junk-bond cartel had risen to power on Ron Perelman’s takeover of Revlon. He again felt a pang of responsibility for that loss and the damage the raiders had wrought. He had been defeated in that fight. But now…

  An image began to form in Forstmann’s mind. The junk-bond hoards are at the city gates, Forstmann thought. We could stop them, once and for all. This is where we could stand at the bridge and push the barbarians back. Wouldn’t that be phenomenal?

  He would do it.

  Screw Cohen. We don’t need him, Forstmann said. Cohen is so inexperienced he’s bound to fail. This would be Forstmann versus Kravis. The good guys—P&G, Ralston, and Castle & Cooke—versus the junk-bond hoards of Drexel Burnham and Merrill Lynch.

  “You know the conditions,” Forstmann told Boisi. “No junk paper. None of that crazy shit. And we have to be invited to bid.”

  “Okay,” Boisi said. He would have pledged his left leg and his bonus at that point.

  And, Forstmann added, Forstmann Little must have a veto over the bidding group’s moves. Boisi agreed to that, too.

  Slowly Johnson’s group moved toward assembling a bid of its own. Johnson, who had spent the weekend in Atlanta, returned to New York Monday afternoon and met for an hour with representatives of Texas investor Robert Bass, one of several parties Cohen was considering bringing into the fold. Afterward Johnson, Horrigan, and the other RJR Nabisco executives met for dinner with the Shearson and Salomon teams in one of Shearson’s paisley-wallpapered dining rooms.

  Two schools of thought were forming as to the best way to approach the bid. The Salomon team, led by Gutfreund and Strauss, was leaning toward an immediate bid, something that would show the world and the board they were for real. Something around $92 a share, just enough to top Kravis’s $90. It was a trader’s instinct: Bid fast, top the other guy by a fraction of a point, and wait to see what happened next.

  Another faction, led by Steve Goldstone and Tom Hill, judged that approach shortsighted. Topping Kravis now, they argued, would only lead to a drawn-out bidding war that would send prices spiraling upward. An auction was the last thing they wanted. Somehow they had to bring a swift end to the process: a single, sharp, decisive blow that would knock out Kravis and secure the board once and for all. A bid of $100 a share wasn’t out of the realm of possibility to Hill and Goldstone. By evening’s end, Goldstone felt the group was leaning toward his position.

  Tuesday morning Goldstone took a call from Peter Atkins, the attorney working with Hugel’s committee. It had been a week since Kravis’s bid, and with his due diligence underway, Atkins was curious as to when he could expect a bid from Johnson. Goldstone decided to try an idea out on him. If we gave you a massive bid—a preemptive bid—Goldstone said, would the board consider entering into a merger agreement? It would allow the board to lock in a high price, Goldstone suggested, while in effect setting a bidding floor. Atkins didn’t seem to give the proposal much thought. His message was clear: Just make your bid, Steve. Make your bid.

  Afterward, Goldstone chewed over the idea further. A blockbuster bid in return for a merger agreement. He liked it. Johnson, too, thought it sounded like a sensible approach. But how to get Atkins to take the bait? Goldstone got an idea from Johnson.

  From conversations with Hugel, Johnson knew the board was deathly afraid the management group would cut a deal with Kravis, eliminating the competition, and, Hugel feared, leading inevitably to a lower bid. Maybe, Goldstone reasoned, the board would leap at the chance to seize a high bid as a way of spoiling any chance of further talks between the two sides.

  Goldstone talked to Atkins again Wednesday morning. “Here’s what I have in mind,” Goldstone told the lawyer. “We would like to negotiate a merger agreement with you. It’ll establish a floor. I can tell you, if you’re willing to proceed on that basis, we will give you a very, very good bid. A preemptive bid.”

  “Look,” Atkins said, “why don’t you just give me the bid now. The board is very interested in receiving your bid.” Atkins thought: Hadn’t he heard this before?

  “But Peter, it’s not that simple,” Goldstone countered. “Why should we give you a bid if there’s no quid pro quo? We’re not getting anything back. Right now we have the opportunity to negotiate with our competition. If we do, and we’re successful, you’ll see a bid much lower than this. I’m not going to throw a bid out to you now until we’re through talking with our competition.”

  It was a bluff. Goldstone had no idea whether Johnson’s group could work something out with Kravis. As heated as the public rhetoric had become, the chances seemed low. But Atkins didn’t know that. Goldstone had to use his own fear against him.

  “Oh, I see the leverage,” Atkins said. “You’re really giving us an incentive.” Goldstone almost heard the light bulb click on over the lawyer’s head.

  “That’s right.”

  “I see,” Atkins said. “Now you’ve given us something to think about. Well, I’ll discuss it with the appropriate people and get back to you. Do you have a proposed merger agreement in mind?”

  “Yes, I do.”

  “Why don’t you send it up to me.”

  Goldstone was excited. He instructed Gar Bason to send over an agreement that afternoon, and late, he rushed over to lunch at Shearson.

  The Salomon chieftains, Gutfreund and Strauss, were already waiting in Cohen’s office when Goldstone arrived. They repaired to Cohen’s dining room for lunch, where Goldstone briefed the group on his conversation with Atkins.

  Gutfreund was immediately skeptical. A preemptive bid? Goldstone’s strategy, he said, would push the group into a bid well above $90 a share. Why go so high? “Aren’t we wasting our money?” Gutfreund asked. “Why should we do this? Can you tell me we’ll actually get a merger agreement if we do this? What are the chances it’ll work?”

  “I’d say less than fifty-fifty,” Goldstone admitted.

  Goldstone was baffled. Hadn’t these people told him just two nights ago they were in favor of a preemptive bid? The lawyer tried to read Cohen, but couldn’t. He thought Jack Nusbaum shared Gutfreund’s concerns about overpaying.

  After lunch Goldstone returned to his office, worried. He didn’t call Atkins back. For the first time he realized he was making promises his group, especially Gutfreund, had no intention of keeping. He was irritated. Gutfreund didn’t seem to understand even the most fundamental bidding strategy. Now, Goldstone knew, he had to move very carefully. He may already have gone too far.

  On Tuesday evening, the due diligence sessions completed, Kravis returned from the Plaza to his office in a black mood, ready to discuss with Roberts the plan for their next move.

  Their bid was at a crossroads. After seizing the initiative from Johnson’s group a week before, they were losing momentum. Nothing seemed to be going right. Due diligence had been a disaster. Short of a miracle, Kravis and Roberts were facing the biggest deal of their lives with little more financial guidance than that available to an RJR Nabisco retiree.

  If that weren’t bad enough, Kravis was hearing ominous rumblings among his investors. Friday had seen a spate of newspaper stories suggesting that some of Kohlberg Kravis’s largest backers were uneasy about the aggressive tack Kravis had taken. The involvement of state pension funds in a “hostile” bid spawned headlines and partisan political squabbles in Oregon, Michigan, and Massachusetts.* Kravis and his people tried to calm their investors, but the pressure on them was mounting. He’d even had Eric Gleacher ask Hugel to assure his investors he wasn’t a hostile bidder.

  Kravis suspected Tom Hill and the management group were behind some of the trouble in his rear, and he was right. One of Kravis�
�s most influential backers was Doug LeBon of Los Angeles-based Wilshire Associates, a pension fund adviser that called the shots for a number of Kravis’s largest investors, including the states of Massachusetts, Oregon, and Iowa. LeBon’s clients accounted for roughly 25 percent of the money behind Kravis. No sooner had Kravis announced his tender offer than Wilshire’s clients came under pressure from all sides to denounce the move. LeBon himself got angry phone calls from RJR Nabisco executives, including Harold Henderson, who heatedly pointed out that Wilshire’s agreements with its clients forbade backing hostile deals.

  Of all his woes, though, none bothered Kravis more than the press. Kohlberg Kravis was getting killed. Following a week of controversy over Kravis’s “franchise” remarks, Monday had brought the first full burst of major media attention. “The Debt Binge: Have Takeovers Gone Too Far?” blared the cover of Business Week. Time weighed in with a handwringing report, “Big-Time Buyouts.” Major business leaders seemed to be popping out of every boardroom with pithy denunciations of LBOs and dire predictions of an America drowning in debt. Every story seemed to take a shot or two at Kravis. Newsweek was the worst. Its coverage included a sidebar on Kravis and Roehm—“The ‘High Voltage Life’ of a New York Supercouple”—that contained such juicy details as Oscar de la Renta’s threat to Kravis to make Roehm an honest woman.

  The press attacks deeply wounded Kravis. George Roberts, who led a private life in California, also found the coverage unnerving. Friends sidled up to him at cocktail parties and asked him whether his business was really good for America. Remarkably, in thirteen years of public life it was the first time the two cousins had been pulled into the glare of a major bidding contest. While Kravis had long been a fixture of the society columns, color pictures and articles in Newsweek and Time were another thing altogether. This kind of publicity could ruin their business. It could also bring down the wrath of Washington, a fact never far from Roberts’s mind.