Returning upstairs, Kravis took a short call from Cohen.
“That’s funny,” Kravis said, putting down the phone.
“What?” Beattie asked.
“He’s bringing Tommy Strauss. You’d think he’d bring Gutfreund.”
“Strauss?” Beattie was surprised. “Why the hell is he bringing over Tommy Strauss? What the hell does he know about this business?”
Kravis didn’t have to say how he felt. To Beattie it was clear he’d just as soon not have to deal with his former friend.
Roberts took a second call. An attendant at the Oak Room wanted to know why a Mr. Roberts was charging his dinner to that room. “We show a Mr. Brown registered to that room.”
Roberts had to smile. Mr. Brown was the code name they had used in registering. “Just put it on the room,” he said.
Across the street at Nine West, Johnson was growing worried about the size of the group that would return to the Plaza. Goldstone had been called, and would need to be brought along. So had Gutfreund and Strauss, who clearly expected to go as well. Johnson wanted to keep the meeting small, both for secrecy’s sake and because so far large contingents of people seemed to lead invariably to large arguments. Besides, he sensed Kravis didn’t much care for either of the Salomon chiefs.
Johnson asked Jim Robinson to see to it that only one of them went along. Somehow, Strauss was chosen. Along with Shearson’s attorney, Jack Nusbaum, that made six. Johnson was happy.
When Goldstone arrived, Johnson enthusiastically described the afternoon’s talks with Kravis. Everything was going great, Johnson said. “Now we’re to the point where Henry is going to want to see the management agreement.”
Goldstone was immediately suspicious. For two weeks he had jealously guarded the pact’s secrecy. Goldstone, like Jim Robinson, was under no illusions about how it would appear if leaked to the press. You’re taking a big risk showing this to Kravis, Goldstone warned. If these talks fall apart, he said, Kravis could use it to crucify us in the papers.
“Jesus Christ,” Johnson said, brushing Goldstone’s concerns aside. “They’re going to be our partners here. You’re gonna be partners, you gotta have everything on the table. If there are problems, they gotta be worked out.” Johnson told Goldstone he was being paranoid. At his client’s insistence, Goldstone agreed to show Kravis a copy of the agreement. But he didn’t like it one bit.
The six members of Johnson’s group hustled back to the Plaza around nine o’clock. After twenty minutes things were going smoothly, and Johnson, with no appetite for lawyerly details, was growing restless. As best he could tell, it was all over but the fine print. “Is there anything else you need me for?” he asked Goldstone.
“No reason for you to hang around that I can see,” the lawyer replied.
Exhilarated, Johnson returned to Nine West, wolfed down a sandwich, and briefed Sage and Horrigan on the evening’s events. Then he walked the two blocks to his apartment, showered and shaved, and threw on a sports coat. He prepared to head back to his office, where he planned to do some serious partying.
“Why don’t you come on over?” Johnson asked his wife, Laurie. “You’ve just got to come. It’ll be an interesting experience. You’ll have some fun.”
Peter Darrow, the lead attorney for Salomon Brothers, was unwinding at his Brooklyn Heights home when Salomon’s Mike Zimmerman called around ten o’clock. “Gutfreund’s up at Nine West,” Zimmerman said, “and he wants you up there, right away.”
Darrow made it to RJR Nabisco’s offices in no time. He found the forty-eighth floor deserted except for a seething John Gutfreund. Salomon’s chairman was clearly in no mood to party. He was, in fact, as mad as Darrow had ever seen him.
“I don’t know what’s happening, Peter,” Gutfreund said. “There’s a meeting over at the Plaza. I’ve been excluded. I don’t know why. I want you to get into the meeting, right now.”
“Sure, John, no problem,” Darrow said, not having any idea how he would gain entrance to a closed meeting to which John Gutfreund hadn’t been invited. Gutfreund handed him a slip of paper with the room number of Kravis’s suite.
Darrow strode across Fifty-eighth Street and took an elevator to the hotel’s fifth floor. He checked twice for the room number Gutfreund had written down. It didn’t exist. Darrow found himself wandering aimlessly until he saw a very large man standing outside a pair of double doors.
“This is Henry’s suite?” Darrow said on a hunch.
“Yes sir,” the man said, opening the doors. “Go right in.”
Darrow walked in to find Tom Strauss in the middle of a heated discussion with Kravis and Roberts. He didn’t know it at the moment, but he was witnessing the first cracks in Ross Johnson’s carefully won $20 billion peace pact.
“This is our capital,” Strauss was saying. “We’re not prepared to put in these amounts when anybody other than us controls the exit.”
Strauss’s speech was impassioned, his plea direct. Salomon and Shearson simply must run these bond offerings, he said. Salomon was ready to run them, was willing to run them, had the expertise to run them, and demanded the right to run them. They had worked weeks in preparation, and to hand their assignment to Drexel wouldn’t be fair.
“We’ve just got to do this thing,” Strauss said. “Why don’t you try us?”
Irked, Kravis explained the importance he placed on Drexel’s handling the bonds. “Look,” he said, “Drexel has done a first-rate job for us every time. They did Beatrice when everyone said it couldn’t be done. They’re the best. They’re cheap. This is the biggest deal ever. We can’t afford to take any chances.”
Strauss may have been arguing for the sanctity of Salomon’s capital, but everyone in the room knew what he was really objecting to. Salomon hated Drexel. To lose history’s largest bond offering to its archrival would be a profound embarrassment to the firm. For five years Salomon, strong in every other kind of bond, had tried in vain to break into the highly specialized—and highly profitable—field of junk bonds. But its efforts, plagued by internal politics, had resulted in a series of disasters. Drexel’s hammerlock on the market was a source of continuing frustration to Gutfreund.
“Not to knock you, but you guys don’t really do this stuff,” Kravis told Strauss. “You guys haven’t done anything here.”
At one point, Strauss mentioned that Salomon had had sixty bond salesmen in over the weekend to hash out the best ways to sell these bonds. What am I supposed to tell them? he asked. Kravis and Roberts rolled their eyes. “So what if your guys were there all weekend?” Kravis said. “That doesn’t mean anything. We ought to go with the best, most qualified people.”
Peter Cohen found himself in an awkward position. Having more or less approved Drexel’s selection earlier, he row weighed in with what seemed a halfhearted endorsement of Strauss’s stance. Cohen, in fact, had his own reason to distrust Drexel. For five years Shearson had been locked in litigation with Drexel over tin contracts that Cohen believed Drexel had reneged on. Drexel’s refusal to make good on the contracts had forced Cohen to take a $50 million charge against his 1985 earnings. Drexel, he said, simply wasn’t the kind of firm Shearson felt comfortable betting its future on.
Soon both Kravis and Strauss were repeating themselves. As their debate wound down, no one was overly worried about Salomon’s newfound intransigence. In a deal this large there were bound to be some sticking points in the fine print. Surely they could reach a compromise later on. Besides, there was a more important matter to be dealt with: the management agreement.
Goldstone hauled out a copy and waved it in front of Kravis. “We’d like you to sign off on this,” the lawyer said.
“Show it to Dick,” Kravis said.
Beattie watched as Goldstone flipped through the pages and stabbed his thumb at the paragraph he was looking for. “This,” he said. “I want to make sure you see this and understand it.”
It was the control paragraph, stating that Johnson would
have full control over the deal. Standing beside Goldstone, Beattie thought it an insignificant detail. If they struck a deal, he knew, Kravis was going to call the shots. It was as simple as that.
Without saying anything, Beattie took a copy of the agreement and retreated to a corner with Casey Cogut to scan it. Goldstone was nervous. “I want your word that you won’t use this document for any reason other than evaluating this transaction,” he said, “and that you won’t disclose it to anyone.”
After a few minutes, Beattie motioned to Kravis and Roberts, and, with Cogut, the four retreated into an adjacent bedroom. “You’re not going to believe this,” Beattie said. The lawyer had read the document quickly, but what he saw was incredible: The control, a veto in Johnson’s hands, and, most alarming of all, the astronomical returns Shearson was promising Johnson. “You can’t live with this thing, Henry,” Beattie said.
Cogut agreed. “If we sign up to this deal, Ross will run the whole thing. You’re not going to agree with that.”
Kravis was shocked. He knew Cohen was hungry to get into merchant banking. But giving Johnson control of the deal? It was unlike any LBO he had ever seen. “This is just crazy,” Kravis said. “How could Cohen do this?”
Cogut and the Salomon lawyer, Peter Darrow, were neighbors on a one-block street in Brooklyn Heights. They had joked that the RJR Nabisco drama would be “a good deal for the street,” meaning Garden Place, not Wall Street. Cogut emerged from the bedroom and, as the meeting showed signs of breaking up, motioned to Darrow. The Salomon lawyer slipped into the bedroom where Kravis and the others were caucusing.
“Have you seen this?” Beattie asked Darrow.
Darrow nodded.
“Are you on board with this thing?”
The Salomon lawyer had expected this. As soon as Goldstone brought out the agreement, he had called Gutfreund to ask how to handle it. Darrow had to walk a fine line. If Salomon were to be partners with Kravis, it was important to signal its discomfort with what Gutfreund called the “unseemly” agreement. But if the talks somehow fell through, Kravis would no doubt use Salomon’s displeasure as a club to publicly maul the management group.
Darrow conceded to Beattie that the document had “obvious problems” and would likely be rewritten. He mentioned that Gutfreund and Warren Buffett opposed it. It was all he had to say. A few minutes later, Beattie stepped back into the living room and took Goldstone aside.
“How many people did you say are involved in this?”
Only seven at the moment, Goldstone said, but Johnson had in mind that hundreds of employees would also share in the riches.
“Well, this is pretty rich, you know.”
“You should talk to Ross about that.”
“Well,” Beattie said, “we’ve obviously going to reserve opinion on this. We can’t say yea or nay until we have some time to look at this thing.”
Goldstone nodded, but suggested they consider the document closely. “You’ll need to get things resolved, because it’s very important.”
The meeting adjourned with plans to reconvene at RJR Nabisco’s offices an hour later. In the confusion, neither Goldstone nor Jack Nusbaum retrieved the management agreement from Beattie.
“They never asked for it,” said Casey Cogut. “So we kept it.”
When Kravis, Roberts, Beattie, and Cogut stepped from the elevator onto the forty-eighth floor, they were surprised to find the place packed with people. Scores of people with nothing to do with the negotiations were rushing to and fro. Linda Robinson was scurrying about with a draft copy of a press release. Kravis was nonplussed to be introduced to Laurie Johnson. He spied Johnson, scotch in hand, looking relaxed and refreshed, a puff handkerchief peeking jauntily from a chest pocket. Kravis was also introduced to Ed Horrigan, who looked natty in a white tennis sweater. Expecting to resume a set of tough negotiations, the Kravis group was startled to encounter something more akin to a fraternity mixer.
Kravis and Roberts were escorted into Johnson’s office, the sight of their first tangle a week earlier. In fine spirits, Johnson offered the cousins a drink, which they declined. Beattie slipped Johnson’s secretary a draft agreement he had hastily scribbled out and asked that it be typed. There was no sign of Cohen or Strauss.
As Kravis and Roberts waited, they listened to Johnson ramble on about the businesses they were all about to co-own. In a wide-ranging soliloquy, Johnson—upbeat, casual, laughing—skittered through a number of subjects, including Premier, the Atlanta headquarters, and the outlook for Nabisco businesses they would sell. He was glad for the time to get to know his new partners. Jim Robinson and Ed Horrigan sat by, listening and chatting occasionally.
For nearly an hour they discussed the fine points of RJR Nabisco. At one point, Gar Bason, the terrierlike Davis Polk lawyer, poked his head into the room. “What are you doing in this room without another lawyer?” Bason challenged Beattie. He was merely being protective of his client, but it broke the mood.
Kravis noticed they had been waiting a long time. “What’s holding everything up?”
“I don’t know,” Johnson said. But then, he wasn’t especially concerned; these finishing-up sessions always took time.
Cohen came in shortly after. He had been working with Strauss and Gutfreund on a way around the bond-offering problem.
“Where do we stand?” Roberts asked.
“We’re still trying to thrash this thing out,” Cohen explained.
In fact, Cohen was getting nowhere. For an hour he had tried to fathom Salomon’s objections to Drexel and searched in vain for a compromise. Cohen hadn’t come from a trading culture like Salomon’s, and sometimes didn’t grasp the fine points of Gutfreund’s arguments. It was taking time, and he was tired.
Later, everyone who participated in the long night’s deliberations would emerge with different versions of what came to be known as The Drexel Problem. Jim Robinson would point to Drexel’s expected indictment. Salomon’s official line was its concern about placing its capital in another firm’s hands—a curious explanation, because it planned to do exactly that with Shearson. Johnson would suggest, mysteriously, that Kravis had somehow come under the control of Drexel.
Months later Tom Strauss acknowledged the central controversy. It lay in the esoteric world of the bond trader. When more than one bank agrees to underwrite a bond offering, a lead bank must be chosen to run the books. The key records of bond sales reside physically at that bank, which generally calls the shots and parcels out bonds over the course of the offering. The lead bank is so noted by placing its name first—on the left side—of the subsequent tombstone advertisements that pack The Wall Street Journal and other financial publications. Being “on the left” of the tombstone thus has powerful symbolic significance in the bond world.
Before Kravis’s entry, Strauss and Cohen had agreed that Salomon and Shearson would corun the books. Shearson would be on the left, Salomon on the right. The books would rest physically at Shearson. That arrangement didn’t bother Salomon, Strauss explained, because Salomon’s power in the bond world so overshadowed Shearson’s that everyone would know who had really run the deal.
The same structure, however, would send an entirely different message with Drexel on the left. While Salomon could tower over Shearson from a position on the right, the same wouldn’t be true of a bond-trading power such as Drexel. “With Drexel on the left,” Strauss said, “we would have been perceived as an afterthought.”
In the end, then, perception was the issue. Perception about who was running a set of bond offerings that, to Johnson or any other acquirer, was a detail. For despite its status as a full partner in Johnson’s deal, despite all the high talk about merchant banking, Salomon’s principal mission wasn’t owning Oreos. It was selling bonds. And it was willing to sacrifice Johnson’s interests—indeed, his entire deal—to avoid the perception that it was taking a backseat to its hated rival, Drexel. Through all the machismo, through all the greed, through all the discussion of
shareholder values, it all came down to this: John Gutfreund and Tom Strauss were prepared to scrap the largest takeover of all time because their firm’s name would go on the right side, not the left side, of a tombstone advertisement buried among the stock tables at the back of The Wall Street Journal and The New York Times.
By two o’clock Cohen was shuttling between Kravis and Roberts in Johnson’s office and a Salomon contingent, which remained in the “fishbowl” conference room around the corner. Desperately he sought a middle ground. Whatever doubts Cohen might have had about sharing his bounty with Kravis, that night he tried his best to reconcile the two sides.
But no compromise seemed acceptable to Gutfreund. “In no way will we defer to Drexel,” Salomon’s chairman intoned. “Glad to have ’em as a partner, Peter. But we haven’t gone this far to give this deal up to Drexel.”
Time after time, Cohen attempted to pull his friend Strauss off to the side for a heart-to-heart talk. Each time, Mike Zimmerman or one of the other Salomon bankers would trot out and join the conversation. Cohen began to think of the Salomon executives as sausages, linked together wherever they went. It was impossible to get a moment alone with any one of them.
Only once did Cohen lose his temper. Zimmerman made another of his group’s pronouncements about Salomon’s reputation. “We are Salomon Brothers,” he said. “Who do they think they are to treat us this way?” It was too much for Cohen, who proceeded to jump down the banker’s throat. “What are you talking about? You guys didn’t exactly blow out the lights on Southland and Revco, you know. They have reason to be concerned. I mean, do you even understand what we’re doing here?”
Cohen tried every alternative he could imagine. Reimbursing Kravis for the extra cost of hiring Salomon. Setting up a trading room at a neutral site where all three firms could manage the offering together. He held his breath whenever he saw movement in the Salomon position. Each time they seemed to be nearing an agreement, a Salomon banker popped off about Drexel. “What are we doing?” one would say. “These guys are crooks. They’re crooks!” And the whole group would set off on a spree of Drexel bashing.
Barbarians at the Gate Page 41
