Barbarians at the Gate

by Bryan Burrough

  It was as frustrating as anything Cohen had attempted. A man who prided himself on his stamina, Shearson’s chief had to admit he was exhausted. For two weeks he had been fighting nonstop. He needed sleep. Negotiating the most important issues of history’s largest takeover at two in the morning—it made no sense. Why were they here?

  As the night wore on, Johnson, who continued to be impressed with Kravis’s financial sophistication, began to lean perceptively toward his position. Why not go with Drexel, Johnson asked, if in fact they were most reliable? “Peter, we should have the best people doing this, I don’t care who they are,” Johnson said. “If it’s a better idea, let’s use the better idea.”

  Johnson’s behavior emboldened Kravis. Why don’t you go out there and bang out a compromise yourself, Kravis asked Johnson at one point. After all, wasn’t Johnson the client here? Couldn’t he simply demand that his own investment bankers go along with his wishes? Johnson said he’d give it a try.

  He left, then returned twenty minutes later. “Well, I talked to ’em.”

  And? Kravis wondered.

  “Well, I still don’t know what’s going on.”

  “Who the hell is making decisions around here?” Kravis said, his anger growing.

  “Well, I don’t know,” Johnson replied. “There’s all these guys from Salomon out there…”

  Jim Robinson, who had kept his counsel through most of the evening, thought he saw a solution. Gutfreund, he suggested, hadn’t liked being excluded from their discussions at the Plaza. “I think his feelings are hurt,” Robinson said. “Why don’t you guys sit down and talk with him?”

  “Fine,” Kravis said. “Why don’t you go get him.”

  Word came back that no one could find Gutfreund. He had vanished. “Where the hell is he?” Johnson asked, stalking out of the room. He checked first with the security guards, who said they thought Gutfreund had gone out for a walk.

  If Gutfreund was pouting, Johnson figured, it would probably only make things worse to send a minion after him, so Johnson went to retrieve him himself. He found him on Fifty-seventh Street, smoking a cigar. Gutfreund appeared to be lost in thought.

  “Come on, John, you gotta get upstairs and spend some time with Henry,” Johnson said. “This thing seems to be moving along.”

  Around three o’clock Kravis and Roberts sat down with Gutfreund in the small anteroom off Johnson’s office. “We’re trying to be reasonable here,” Kravis said. “Now why is it so important that you guys run this deal?”

  “Because I think we’re competent,” Gutfreund said. “Because our people have spent a considerable amount of time on this. We are perfectly capable of doing this job, and we should do it…. There are any number of reasons we should do this deal…. Our firm has taken a terrible beating in recent years.” Kravis knew: It was one reason they didn’t want Salomon running the books. “Now I’ve got the most respect for Mike Milken,” Gutfreund continued, “but this is how we at Salomon Brothers want to proceed.”

  Gutfreund, it was clear, wasn’t budging, but neither was Kravis. When Gutfreund left the room, Roberts sank into a dark mood. He stood talking with Kravis beside Johnson’s wet bar for several minutes until Dick Beattie walked in.

  “Look, this is crazy,” Roberts said. “We’ve spent all night arguing who’s going to be on the left and right of the underwriting tombstone. How are we going to work out agreement on the real issues? How are we going to work with these guys even if we do this deal? Everyone’s interested in everything except doing a business deal. It’s all jockeying for ego and position.”

  He was growing more depressed just talking about it. “I came in here thinking we were going to do a deal,” Roberts said. “Now…”

  “I believe you, George,” Kravis said, nodding his head in agreement. “You’re absolutely right.”

  Beattie shared his clients’ discouragement. “You know, there’s a lot of issues in the management agreement we put off, too. If we can’t get this behind us, we’ll never get anything behind us.”

  “Let’s just go home and get some sleep,” Roberts said. “This is crazy.”

  Kravis took Cohen aside and told him they should resume after daylight. As for the bond situation, Roberts and Kravis planned to talk through compromises at a seven o’clock breakfast with Drexel’s Peter Ackerman, the trader stepping into Milken’s shoes. Maybe Ackerman could come up with something Gutfreund could live with.

  “Call me at home when you’re ready to reconvene,” Cohen said.

  As the Kravis contingent headed for the elevator, Gutfreund came scurrying after them. “Dick, Dick, hold it a second. Let’s talk this over.” Beattie tried to calm the Salomon chairman. “We’re just not making any progress, John.”

  Kravis and Roberts paused while Beattie walked back to speak with the Salomon bankers milling about in the fishbowl. A dozen questions pelted the lawyer as he entered. “Why are you guys so protective of Drexel?” someone asked. “They’re big boys. They can take care of themselves.”

  “Look,” Beattie said, “all night Peter Cohen has been defending you guys. The Drexel guys are our partners. They’ve been good to us. We’re not going to desert them.”

  Beattie didn’t belabor the fact that Salomon had repeatedly bungled its attempts to enter the LBO field. Or that Kravis would sooner have his mother handle this offering than Salomon. Or that Kravis felt Strauss had betrayed him. It was all so complicated.

  By the time Kravis and Roberts departed, Johnson had already left. Gar Bason had a memorandum of agreement between the two sides ready to sign, and Johnson initialed it on his way out. The impasse between Kravis and Salomon, he was certain, would be solved by daylight. Frankly, he liked Kravis’s approach better than Shearson’s. But he would be satisfied with whatever approach they chose. These last-minute details were just so tiresome.

  Many of the Shearson group stayed and stewed over the night’s events until five A.M. Two members of the Salomon contingent, Peter Darrow and Mike Zimmerman, emerged into the dawn to find their cab had been waiting for eight hours. The meter was still running.

  “Excuse me, sirs?” the driver said as he dropped the pair off in Brooklyn Heights. “Would you mind initialing this voucher? No one’s going to believe this.”

  Dawn was gathering when Cohen dragged himself into his Fifth Avenue apartment. He thought about going to bed, but knew he was too wound up to fall asleep immediately. In the bedroom his wife, Karen, woke up and asked how it went. Rarely had Cohen felt so frustrated. For the first time in his career he hadn’t been able to build a bridge between warring factions. It was an ability he prided himself on. They sat on the bed, husband and wife, for nearly an hour, sorting out the night’s events, slowly unwinding, before quietly falling asleep.

  The ringing phone beside his bed jarred Cohen from a deep sleep. Through bleary eyes he stared at the clock. It was eight o’clock. Tucking the receiver to his ear, Cohen heard the cool voice of Henry Kravis. They were ready to meet.

  Cohen wasn’t looking forward to seeing Kravis again; for some reason he couldn’t seem to shake his head clear. He called Jim Robinson. “Whatever you’re doing,” Cohen said, “drop it. Come on up and meet me at Nine West.”

  Next Cohen called Jeff Lane. Shearson’s number-two executive hadn’t been deeply involved in the RJR drama so far, for he had his hands full running the company in Cohen’s absence. Now Cohen needed him. “I’m really worn out here,” he told Lane. “I may not be thinking as clearly as I should. I need someone with a fresh head.”

  By nine o’clock a small group had reassembled in Johnson’s offices. Only Gutfreund and Strauss made up the Salomon contingent. Kravis and Roberts showed up a few minutes later, ready to talk. Cohen suggested they return downstairs to their own offices until Johnson turned up. When Johnson hadn’t arrived fifteen minutes later, someone called his apartment and discovered he was still asleep. Around nine-fifteen Cohen went down to Kravis’s offices, so tired he could barely s
ee straight, and found Kravis and Roberts with Dick Beattie. At breakfast, Peter Ackerman had offered to back out of the deal if Kravis wished. Kravis wanted no such thing. Asked for a compromise, Ackerman came up with something he thought Gutfreund could live with. The bond offerings would be split: Drexel would head the first portion, with Shearson on the right, and Salomon would head the second, also with Shearson on the right. Similar ideas had been batted around the night before, but Kravis thought it sounded reasonable.

  Cohen tried his best to listen, not sure he fully understood the proposal. Less than a half hour later he returned upstairs to explain Kravis’s compromise to a group that now included Jack Nusbaum, Jim Robinson, and Steve Goldstone. Johnson still hadn’t shown up. When Gutfreund and the others began questioning him about Ackerman’s plan, Cohen found himself short of answers.

  “Look, I give up,” Cohen wearily told the group. “Maybe somebody else can crack the code here. Maybe somebody else should go down and see what you can do.”

  Jeff Lane and Jack Nusbaum were chosen to make the second sortie. Downstairs Kravis sent the pair into another room and had Ted Ammon explain again the compromise he had in mind. Kravis was alarmed. Lane and Nusbaum didn’t seem to have the slightest grasp of what they were talking about.

  In her apartment above the Museum of Modern Art, Linda Robinson was awakened by a call from her secretary. “Henry Kravis just called. He says it’s important.”

  Robinson hadn’t been asleep for more than three hours. When her head hit the pillow at six A.M., she had hoped the deal would be struck by the time she woke up. She called Kravis and was passed through quickly.

  “How’m I doing, coach?” Kravis asked.

  “I don’t know, Henry,” Robinson said sleepily. “It’s nine-thirty in the morning. What’s going on?”

  “We just had a meeting. Things went okay, but we couldn’t really tell.” Kravis was fishing, Robinson figured.

  “I don’t know what happened,” she said, “but I’ll find out and call you back.”

  Linda Robinson put down the phone, then called the group at RJR Nabisco. Kravis insisted on keeping Drexel in the deal, she was told, and the talks were collapsing. Everyone was blaming it on Kravis. Oh, no, Robinson thought.

  She called Johnson. He was still at home and knew nothing about the rapidly deteriorating situation at Nine West. Johnson was a late sleeper, and hadn’t let a $20 billion negotiation change his habits. “Things sound really bad,” Robinson said. “They’re way off track.”

  Finally she called Kravis back. “Everybody is really mad. What the hell went on when you met with our guys?”

  “Your guys were really tough.”

  “Well, they say you were backsliding on all this stuff.”

  When Johnson finally reached his office around ten o’clock, he found Cohen, Gutfreund, and the rest in an uproar. Not only was Kravis insisting that Drexel corun the books, they said, but he had now raised questions about the management agreement and other new issues. “They hate your management agreement,” Cohen said. “They’re taking a whack of that, too.”

  Johnson could always tell when someone was trying to get a rise out of him. Cohen, it was clear, wanted him mad at Kravis. Confused and growing angrier by the minute, Johnson took a seat in the large conference room where the group was debating how to handle Kravis. Mostly they seemed to be cursing him.

  They’re trying to take the whole deal! We’re getting fucked! They’re fucking us! They’re fucking us!

  It made no sense to Johnson. As best he could tell, it all boiled down to who got the most fees. When he asked questions, the answers came back in Wall Street gobbledygook that only made the issues more difficult to comprehend. Half the time Johnson couldn’t tell if he was supposed to be upset. “I just bloody don’t understand what the problem is,” he said.

  Strauss tried to explain that splitting the bond offerings would be a logistical nightmare. “Goddamn it,” Gutfreund railed, “what they’re looking for is preposterous. We should just go out on our own. We’ll never be able to live with these people.”

  Disgusted, Johnson retreated to his office. He wanted no part of what he viewed as trivial arguments. He couldn’t believe the agreement would fall apart over something as silly as which bank would run a bond offering. People shuttled in after him, complaining that the deal wasn’t working. Johnson grew testy.

  “This is all horseshit,” he snapped. “Nobody gives a shit about the company. Nobody gives a shit about the employees. Jesus, we’ve got a goddamn company to run. I’ve got 140,000 people to worry about. We’ve got to get going!”

  As the morning wore on, Johnson waited for something—anything—to happen. The peace treaty couldn’t fall apart. It just couldn’t. This too, he figured, would blow over.

  Inside the fishbowl, matters deteriorated quickly. If Kravis insisted on using Drexel, they agreed, there would be no joint deal. If there was no deal, it was time to bid. It had been ten days since Kravis announced his $90 offer, Gutfreund and Strauss argued, and still the management team had no bid. They proposed to immediately loft a $92 counterbid.

  “It makes us real,” Strauss argued. “We need to be penciled in as a player. We need a bid on the table.” The price got no argument from Cohen or Jim Robinson. Of those present, the only serious opposition came from Steve Goldstone.

  To Goldstone, it was clear what this tactic was about: It was what traders called a “fuck you” bid. Simply put, Cohen and Gutfreund were so mad at Kravis they wanted to shove an offer right in his face. Goldstone silently cursed these men and their giant egos.

  He stood beside the great table and denounced the idea of a new bid, his voice rising as he spoke. He had been pleading with Atkins for a merger agreement, promising that management would come through with a blockbuster bid. If Shearson bid $92, he said, that argument would be moot. A $2 bump wouldn’t bust many blocks. Once a bid was out, they lost their leverage with the special committee. Atkins and Hugel would know they had management on the hook and would pull for all their worth.

  “This won’t scare Henry off,” Goldstone argued. “Henry won’t walk away from this thing. It will only infuriate him. All you’re doing is pissing off Henry and losing our leverage with the special committee. We’re throwing away our strategic advantage. It’s a wasted bid.”

  Gutfreund didn’t think much of Goldstone’s argument and said so. Ross Johnson may write the check, Gutfreund suggested, but it was still Salomon and Shearson’s bankbook. “It’s not your money,” he snapped. “We know how we’re going to proceed.”

  For several minutes Goldstone and the Salomon executives locked in a heated discussion of bidding strategy. Goldstone wished Tom Hill, who was in Minneapolis for a Pillsbury board meeting, were there to add heft to his argument. Finally Goldstone’s partner, Dennis Hersch, leaned over and whispered into his friend’s ear.

  “Hey, cool it,” Hersch said. “They’ve made up their minds. You’re not their counsel.”

  Goldstone stormed around the corner into Johnson’s office. Spitting mad, he briefed Johnson on the situation, adding that the bankers were prepared to launch a counterbid. “It’s a serious, serious mistake and it’s going to hurt us,” Goldstone said. “But I can’t stop them. They’re completely hostile. They’re not listening to me.”

  Johnson listened as Goldstone went on about Gutfreund. Still he remained unconcerned. This was a negotiation, and all negotiations get heated. Sooner or later, he told himself, they would calm down.

  Robinson, Cohen, and Nusbaum were appointed to make the final trip downstairs to Kohlberg Kravis around eleven o’clock. Escorted into Kravis’s office, Robinson did the talking.

  “We appreciate your negotiating in good faith,” he said. “We both tried to cut a deal. Everybody worked hard. We seem to have problems that can’t be overcome. If you can’t move off that point, there’s no point in discussing this any further. We’ll have to go our separate ways.”

  Kravis was n
onplussed. “What’s the response to our proposal that we gave to Peter this morning?” he asked.

  Robinson was every inch the diplomat. It just wouldn’t work, he said, not going into details. Then he dropped the bomb.

  “We’ll be submitting an alternate bid,” Robinson said. “We’re putting it on the tape right now.”

  “What?” Kravis said, amazed. As far as he was concerned, they were still in negotiations. “Why?”

  “We may win or we may lose,” Robinson said, “but if we lose it’ll be with a structure that is best for our company and investors.”

  When Robinson’s group left, Kravis erupted, as did George Roberts. “Goddamn it,” Roberts groused, “Ross Johnson didn’t have the balls to come down here and look us in the eye and tell us that himself. I’m glad we didn’t hook up with those guys. It never would have worked out.”

  Cohen stepped out of Kravis’s office, picked up a phone in Kohlberg Kravis’s waiting room, and called the group upstairs.

  “Go ahead,” he said. Minutes later news of the management group’s $92 bid crossed the Dow Jones News Service.

  Kravis wasn’t the only one stunned by the management group’s bid. Johnson was floored. Brooding in his office, Johnson had figured the debate going on in the conference room was theoretical. Despite Goldstone’s warning, he didn’t believe anyone would actually launch a new bid. Not with a deal with Kravis so close. And certainly not without his approval.

  “What are we doing?” Johnson railed at Goldstone when he saw the news cross the tape. “This is stupid as hell! This is asinine! If all the negotiations have broken down, what the hell use is there in making an offer? You’re not going to get a merger agreement.” It would only anger Kravis.