Barbarians at the Gate

by Bryan Burrough

  Linda Robinson arrived on the forty-eighth floor and talked with Kravis on the phone at noon. He was livid. “I can’t believe they did it!” Kravis raged. “Why didn’t they try harder?” He went on for several minutes, his anger flowing unchecked. Linda Robinson could only listen, irritated and a bit embarrassed at her own side’s behavior.

  Johnson remained in his office, shocked at the turn in events. He couldn’t talk to Gutfreund or Cohen; they seemed too pleased at having shown Kravis the price of messing with them. He couldn’t talk to Kravis, who, in Johnson’s words, was “pissing fire.” Just seventeen hours earlier, he had managed to get a peace treaty. He hadn’t wanted to invite Strauss or Cohen or any of the Wall Streeters. The whole thing had fallen apart over greed—pure and simple greed. And now, the pièce de résistance, his own partners were launching a $20 billion bid without even bothering to tell him. He felt like the man who entered the casino in a tuxedo one night and emerged the next morning in rags. Far worse, Johnson realized, he had lost all control of his fate.

  As Johnson moped, Goldstone reluctantly dialed Peter Atkins to inform him of the group’s new bid. Atkins was pulled from a special committee meeting at Skadden Arps to take the call. Goldstone fought to disguise the displeasure in his voice. After their discussion of a preemptive bid the day before, he was almost ashamed to speak to Atkins. A blockbuster, Goldstone had vowed.

  As he broke the news to Atkins, Goldstone thought he could hear the surprise in the lawyer’s voice. He wanted to explain, but knew he didn’t dare. When he finished, there were several moments of awkward silence. He knew Atkins must be struggling with how to deal with the surprise of such a low bid.

  “Okay,” Atkins finally said. “I hear you.”

  Goldstone wasn’t the only one unhappy with the management group’s $92 bid. In Minneapolis, Hill stepped out of a Pillsbury board meeting to hear the news from Cohen. “I think it’s a mistake,” Hill told his boss. Now they were in an auction, and in an auction the auctioneer has control over all the bidders. “Once we stepped forward with a bid,” Hill recalled months later, “the board knew they had us by the short hairs.”

  Afterward, everyone scattered. Cohen spent the afternoon in a New York Stock Exchange board meeting. Strauss and Gutfreund boarded a plane and flew to Palm Beach for a weekend outing with Salomon clients. Johnson simmered in his office. Linda Robinson stopped by Kravis’s suite on her way out of the building.

  “We’ve got to do something,” she said. “We’ve got to get it back on track.”

  “I don’t see how we can get it back on track,” Kravis said. He was resigned to the fact; it was over. In the middle of negotiations, Peter Cohen had pulled a gun and sprayed the room with bullets. How do you negotiate with people like that?

  “You’ve made your bid,” Kravis told Jim Robinson’s wife. “You’re on your own at this point.”

  Financial studies were Frank Benevento’s life. As a consultant to Johnson and Sage, Benevento loved to use terms such as financial engineering to describe his number crunching. Lately Benevento had been busy studying the fee structures of major Wall Street advisers. On Thursday afternoon he walked into Johnson’s office with the results of his latest study. According to the percentile fees currently prevailing on Wall Street, and in light of the tremendous fees being paid the investment bankers and lawyers in this deal, Benevento said, he had compiled his own bill.

  It came to $24 million.

  Johnson nearly fainted. Everyone, he reflected, was out to get something for themselves. The directors, with their petty concerns about pensions and auto insurance. Kravis and his investment bankers and their fees. Salomon and its bonds. And now Frank Benevento wanted $24 million.

  There was no bloody way Benevento was getting anywhere near $24 million, Johnson thought. He told him to bill the company for whatever he wished. The matter would be dealt with when things returned to normal.

  Depressed, the Johnsons left New York on Friday morning, flying north to a hospital outside Albany. That afternoon Johnson sat in his comatose son’s hospital room for four hours. Bruce Johnson wasn’t doing well. His condition had deteriorated seriously on the trip to Albany from Westchester. The Westchester doctors insisted it would be safe, but their Albany counterparts felt he probably shouldn’t have been moved. Bruce’s temperature soared. Johnson passed the day talking with the doctors, but there was little to say.

  Similarly, Kravis spent Friday with his own son. It was Parents Day at the exclusive Middlesex school in Massachusetts, and Kravis drove up for the occasion. Afterward he retired to his country home, hoping to escape the rigors of all-night negotiations and the rat-a-tat of press criticism. The media attacks had left him feeling besieged. At his darkest moments, it was enough to make him question how badly he really wanted to own RJR Nabisco. Was it worth the cost of being a pariah?

  Friday afternoon Kravis suffered by far the worst blow from the press so far. “KING HENRY,” blared the cover of Business Week, out that day. The headline inside read, “Why KKR’s Kravis may be headed for a fall—even if he wins the battle for RJR Nabisco.” Carolyne Roehm saw the cover at her Seventh Avenue office and cringed.

  Kravis reacted as if he’d been publicly labeled a child molester. He withdrew into himself, morose. All weekend Roehm tried to cheer him up, but it was no use. She tried silliness and teasing and laughing. She joked they should enlarge it to poster size and hang it up. Linda Robinson called and passed on her condolences. Nothing worked. Kravis was stricken.

  Then, at his lowest ebb, something happened that should have made him feel better. Kravis didn’t know it, but the tides of public sentiment were about to shift, strongly, in his favor.

  For all the debate over its contents, the copy of Johnson’s management agreement that fell into Kravis’s hands hadn’t changed much in two weeks.

  Despite Gutfreund’s complaints about its “unseemly” aspects, despite Jim Robinson’s suggestions, and despite the fact that virtually everyone involved agreed it would be renegotiated, so far it hadn’t. Peter Cohen had more important things to worry about. He passed responsibility for it to Jack Nusbaum, who passed it on to an associate at his firm. Negotiations would be messy and time-consuming, and everyone was busy battling Kravis.

  Gutfreund, having received assurances it would be cut back, was in no hurry. The keepers of the agreement, Johnson’s attorneys at Davis Polk, were in no hurry. Steve Goldstone, curiously, left it to Johnson to renegotiate the management agreement. “Ross is a grown-up,” Goldstone said later. “He knew he had to give it up. It was up to him.”

  Day-to-day responsibility for the agreement remained in the hands of Goldstone’s assistant, Gar Bason. Bason saw his job as looking out for no one’s interests but Johnson’s and was determined to hold the agreement sacrosanct, no matter what Cohen had promised Gutfreund. For a week following Salomon’s entry into the fray, Bason badgered Gutfreund’s aides to approve it. “Have you signed off on it yet?” he asked. “Have you signed off?”

  Frustrated, Bason complained to Goldstone. “They’re just fucking us over!” he snapped. Irritated by Bason’s demands, Salomon’s lead attorney, Peter Darrow, also took complaints to Goldstone. “Your guy Bason keeps hammering me on this thing,” Darrow said. “He seems to think there will be no changes. Well, there will be changes.”

  Goldstone had no interest in fighting. “Agreed,” he said. It could wait.

  Among the few who wanted the agreement changed quickly were Jim and Linda Robinson, the two members of the group most keenly attuned to public relations. Both had recognized the agreement’s potential to explode in Johnson’s face. But Jim Robinson, the one who could have pressed for a change, didn’t. As a result, nothing happened. The agreement simply lay in state, a time bomb ticking away. Friday afternoon it went off.

  Linda Robinson took the call. A veteran New York Times reporter, James Sterngold, was preparing a story on the management agreement for Saturday’s paper. From what Sterngold
told her, it was clear he knew everything: the $2 billion, the free ride, even Salomon’s opposition. Linda Robinson’s first impulse was to come clean and discuss the agreement openly, but she was overruled by a press-wary Goldstone. When she informed her husband of Sterngold’s call, Corporate America’s secretary of state had a succinct reaction: “Oh, shit.”

  Late Friday afternoon Peter Cohen sat in the back of a limousine cruising home. It had been a long, frustrating week, but despite breakdown of the peace talks, he still held out hope he could get Johnson and Kravis together. No permanent enmity existed between the two sides, and the clash between Drexel and Salomon seemed too silly to keep them apart.

  When he heard of the developing Times story, Cohen instantly realized the repercussions. If the pact had leaked, it could only have come from one place. Cohen immediately called Dick Beattie.

  “What the hell happened?” Cohen demanded.

  “I don’t know, Peter,” Beattie said. “I have an idea how it happened. But it didn’t come from me.”

  “You leaked that agreement to Sterngold!”*

  “Peter, I didn’t. I couldn’t have. It’s right here in my briefcase.” The briefcase lay open at Beattie’s feet. “Peter, I’m not in control of everything,” Beattie said. “Henry hands out everything to everybody.”

  In fact, Kravis had convened a meeting of his investment bankers Thursday afternoon, where terms of the agreement were aired in detail. Kravis hadn’t trusted his advisers to keep their mouths shut for a moment. The management agreement, though, seemed like just the kind of thing they ought to know about. Any one of a dozen advisers, Beattie knew, could have been the leak’s source.

  Cohen hung up, incensed. The battle for RJR Nabisco was escalating. The winds were changing, and they were beginning to blow hard in Peter Cohen’s face.

  By Friday Ted Forstmann’s bidding group was ready to surface. At first, Hugel’s special committee, wary about giving sensitive financial information to the company’s toughest competitors, had balked at welcoming Forstmann’s group. But Geoff Boisi’s persistence had won the day. Boisi had agreed to a difficult due diligence process, in which each document the group received was to be color coded for review by only certain members.

  What broke the logjam, though, was Hugel’s realization that Forstmann Little represented a fallback position in case Johnson and Kravis teamed up. Hugel was certain the two would join forces: It made too much sense. If so, Forstmann’s presence would keep the bidding alive.

  Forstmann, of course, ensured it would be a difficult birth. Friday he spent the day at Lazard’s Rockefeller Center offices negotiating a press release announcing his group’s formation. He insisted that the release note that his group had been “invited” to bid; it was vital if Forstmann were to wear the white hat. Peter Atkins refused. The board, after all, was supposed to be neutral. No matter how much it wanted Forstmann in the bidding, it couldn’t be seen as playing favorites.

  But Forstmann was adamant. “I have to be invited. Don’t you understand?” he told the Lazard advisers. “Either it’s there or I’m not.”

  All afternoon they argued. Then, with Forstmann on the verge of storming out, Atkins finally relented. How about welcomed? the lawyer suggested. The board would welcome Forstmann’s interest. Forstmann agreed.

  During a break, Forstmann contacted his office and discovered a message from Jim Robinson. Minutes later he called and heard Robinson’s soft Georgia drawl come on the line.

  “Teddy, you know the respect I have for you,” Robinson began. “You run your business, and I run mine. Now, I’m not telling you how to run your business. But I want you to know that the rumor down here is that you and Geoff Boisi are trying to put something together. I want you to know our guys are jumping up and down stiff-legged about this.”

  Forstmann wasn’t familiar with the phrase, but got the message that Cohen was irate. “They feel,” Robinson continued, “they had a statement from you that if you didn’t do something with us, you wouldn’t do anything at all. They said you had agreed to sit on the sidelines.”

  Forstmann took a deep breath. “Jimmy, this is very tough. I know you know I’m an honest guy.” He told Robinson how he had stressed to Cohen that Forstmann Little had three options: joining forces with Shearson, going it alone, or dropping out. “Quite frankly, the last alternative was my preference—I just wanted to forget it. Now I’m not sure what we’ll do.”

  “I know that,” Robinson said. “But you said yourself you’d sit on the sidelines.”

  Forstmann attempted to explain what he meant by the sidelines remark. He could tell it was no use. “Listen, Jim, we don’t know what we’re going to do yet. When we do, you’ll be the first to know.”

  Two hours later, Forstmann called Robinson again. He read the American Express chief the press release announcing formation of the new bidding group.

  Robinson laughed. “Gosh, my phone call sure had some impact.” Forstmann hadn’t given Robinson’s earlier objection a second thought.

  “Good luck to you guys,” Forstmann said.

  “And you,” said Jim Robinson.

  Johnson slept late Saturday morning at his Atlanta home. Padding downstairs he picked up the The New York Times. Scanning the business section, his eyes were immediately drawn to a story at the bottom left-hand corner.

  “NABISCO EXECUTIVES TO TAKE HUGE GAINS IN THEIR BUYOUT,” the headline read.

  Johnson, who never viewed the management agreement as the symbol of greed others did, thought the story was so wild it wouldn’t have any credibility. It suggested the pact might be worth as much as $2 billion, a figure Johnson considered absurd. Only if every incentive was reached might they have reaped that much, but now, with bids pushing into the low nineties, that would never happen. Besides, everyone knew the agreement was to be renegotiated.

  “This is absolutely fucking ridiculous,” he said aloud. No one would believe this. Would they?

  He reached Jim and Linda Robinson in Connecticut. “No reasonable person is going to believe this shit,” he told them. “This is goddamn asinine.”

  Linda Robinson didn’t think the story was so far off the mark, but didn’t tell Johnson that. “Ross, it’s not a p.r. problem you’re dealing with,” she said. She had to make Johnson grasp the scope of the dilemma they now faced. “It’s a factual problem. You don’t understand. You can’t just tough this out. You’re going to get killed on this thing.”

  Johnson’s phone rang off the hook that day. One of the first to call was Andy Sage, the architect of the management agreement. Sage had read The Times story and, remarkably, hadn’t thought much of it. “Oh, that thing,” Sage said. “That’s all conjecture; nobody’s going to take that seriously.”

  Sage wanted to talk about the bank situation. He was concerned that Shearson wasn’t making progress toward assembling bank financing. “I can only beat their heads so long,” Sage said. “I just don’t think they’re doing the job.”

  It was all Johnson needed to hear. Coming on top of everything else, he was beginning to realize the limitations of his partners, Shearson and Salomon. “Having watched and listened to George and Henry,” he told Sage, “I would say we’re a little overmatched here.”

  Charlie Hugel, who read The Times story that morning at his Connecticut home, was also getting calls. His were from angry directors, demanding an explanation from Johnson. If The Times report were true, the board risked looking like fools for not knowing about the agreement. Hugel himself was also curious, although he was too contemptuous of the press to grant it any accuracy. He called Johnson in Atlanta.

  “Oh, Charlie, listen,” Johnson said. “It’s horseshit. Don’t believe a word of it.”

  The two men discussed the article’s alleged inaccuracies for some time. “Listen,” Hugel finally said, “will you get me a letter on it, because I’m getting some calls.”

  Sure, Johnson said. The next day Goldstone authored a letter to Hugel, which Johnson signed.
“Saturday’s New York Times incorrectly implied that I and a few other members of management could earn excessive amounts under our group’s buyout proposal,” it began. “This simply is not the case, and I would like to set the record straight.”

  Johnson went on to suggest that his group’s compensation arrangements were typical of LBOs. Furthermore, he wrote, much of the equity the group would receive would be distributed to large numbers of employees. “When we reached agreement with our financial partners on the allocation of equity,” Johnson wrote, “I asked our lawyers in New York and Winston-Salem to analyze ways in which this stock could be distributed to our employees, and they are actively engaged in this analysis.”

  Charlie Hugel read Johnson’s letter carefully. In three weeks of conversations with Johnson—including the talk in which Johnson offered him a share of the purse—it was the first time Hugel had heard any mention of employees receiving stock. Not even the day before, when Johnson had The Times story in hand, had he mentioned anything about this.

  Hugel thought Ross Johnson was lying.

  Among the more surprising elements of The Times story was a passage suggesting that Salomon had misgivings about the management agreement. Gutfreund called Johnson Saturday to deny this and to assure him that no Salomon executive had talked to the reporter. “Well, I tell you, Johnny, you got some kind of canary in there somewhere,” Johnson said. He left it at that; Johnson simply wasn’t built for confrontations.

  Steve Goldstone was. When Goldstone read the Salomon reference he went berserk. The first thought that crossed his mind was that Salomon had leaked the management agreement to force the changes it wanted. He put the thought aside.* Not even Gutfreund, he said, was that stupid.

  “We’ve got to get Sally in line,” Goldstone complained to Cohen that afternoon. “If there’s some changes we have to make, let’s get to it. But this kind of public bickering shows a terrible division in our camp. They simply have to be brought in line. This is going to kill us.”