Barbarians at the Gate

by Bryan Burrough

  “Be advised that this committee is flatly opposed to your group taking any such action,” Hugel wrote. “Whatever your grievances may be, this committee considers the Forstmann Little group to be a credible bidder for RJR Nabisco. The interests of RJR shareholders will be best served by the active participation of that group in our process, free from interference by your group…. Please confirm to me immediately that your group will not take any such action.” Goldstone had written Hugel a halfhearted response, suggesting a suit was unlikely but defending the group’s right to bring one, anyway.

  Each new disclosure contributed to the revised picture of Johnson developing in Hugel’s mind. Hugel was chairman of the board of trustees at his alma mater, Lafayette College. Johnson, he realized, gave little to charity. Hugel had been married to the same woman for thirty-six years, and he wondered whether the changes he saw in Johnson could be attributed to Laurie. The phenomenon of rich, older men taking pretty, young, second wives has been called the Jennifer Syndrome, and Hugel was the kind of solid citizen who thought older husbands often did foolish things to show off for their Jennifers. He felt that ambitious women such as Laurie Johnson, Susan Gutfreund, Linda Robinson, and Carolyne Roehm—in New York they called them “trophy wives”—compared notes on how their new husbands were doing, egging them on to grandeur.

  Of the other committee members, the Yale-educated, Brooks Brothers–clad Macomber had long mistrusted the Manitoba-educated, Cassiniclad Johnson. Macomber had walked away from Celanese with a $2 million severance package, and was stunned at Johnson’s $2 billion pact. Like Hugel he was an old-school believer in fundamental business values and regarded what Johnson was doing as making all executives look bad. He was also a great believer in the board’s prerogatives. He hated having been taken by surprise by Johnson.

  Johnson’s most nettlesome director found a kindred spirit in the one thought to be his chummiest. Johnson had just put his friend Marty Davis of Gulf + Western on the board earlier that year. But Davis was nobody’s patsy. He was a blunt, Bronx-born high-school dropout, who had risen in the movie business from Sam Goldwyn’s office boy to head of Gulf + Western’s Paramount unit. He had developed a fearsome reputation for firing and intimidating people, earning him a spot on Fortune’s list of “America’s toughest bosses.” As chief executive of Gulf + Western, he had faced down corporate raiders such as Carl Icahn. He had also overhauled the company from a sprawling conglomerate to a media and financial power. He knew how to value businesses, and he thought $75 a share to be insulting or bungling or both.

  Bill Anderson of NCR simply didn’t like junk bonds, corporate raiders, or any of the modern folderol that kept business from doing business. At NCR he preached a homespun philosophy of looking after “stakeholders”: employees, suppliers, and communities whose lives were intertwined with and dependent on a large company. Anderson had gone so far as to hand out stakeholder literature to other board members. He, too, was growing tired of the entire spectacle.

  Of all the directors, Albert Butler felt the heat most keenly. At home in Winston-Salem, he was constantly upbraided by anti-Johnson zealots who felt the board had sold out the town and its workers. He and Wachovia’s John Medlin were lunching at a downtown club when an angry Paul Sticht happened by. “How could the board let him do this?” Sticht demanded. “How could it?” Butler and Medlin patiently explained that they had really had had no choice, but Sticht didn’t want to hear it.

  Neither did anyone else.

  By the time the committee met Monday, there was an unstated acknowledgment that things had gotten out of control. It was time, the directors agreed, to take matters into their own hands. At the urging of Davis and Macomber, the board’s bankers had begun working on a restructuring plan of their own. In theory, the committee could throw out all bids and restructure the company independently, giving shareholders a big onetime payout from the sale of assets. In practice, the board needed the restructuring as a club to wave before Johnson and Kravis, an alternative in case the two teamed up.

  More important on the morning’s agenda, Peter Atkins had constructed a set of formal bidding guidelines, laying down procedures for each of the three groups—Johnson, Kravis, and Forstmann—to make its bid. For the most part the rules were standard; each of the bidders agreed to them within days. The key was the deadline: five o’clock Friday, November 18, eleven days away.

  When the guidelines were issued that afternoon, Johnson groaned. A formal auction put all bidders on the same footing, meaning his group had squandered the last of its tactical advantage. In a call to Hugel, he tried one last pitch for a merger agreement, but got nowhere. As for the restructuring idea, Johnson thought it was a bluff. “Charlie, you’ll get your balls blown off,” he told Hugel. “No way you’ll get ninety dollars out of a restructuring.”

  As the anti-LBO backlash rose to new heights, Kravis grew concerned that it might be doing irreversible damage to the firm’s reputation. He and Roberts consulted twice with a pair of old friends, Gershon Kekst and Marty Lipton, about what they could do to counter it. The consensus: very little. Headlines attracted congressmen, they knew, and Kravis resigned himself to the possibility of anti-LBO legislation once the battle concluded. He tried not to think about it. “They can’t do any more than crucify us in the press,” Kravis said, “and that’s been done.”

  Still stinging from the Business Week cover, Kravis received lectures on handling the press from his wife, who had suffered her own share of slings and arrows in the quest for publicity. “Henry, whether you like the press or not, you’ve got to deal with it. So deal with it,” Roehm urged. “What you don’t understand is that you’re letting the press be handled by the other side. You must put out your own side of the story, or it won’t get told.”

  “But—”

  “There are no buts,” Carolyne Roehm said. “You’re being hammered. You’ve got to get your story out there. Otherwise the story that gets told will be theirs.”

  On his wife’s advice, Kravis and Roberts agreed to see a reporter from The New York Times that week. The journalist had in mind an extensive interview, but Kravis, after making sure it was understood that he had never uttered the word franchise to Peter Cohen, cut the session off after a few minutes. Tom Daly, a Kekst spokesman, apologized for the “abrupt and frosty” end to the interview, explaining that the two were “stressed out.”

  The press wasn’t Kravis’s only worry. He was still searching for a wise man to provide guidance to fathoming RJR Nabisco’s depths, and with just eleven days until bids were due, he was growing desperate. At Eric Gleacher’s suggestion, he had interviewed Charles M. Harper, the chairman of agricultural giant ConAgra, about running the company; it hadn’t worked out. Kravis had two meetings with executives of Pepsi, who wanted to invest in his deal in return for buying several Nabisco lines. While he had no doubt the Pepsi executives could help manage the company later, they couldn’t help him now. Then, finally, Kravis heard the obvious name: Paul Sticht.

  When Kravis called, Sticht tried to balance his loathing of LBOs with his loathing of Ross Johnson. Sticht considered LBOs “a national scandal [that] produced no good for anybody but a few greedy people.” But the rabid anti-Johnsonism of Winston-Salem—even his barber was rooting for Kravis—convinced Sticht that helping Kravis was the right thing to do.

  The two men met at Simpson Thacher Monday afternoon at four o’clock. Sticht wouldn’t come to Kravis’s offices for fear of running into Johnson in the lobby or elevator. Kravis found Sticht a genial retiree, “a real gentleman,” with none of the obvious bitterness toward Johnson that Tylee Wilson had evidenced. He obviously cared about the company and its employees. Still, Sticht was out of touch with the new RJR Nabisco; his hands-on knowledge of the company seemed to be five years out of date. In the end, though, Kravis had to face a simple truth: Sticht was all he had. The two men shook hands, and Paul Sticht joined the Kohlberg Kravis team.

  “Somebody take Henry’s tempera
ture,” Johnson said when he heard the news. “He must be running a fever.”

  Leaked to the press on Monday, Peter Cohen’s letter to Forstmann Little read like a shot across Ted Forstmann’s bow.

  Dear Ted:

  I am deeply disappointed, in fact dumbfounded, by published reports that you may be leading a group whose purpose would be to seek to acquire RJR Nabisco, Inc.

  You will recall that two weeks ago you approached Jim Robinson, Ross Johnson and me with a view towards becoming an important member of the management-led group which was considering an offer for RJR Nabisco. I am sure you remember your expressed reasons for wanting to join us.

  In view of your strong desire to become our partner, and in reliance upon the specific representations outlined below, we agreed to discuss all aspects of our proposed transaction with you fully and frankly, including our economic models, our detailed financing arrangements, our proposed bidding strategy and our preliminary thoughts regarding possible divestitures….

  We allowed Goldman Sachs, as your agent, to participate in our conversations based upon your and their expressed assurances that they would likewise be bound by the terms of the confidentiality agreement which you had signed. It would appear that Goldman Sachs nonetheless induced certain food companies to join your group, presumably using the confidential information which you obtained from us to induce them.

  I strongly urge you to very carefully consider your actions. Our business relationship, including our recent discussions, presumes a code of conduct which should not include either ethical lapses or breaches of contractual relations. Shearson and the executives of RJR Nabisco intend to honor the commitments they have made. We expect you will do so as well….

  I very much hope that you will carefully consider the contents of this letter.

  Very truly yours,

  Peter

  Cohen’s letter had a predictable effect on Forstmann, who fired back a reply the next day.

  Dear Mr. Cohen:

  Through your letter of November 7, 1988 and your apparent distribution of that letter to the press, you have begun a program of irresponsible and false attacks against the ethics of Goldman, Sachs & Co. and Forstmann Little. By implication, you also attack the ethics of Procter & Gamble, Ralston Purina and Castle & Cooke, which have joined with us in considering the acquisition of RJR Nabisco. As you are aware, by attacking our reputation, you attack that which is most valuable to us. We believe that the motivation for your actions is to drive us out of the bidding process for RJR Nabisco in order to permit Shearson Lehman and certain RJR executives to buy the company at a reduced price. It is particularly disappointing that you should pursue this “tactic” because the RJR Nabisco management with whom you are working is obligated to protect the interests of RJR Nabisco shareholders….

  As I am sure you recall, we expressly informed you during the course of our discussions that, if we could not reach agreement with you, we reserved the right to consider our own transaction. We repeatedly made clear to you that we maintained three options: first, to participate in the transaction you were proposing if it were amended to comply with our standards; second, to walk away from any involvement with RJR; or third, to formulate our own proposal if such a proposal was invited by the Special Committee. After the Special Committee indicated to us that they would welcome our group’s interest, we determined to pursue the option of considering such a proposal….

  The Forstmann Little group’s interest in RJR Nabisco works to the clear benefit of RJR’s shareholders and has been expressly welcomed by the company’s Special Committee. We will not make a proposal if, after careful review, this transaction fails to meet our strict financial standards. However, under no circumstances will we permit your efforts at intimidation to impair the interests of Forstmann Little and its capital partners.

  The firm of Forstmann Little & Co. has been built carefully, with the highest possible business standards and with total integrity. We have acted in all respects consistent with those standards throughout this transaction; we need no advice from you in this regard.

  I hope this puts to rest the phony controversy which you have manufactured. Unlike you, we do not intend to release this letter to the press.

  Very truly yours,

  Theodore J. Forstmann

  Cohen had sent a similar letter to each of Forstmann’s bidding partners, including the respected senior partner of Goldman Sachs, John L. Weinberg. Weinberg’s reply read like a senior statesman chastising a junior colleague.

  Dear Peter:

  I received your letter of November 7, 1988 at approximately the same time I received a call from the press, and thus it is clear to me that your letter was for purposes of public relations rather than communication with us. It is also clear that you don’t know me very well; otherwise you wouldn’t have wasted your and my time with insults or threats—particularly when you have not gotten your facts straight.

  In my judgment your letter is not worthy of reply. However, my colleagues have persuaded me that it is appropriate to give you a written response.

  Your letter is factually erroneous and totally unwarranted. Goldman Sachs has not violated any of the terms of the confidentiality agreements which Forstmann Little signed with RJR Nabisco. As you know, I was not personally present, but I am categorically advised by my colleagues that our clear message to you has been that we might proceed independently of management or Shearson and were actively considering that possibility. Goldman Sachs is not precluded by any agreement with Shearson or RJR Nabisco from pursuing that alternative or making proposals for RJR Nabisco that would be received favorably by the Company and its shareholders.

  This view is clearly shared by the Company’s committee of independent directors. As it publicly reaffirmed today, the committee has welcomed the potential interest of Forstmann Little, Goldman Sachs and the highly respected companies with which we are working.

  I find it difficult, if not impossible, to take seriously your professed interest in good relationships with Goldman Sachs. It is not conducive to any relationship between our firms for you to make charges such as those in your November 7 letter, or to seek to exploit them by releasing them to the press before you have even communicated them to us or received our response. We do not believe it is in anyone’s interest to escalate this exchange and therefore we are not planning at this time to send copies of this letter to the press.

  I strongly object to the tone and substance of your letter; you have no basis to lecture me, Geoff Boisi or Goldman, Sachs & Co. about anything. Moreover, your tactical maneuvers can only contribute to the negative impression of our industry that many people have. I trust those tactics will cease.

  Sincerely,

  John L. Weinberg

  After reading the letters from Hugel, Forstmann, and Weinberg, Jim Robinson called Cohen and, in no uncertain terms, suggested he didn’t care to read any more examples of Shearson’s penmanship.

  Bob Carbonell, chairman of Del Monte, stormed into Johnson’s New York office Wednesday morning. El Supremo was as angry as The Pope had ever seen him. “Ross, you won’t believe the amateur hour that’s going on,” he said.

  Carbonell explained that he had just returned from being questioned by a squad of Dole executives at The Plaza as part of Forstmann Little’s due diligence. From their questions, it was obvious that Dole had somehow gained access to a wealth of Del Monte confidential information: shipping schedules, production forecasts, everything. Del Monte’s competitive position, Carbonell concluded, had been seriously compromised.

  Both men realized the slip must have come from the special committee. Its vaunted security procedures hadn’t worked and, as a result, Dole had been allowed to snoop into Del Monte’s most secret files. For the first time in a month, Johnson lost his temper. He could put up with fighting Kravis or Cohen. Those were fair fights. But to suffer a blow from pure laziness, pure incompetence—that was too much.

  Hugel had flown to Russia the day bef
ore, but that didn’t stop Johnson. John Martin called Roone Arledge at ABC and had a call patched through to the network’s office in Moscow. In Moscow, Hugel hustled out of his hotel, through the dark, winding streets, and up to the ABC office to take Johnson’s call. Even in Russia Hugel hadn’t been able to escape RJR Nabisco. He ran into a senior Pepsi executive in the lobby of his hotel and discussed ways Pepsi might enter the bidding. At the Kremlin, Hugel met with several top deputies, including the chairman of the USSR’s committee of commerce. All wanted to know about the big battle on Wall Street.

  Now Hugel listened as Johnson vented his fury at the special committee. “Now I know they’re all complete fucking idiots!” Johnson ranted over the transatlantic line. “Here they are getting paid twenty-eight million dollars to jump all over our ass. To not even do the due diligence right. This really, really hurts, Charlie. They don’t need all that information to understand whether the goddamn company is right or wrong. You’re going so goddamn hard to pump up these people that you’re killing the company! It’s not fair.”

  Hugel said he would look into it, and later a committee aide apologized to Johnson for what he termed a “technical mixup.” There was a postscript to the episode. Several weeks later Carbonell received a Federal Express package apparently misrouted by a clerk at Dole headquarters. Inside he found photocopied sheets of Del Monte financial data. To Johnson it was clear Dole was sending the data to its executives around the world. By then, of course, it was too late to do anything about it.

  The New York Public Library looms out of midtown Manhattan’s grimy streets south of Grand Central Station like the Parthenon. A stone re-doubt two full city blocks long, among the best examples of beaux arts architecture in New York, it features an enormous entranceway flanked by a pair of massive stone lions, Patience and Fortitude.