Barbarians at the Gate

by Bryan Burrough

  “No…no…” Seslowe moaned as the impact sank in. “This is complete bullshit! This is a catch-22. They won’t invest until they meet with First Boston. This is a disaster!”

  Skadden Arps refused to budge on the agreements. Seslowe did the only thing he could; he panicked. All Monday and into Tuesday, he scrambled for commitments: Not all his investors held stock. Maher and the Pritzkers looked on warily, hoping Seslowe could come up with the money by five o’clock.

  At least the bank situation had firmed up. Against all odds, First Boston’s bank team was nearing success. It hadn’t been easy. Every major U.S. bank was committed to helping Kravis or the Shearson group. None was enthusiastic about fielding a third team to help First Boston’s iffy bid. The Japanese banks had their own problems. “We’d love to work with you,” one Tokyo banker told First Boston’s Dave Batten, “but we’re already working with two other groups, and we’ve run out of people who speak English.”

  Somehow Greg Malcolm had managed to gain multibillion-dollar pledges from Credit Suisse and a French bank for the tobacco half of their plan. All that remained was for Chase Manhattan to finish work on the monetization proposal.

  Monday afternoon Malcolm took a call from David Maletta, First Boston’s liaison to the banks on the monetization project. With any luck, Malcolm thought, Chase Manhattan had finally signed off.

  “We’ve got a big fucking problem,” Maletta said.

  “What’s the problem?”

  “Chase won’t do it.”

  Malcolm’s heart sank. “You’re kidding.”

  “No, I’m not.”

  “What happened?”

  First Boston had crawled upward through layer after layer of bureaucracy, Maletta explained, only to be tomahawked by Chase Manhattan’s senior credit officer. Malcolm was stunned. When Jim Maher heard the news, he closed his eyes. “We’re in big trouble.”

  Time magazine hit the newsstands Monday, and it was even worse than Linda Robinson had feared. “A Game of Greed,” the cover blared over a picture of a thoughtful Ross Johnson, hand on chin. “This man could pocket $100 million from the largest corporate takeover in history,” it read. “Has the buyout craze gone too far?”

  As bad as the cover was, the worst damage to Johnson was, as usual, self-inflicted. What about the outsize management agreement? “My job is to negotiate the best deal that I can for my people.” Does a chief executive deserve that kind of reward? “It’s kind of Monopoly money.” Wouldn’t lots of people lose their jobs? Sure, Johnson said, “But the people that I have, particularly the Atlanta people, have very portable types of professions: accountants, lawyers, secretaries. It isn’t that I would be putting them on the breadline. We have excellent severance arrangements.”

  That wasn’t quite true. The special committee wanted each bidder to include employee-protection guarantees in their draft merger agreements, a notion the management group was stoutly resisting. The point would take on significance, because a longtime employee was lobbying hard for the employee protections.

  Ward Miller, the special committee’s secretary, was a longtime top legal officer for Johnson. The former Vice President of Worry would now also turn on Johnson. Miller had joined Standard Brands fresh out of law school in 1961. Now he was fretting for all his many old colleagues who would be fired as Nabisco was broken up. In this lull between bidding rounds, he had a chance to do something about it.

  To each of the directors, Miller insisted on several points: guaranteeing pay and benefits of RJR Nabisco employees for three years; giving remaining employees the right to quit with sweet severance packages if they were forced by RJR’s new owners to move more than thirty-five miles; assuring that retirees’ medical benefits would continue.

  The Kohlberg Kravis lawyers didn’t like Miller’s ideas, but they negotiated them. The management group’s lawyers wouldn’t budge. Miller went back to the board members and peevishly let them know it. The only employee Johnson seemed interested in was John Martin. He was beginning to lobby directors for a fat pension for a man who’d joined the company in January.

  Johnson talked to Hugel Monday afternoon. “I won’t even ask you if this will be a fair bid,” he said. “If you ask me, ‘Do I trust the people on the special committee,’ the answer is no.”

  Hugel assured Johnson the process would be fair. But when he started to pound the restructuring drums again, Johnson cut him off. “Oh come on, Charlie,” he said, “that shit’s getting pretty tiresome.”

  Tuesday morning Hugel was astounded to take a call in his hotel room from Johnson. He looked at the clock; it was six-ten. “What are you doing up?” Hugel asked. The only time Johnson was ever awake at six o’clock, he figured, was when he had stayed up all night.

  “We’re trying to figure out what’s going to happen on the bids,” he said. The Shearson camp was divided, Johnson went on. Most thought Kravis was bowing out; a few, like Johnson, feared he might come in with a blockbuster bid.

  “I don’t know what they’re going to do,” Johnson said.

  “What the hell are you asking me for?” Hugel said. “I don’t know either. Just go as high as you can.”

  On Tuesday morning First Boston’s bid hung in limbo. For hours Seslowe had assured Maher he would assemble his share of the pot. As Seslowe scrambled, Mel Klein kept the Pritzkers updated. Jay was negotiating a cruise ship deal in Miami; Tom, who had suffered an ear injury in a scuba diving accident, couldn’t fly and was marooned in a Los Angeles hotel. Both father and son worried that if Seslowe “cratered,” First Boston would turn to them to make good on his pledge. And $400 million wasn’t pocket change, not even to Jay Pritzker.

  “Be ready to make a decision,” Klein counseled that morning. “Today is the day.”

  That morning Maher and his aides were busy arm-twisting senior officials at Chase Manhattan on the monetization proposal. They got nowhere. Klein’s partner Harry Gray got the bank’s chairman on the line, but the executive was leaving for Russia in less than an hour and wasn’t inclined to spend the time overruling his senior credit officer.

  Maher was badly wounded. Without bank backing, Finn’s idea was just that, an idea. Maher decided to lower his sights. If a bank wouldn’t agree to fund the monetization proposal, First Boston had to get someone to vouch for the soundness of the idea. Maher needed something—anything—to give the board to convince them the project was workable.

  Mel Klein tried Bankers Trust, but was told it had no extra people to spare. Then, at noon, Harry Gray tried Citibank once more and struck pay dirt. A team would be over to First Boston at two o’clock.

  It was going to be close.

  The unenviable task of compiling First Boston’s scattered documents and data into a single, three-inch-thick binder fell to thirty-one-year-old Gordon Rich, a short, excitable banker with thinning brown hair.

  By Monday afternoon Rich had no idea what form First Boston’s bid would take: a merger, a recapitalization, or something else entirely. “Look, I’m running out of time here,” he told a gathering in Maher’s office. “I’m going back to my office and writing this deal now. If you guys don’t tell me the deal, I’m submitting what I wrote, not what you agree on.” Rich then stalked out.

  By one o’clock Tuesday morning, when Rich convened a meeting of lawyers in the forty-fourth-floor boardroom, he still hadn’t calmed down. Going around the table one by one, each lawyer had something to say about a document in Rich’s package. The speeches droned on and on. At such times some men might count sheep. Gordon Rich counted lawyers. He got to thirty-eight before losing his temper.

  “Look, if it’s not vitally important, I don’t want to hear it,” Rich announced. “I don’t care about every last little change. This will be done my way.”

  All Monday night and into Tuesday morning, Rich stalked First Boston’s halls demanding the material he had to send to Atkins. “Shut the fuck up!” he yelled at attorneys. “This is how we’re doing it. If you want to complain, go to
Maher!”

  By early Tuesday afternoon, Rich was beside himself. For four days he had pleaded with these people to deliver their work twenty-four hours ahead of time. Yet here it was, just hours to go, and he still didn’t have half the documents he needed.

  Like some fairy-tale troll, Rich began grabbing people as they walked by his office, demanding to know when their part of the package would be delivered. At the height of his frustration, he managed to snag Brian Finn. For some reason—Rich wouldn’t remember why—speaking to Finn was vitally important. When a lawyer named Mike Rothfeld stuck his head into Rich’s office and summoned Finn, Rich angrily objected.

  “No. No. You can’t have him,” Rich shouted at Rothfeld. “Get out of here!”

  When Finn rose to leave, Gordon Rich lost it. He grabbed his gray plastic phone, stretched the cord to its full length and hurled the receiver against its console with all his strength. Both the receiver and the console were demolished. Finn and Rothfeld beat a hasty retreat.

  Afterward, Rich left his office and wandered through empty offices on the forty-first floor. He was so tired he thought about simply leaving the building. Figuring he’d probably be fired, Gordon Rich returned to his office to wait.

  The team from Citibank arrived at First Boston at two o’clock. For some reason, the bankers had come down from an office in New York’s northern suburbs.

  With three hours to go, Fennebresque didn’t have time to worry about itineraries and escorted the bankers upstairs to an unoccupied dining room. “Look, here’s the situation,” he explained to the bank team’s leader. “In a few hours we’ve got to put a bid in. One of the banks crapped out on us at the last minute. There’s no doubt this bid is eminently financeable. There’s no doubt once the logjam breaks, there will be bank money here. We’d like you to give us the strongest letter you can.”

  For ninety minutes Fennebresque briefed the bankers on First Boston’s strategy. In case they didn’t understand, he handed them a draft letter he had written. Maybe something like that, he added. Suggestions never hurt.

  All that day Brian Finn wandered from room to room, grazing on sandwiches and answering questions. His duties were long over. Everything now was a matter of dollars and cents. Around three o’clock Finn encountered Hank Handelsman in a hallway. Pritzker’s lawyer was scowling.

  “Finn, I’ve got a big problem.”

  “What’s that?”

  “We’re short a quarter billion dollars.”

  “You’re what?” Finn was aghast. “What you are talking about?”

  “Seslowe didn’t deliver.”

  The two men walked for a few minutes as the lawyer explained the depth of their predicament. They paused by an empty desk outside Maher’s office. Inside, Finn could see a downcast Seslowe issuing what must been a series of mea culpas. The accountant walked out toward where Finn and Handelsman stood. He stopped, then turned away. Finn glanced at Handelsman. There was no mistaking the malice in the lawyer’s glare.

  Handelsman turned to Finn as Seslowe wandered off. “I could ask Jay for the money,” the lawyer said, “but I’m not real excited about the prospect.”

  “I don’t know about that,” Finn said, “but we don’t send that letter without the equity.”

  If the Pritzkers ponied up the money and won, both men knew they could syndicate most of it within days; banks and institutional investors would be clamoring for a piece of the action. But that didn’t put money in their pockets now.

  “You’ve really got no choice,” Finn said. “You make the call to Jay, or we’re out. Even with the equity, this thing’s a long shot. Without it, we haven’t got a snowball’s chance in hell.”

  Maher, too, rejected any suggestion of delivering a bid without equity commitments. Lacking the monetization commitment was bad enough; lacking the downpayment bordered on black comedy.

  Mel Klein now called around to a number of his fund’s investors and managed to pick up $5 million here, $10 million there. It was pocket change. An hour before bids were due, they were still $200 million short. Everyone—Klein, Maher, Finn, and Handelsman—knew there was only one place that money could come from. If it came at all.

  The clock beside Jim Maher’s desk read four-fifteen when Mel Klein finally got the Pritzkers on the line.

  Klein quickly explained the situation. “Guys, we’ve got to make the commitment now. No one else can write a check for this in five minutes.”

  There was silence on the other end of the line.

  “Jay, Tom, we’re here now,” Klein said. “We’re ready to go. We need a commitment for another $200 million.”

  Jay Pritzker spoke. “Mel, is there another choice?” Klein knew it was probably twice the largest commitment the Pritzker family had ever made.

  Klein was looking out the window. “Jay, you’re in Florida and Tom, you’re in California. I don’t know if either of you is looking at the sunset.” Klein turned to Maher, who stood unsmiling by his desk. “I’m looking at Jim Maher. And there’s only one thing he wants to hear to enable us to go forward with the First Boston offer. And that’s, we need to hear you are behind the Resource Holdings equity.”

  Again there was silence on the line. “Mel, that’s a lot of money,” Tom Pritzker said.

  “I know, fellas, that’s why I’m talking to you. We need to know.”

  “Is there any other alternative?” Jay Pritzker asked again.

  “No, not at this point.”

  “Are we morally obligated to First Boston for this?” Tom Pritzker asked.

  Klein thought for a moment. He glanced at Maher. “Yes.”

  “Do you think First Boston thinks we should step forward with the equity?”

  “Yes.”

  There was a long silence. Mel Klein held his breath.

  “Dad…” Tom Pritzker began.

  “I know,” Jay Pritzker said. “That’s it. We’ll do it.”

  Klein exhaled. “Thanks, guys.”

  He hung up and turned to Maher, who stood by his desk like a cigarstore Indian. “That’s it. The Pritzkers are committed for the whole thing.”

  For the first time that day, Maher had a reason to smile.

  At eleven o’clock Tuesday morning Kravis and Roberts met with their investment bankers, telling them in uncertain tones they hadn’t decided whether they would bid that afternoon. Both men had their own ideas, but the last people they were telling them to were their investment bankers. With any luck, someone would unknowingly pass the misinformation within earshot of Peter Cohen.

  No one was concerned about First Boston. From his bank contacts Kravis knew of Maher’s mounting problems. Mel Klein had kept calling, and now it sounded as if First Boston might have some interest in a minority share of the Kohlberg Kravis deal; Kravis knew a sign of weakness when he saw one. Through a clever ruse, they had also learned of a consensus forming among Atkins and the board attorneys that First Boston’s monetization scheme was almost certainly unworkable. Dick Beattie had simply had his tax attorneys call up and ask about trying the same thing. Don’t try it, they were told, it’ll never work.

  Afterward Kravis and Roberts convened the informal roundtable in Kravis’s corner office. The associates were so tired of these talks they dubbed them “the circle jerks.” Starting with Scott Stuart, they went around the room, each man offering his viewpoint one final time: Should we do it? Stuart and Cliff Robbins gave qualified thumbs-ups. Ted Ammon was on the fence. Bob MacDonnell, the general partner from San Francisco, pushed hard, extolling at length the values of brand names like Oreo, Nabisco, and Ritz. Paul Raether was ready to bid.

  So was Henry Kravis. After a week of keeping his own counsel, Kravis was prepared to lead the final charge. No one in the room was surprised. Those who knew Kravis best never believed he could let go a deal this size. And if we bid, Kravis emphasized, we bid to win.

  Finally George Roberts spoke. “I think we should all ask ourselves, ‘Is this really worth all the headaches? Do we really
want to do this to ourselves?’ We’re going to take a lot of heat from Washington, a lot of heat from our partners.” Roberts looked at each man in the room as he spoke. “The one thing I don’t want to see happen is for this company to get in trouble. It could end the whole thing, the whole industry. I’m just not comfortable with the idea we have to do this deal.”

  Roberts’s speech left them at an impasse. It wasn’t often that Kravis and Roberts openly disagreed. Several in the room exchanged anxious looks. What now?

  “Look,” Kravis said, “we founded this firm on the basis that George and I are going to agree on everything or we’re not going to do it at all.” He turned to Roberts. “Maybe we ought to go off and talk about this ourselves for a while.” Roberts nodded.

  For a moment the deal teetered there. Then Jamie Greene spoke. Greene, an associate in San Francisco, was in charge of assembling the billions in bank money Kohlberg Kravis would need if it bought RJR Nabisco. Among the Kravis troops, that gave Greene’s opinions added weight.

  “Wait a minute, just wait a minute,” Greene said. “George, I just really think we ought to do this deal. Sure, it’s going to be tough to do. But I think this is a wonderful deal.”

  It was the single, gung ho statement Roberts had been looking for for days, and it changed the whole mood. Within minutes they moved from discussing if they would bid, to how much they would bid.

  “Okay,” Roberts said, “if we’re going to do this, it’s got to be safe. It’s got to be a lot less cash than we’ve been talking about. At the end of the day, the board’s not going to be too concerned with three or four more dollars in cash. They’re going to look at the higher value….

  “And if it’s close,” Roberts continued, “we’ll win.”

  For hours they worked on refining a financial structure, opting for safety by boosting the share of PIK securities and reducing the actual cash paid to shareholders. Several times an anxious Dick Beattie stuck his head into the room. “Damn it, give me the bid,” he said. “Time is running out here.”