Barbarians at the Gate

by Bryan Burrough

  “Go away, Dick,” Roberts said, smiling. “All you have to do is change a few numbers. We’ll let you know.”

  Peter Cohen convened the management group that afternoon at Shearson. Everyone had an idea where the bid should be: Johnson’s aides, Benevento and Sage, were throwing around numbers in the vicinity of $110 a share but, as usual, no one listened to them. Cohen and John Gutfreund had the only opinions that mattered.

  Cohen later said he favored a bid of $102, maybe $103. Gutfreund, wary to the end about “deal heat,” actually wanted to reduce the bid, maybe $97, $98. In the end they split the difference. One hundred dollars a share—simply repeating their earlier bid—was felt to be a slap in the board’s face. The group believed some kind of raise was in order, if only to allow directors to save face for having extended the auction deadline. It wouldn’t do to further alienate the board, no doubt already incensed at Johnson’s Time debacle. In the end, Cohen and Gutfreund settled on $101, a $1 bump.

  Later the strategy behind the bid would be hotly debated. Did Cohen and the others genuinely believe Kravis was bowing out of the bidding? “There is no question we were fooled,” recalled Jack Nusbaum, Cohen’s attorney and confidant. “No question. How could anyone say anything else?” According to Nusbaum, the key was Dick Beattie’s call to Cohen. “That’s what bagged us,” he said. “Beattie’s clear indication was that they were through. When he said it, Peter believed it…. We figured Kravis wouldn’t be there. We figured our only competition was First Boston.”

  Chaz Phillips, the Salomon banker, recalled that “Hill felt the strongest that KKR wasn’t there.” Hill reluctantly concurs. “With Henry going to Vail,” he said, “there was a good sense that Henry [was] not hot on the case. That, in fact, was an excellent head fake.” As for Cohen, Hill says, “Peter firmly believed that KKR was not there. In his roots, he really did believe it.” According to Hill, when Cohen returned to New York from Brussels, “he said, he had reason to believe from Dick Beattie that KKR was out of it.”

  Despite the recollections of Hill, Nusbaum, and others, Cohen insists he never believed Kravis had given up. “I always thought he was there,” Cohen said. “Hill was very cocky and sure he wasn’t going to be there. I told him, ‘We’re not going to make that assumption.’ I believed Henry was going to be there…. He goes to Vail for Thanksgiving every year. [Actually, it was only Kravis’s second Vail Thanksgiving.] All you had to have was a fax machine and you were in business.”

  Debate aside, the truest indication of the management group’s belief was its final bid. Any competitor seeking RJR Nabisco would naturally seek to top the $100 bid already on the table. Cohen’s $101 was a tacit confirmation that, just as they had in the weeks before their initial announcement, the management group once again expected no competition. “It was,” said Nusbaum, “our fatal error.”

  At First Boston, Fennebresque hovered over the Citibank team all afternoon. All he needed was a letter saying Finn’s idea was doable. He felt like an expectant father outside the delivery room. Every ten minutes, it seemed, the phone outside the dining room rang. “Where’s the letter! Where’s the goddamn letter?”

  “Hold on, just hold on,” Fennebresque repeated, “we’re trying to get it….”

  It was after four-thirty when the Citibank team leader emerged from the dining room. Fennebresque was pacing nervously outside. “Thanks,” Fennebresque said, taking the letter and shaking the banker’s hand. “Thanks a lot.”

  The letter was quickly inserted into the bid packet, which was then messengered over to Skadden. In its wake, Jim Maher was philosophical. The packet was nowhere near what he expected to produce. The monetization letter was, well, less than he had hoped. He told himself it had been a valiant effort. Their chances of success seemed minuscule but, Maher reasoned, he had beaten long odds before—just nine days earlier.

  “Shit,” he said, “maybe it’ll happen again.”

  George Roberts’s head was bowed as he entered the Kohlberg Kravis boardroom a few minutes before five o’clock.

  Arrayed before him, a dozen of Wall Street’s highest paid investment bankers waited anxiously for news of Kohlberg Kravis’s bid. Each of the bankers wondered the same thing: Would Roberts and Kravis throw up another dead duck? Or did they want to win? As much as each would later brag of having Kravis’s ear, the truth was that few had a clue what the two would do. The answer meant tens of millions of dollars in fees to every banker in the room.

  Roberts, with Kravis at his side, was the picture of dejection, head slowly shaking, eyes downcast, hands deep in his pockets. He addressed the group in funereal tones.

  “We’re sorry,” he said. “We decided to forget it. It was just too much.” He paused a time or two to let the message sink in. “We just couldn’t get there.”

  The room fell utterly silent—the sound of $100 million in fees slowly evaporating.

  Roberts sighed. “What did we bid, Henry? I think it was one-oh-six. Is that right?”

  Kravis nodded. “I think that’s right.”

  Standing to one side, Dick Beattie would never forget the bankers’ reaction when the charade was unveiled. “You could see the dollar signs light up in their eyes,” he would recall. “It was like ‘Whooo! We’re back in the ballgame! Yeah!’”

  Invigorated, they all sat back to wait.

  Chapter

  17

  Spirits were high in the Shearson camp.

  Despite the Time cover, despite the avalanche of bad publicity, despite the obvious ill will among board members, Cohen and Hill were convinced they were on the verge of victory. No one gave Kravis much thought. Everything now depended on First Boston. If the board bought Jim Maher’s bizarre scheme, First Boston would win. Few believed that would happen, but if it did, so be it. No one could compete with the returns Maher was promising. “There was a real good feeling,” Jack Nusbaum recalled. “We’d either be blown away [by First Boston] or we’d win.”

  An hour after submitting its bid Tuesday afternoon, the management group scattered. Cohen, thinking they might hear news by eight o’clock, ducked out to dinner to celebrate his twentieth wedding anniversary with his wife and children. He was back at Willkie Farr by eight. John Gutfreund led a group of Salomon bankers to dinner at Christ Cella, a midtown steakhouse, where they ran into Citibank’s chairman, John Reed. They too were at Willkie Farr by eight o’clock.

  By six o’clock there had been no call.

  By seven there had been no call.

  By eight there was still no call.

  No one at Willkie Farr was particularly worried. Gutfreund and Jim Stern started a poker game. Some of the Salomon bankers sat in a corner reading the latest Car & Driver and Road and Track.

  By nine Cohen and Nusbaum were on the phone to Goldstone, who remained at his downtown office, well away from the Salomon contingent. All three were growing nervous: If Kravis was out and First Boston was really an air ball, they should have heard something by now. Gutfreund, too, was growing impatient, despite his mounting poker winnings—he had managed to shake nearly $400 out of Stern and Bob O’Brien of Bankers Trust. As always Gutfreund hated being kept in the dark. “How come we never know what’s going on?” he groused.

  Jim and Linda Robinson dashed out to a black-tie dinner that evening at the Marriot Marquis in midtown Manhattan. Texaco chief James Kinnear, a client and good friend of Linda’s, was being honored at another Boys Club ceremony.

  Among those at the Robinsons’ table was Eric Gleacher of Morgan Stanley, who also worked with Texaco. Gleacher noticed the aerial of a portable phone protruding from Jim Robinson’s tuxedo pocket and grinned.

  Before dinner Linda Robinson attempted to ease the suspense with small talk.

  “So,” she asked Gleacher, “what did you guys bid?”

  Gleacher demurred. He had guessed Linda might want to play this game. She probably thought he would actually tell her what Henry Kravis had offered.

  “Oh, come on, it
’s over,” she pressed. “You can tell me.”

  Gleacher shrugged. If she wanted to play games, he would play along. “Ninety-four,” he said with a straight face. “They didn’t raise the bid.”

  He paused. “What did you guys bid?”

  “What do you think?”

  “Kind of where you were before.”

  “Yeah,” Linda Robinson said. “That’s pretty close.”

  For those gathered at Kohlberg Kravis, the waiting was agony.

  The halls were filled with pacing investment bankers. There was nothing to do but wait. After a couple of hours, pizza was ordered.

  Then, a few minutes before nine o’clock, Dick Beattie took a call from Peter Atkins. “We’d like you and some of your team to come over,” Atkins said.

  Beattie fought the urge to grow excited. “Are we the only one getting called?” he asked. “Is the other side being invited over as well?”

  “I can’t answer questions like that.”

  The two lawyers talked for several minutes about who would be needed at Skadden. Only lawyers and associates—the detail squadron—would be needed for the moment. Beattie, eyeing the pizzas, had one last concern.

  “You guys got food over there?”

  “Yeah,” Atkins said.

  Beattie relayed news of the call to Kravis. Kravis, too, held his excitement; they had been through this drill before. Told they wouldn’t be needed at Skadden, Kravis and the four general partners headed out to dinner at an East Side Italian restaurant, Campagnola.

  As they did, Beattie hastily assembled a small squad of lawyers, investment bankers, and associates for the trip to Skadden Arps. The group left in pairs, so as not to arouse suspicion if the management group had lookouts posted in the lobby. Once downstairs, Cliff Robbins detoured briefly to have a private word with a security guard. Robbins wanted to make sure that, if Johnson also left the building, Kravis knew about it quickly.

  Kravis had just ordered dinner when he was called from his table to the phone. It was Beattie.

  “They’re going to want you to come over here in about forty-five minutes.”

  “Well, we’re eating. We’ll be there.”

  “We’re in good shape,” Beattie said. “Things look good. Felix is waiting for you here.”

  For the first time Kravis allowed himself to sense victory. He returned to the table and excitedly passed on the news. “Things are looking good,” he said, smiling. Everyone felt a victory was within their grasp.

  Kravis was halfway through dinner when he was pulled away to take another call. It was Beattie again.

  “Goddamn it, where are you guys?”

  “We thought we’d eat dinner,” Kravis said.

  “Felix is getting impatient.”

  “We’re coming, we’re coming.”

  “Come on, Henry. They want to get this thing done and get out of here.”

  “Okay, okay. We’ll be there in a minute.”

  Mildly irritated, Kravis returned to the table. “They really want us to go down there now,” he said. “I guess Felix wants to go home early tonight.”

  After hurriedly finishing dinner, the five general partners piled into Kravis’s blue Mercedes 500. They were at Skadden within minutes. Upstairs, Kravis, Roberts, and Raether were escorted into a conference room, where they were met by Felix Rohatyn, Ira Harris, and Peter Atkins.

  Kravis looked for signs of the management group, but saw none. Rohatyn began reeling through a list of open issues. Lazard and Dillon, he said, wanted to learn more about the securities Kravis proposed to include in his offer. There were some other points, all minor. Then Rohatyn asked, “Is this your best offer?”

  “Yes,” Kravis said.

  “Well, if we can work out the securities and get comfortable with regard to the financing, we are prepared to recommend your bid to the special committee.”

  Kravis and Roberts broke into smiles.

  A winner.

  After six weeks, Kravis and Roberts were on the brink of victory. All that remained were two sets of final negotiations. A Kravis lawyer, Robert Spatt, headed to an upstairs conference room to negotiate the merger agreement. The investment bankers were issued into another room to explain the bid’s securities. There Lazard and Dillon hailed them with questions, including, one final time, what Kravis would do in the event Drexel were indicted.

  With any luck, Kravis figured, both sets of talks could be wrapped up in a few hours. The committee was scheduled to meet the next morning to make its recommendation. With nothing else to do, Kravis and Roberts sat back to wait.

  Once the meetings were underway, Atkins headed upstairs to his office. A stack of phone messages awaited him there. The first call he returned was to Jim Maher. For all the Sturm und Drang, First Boston’s final bid had been quickly dismissed. Practically all the key questions about the initial proposal, such as the timing of antitrust approvals, remained unresolved. The fatal flaw was the monetization letter; First Boston had nothing resembling a solid bank commitment to back it. What Maher sent, in fact, prompted peals of laughter among the committee’s investment bankers. The Citibank letter Fennebresque had worked so hard to procure had only a typed letterhead, and that from a Citibank office on Mamaroneck Avenue in Harrison, New York. It had been signed by a vice president. It was hardly what the committee had been looking for.

  Maher, at home in his West Side apartment, hadn’t been able to stand the waiting any longer. “Peter,” he said when Atkins called, “I’m sitting here, you know, this is killing me. Should I sit up waiting? Or can I go to bed?”

  “Nah,” Atkins said. “I think you can go to sleep.”

  Maher knew the truth then. He had fallen one miracle short.

  “Well,” he said. “That’s too bad.”

  Maher hung up and called one of his aides, Gordon Rich. “I think we’re done, Gordo. I think we’re done.”

  Where was the call? Where was Atkins?

  As the evening wore on, Steve Goldstone paced his office nervously. No news, he told himself, was bad news. Something has gone wrong. Maybe they’re taking First Boston seriously, he thought. God forbid, maybe Kravis bid.

  Where were they?

  As he paced, Goldstone indulged a nervous habit that never failed to irk his colleagues. At times of high stress, he took to squeezing the erasers off the ends of number-two pencils. Sometimes he pressed so hard the tiny pink dots popped across the room and bounced off people’s foreheads. That night Goldstone’s office floor was littered with severed eraser heads.

  By half past nine Goldstone could stand the suspense no longer. First he phoned his partner Dennis Hersch at home; Goldstone put Hersch on a speaker phone to listen as he called Atkins. The Skadden lawyer, just finishing his conversation with Jim Maher, returned the call minutes later.

  “Peter, I’ve got a pile of people waiting around,” Goldstone said. “Are you guys going to make a decision tonight? Do we need to be waiting around?”

  “I’d say there’s no reason for your people to hang around tonight,” Atkins said. “We’ll be in touch with you tomorrow.”

  The words were a splash of ice water in Goldstone’s face.

  “What are you saying? What does that mean?” Anxiety crept into Goldstone’s voice. “Are we out of it?”

  Atkins was a blank wall. “Look, I can’t say any more.”

  Goldstone persisted. “Are we out of it?”

  “Look,” Atkins said, “all I can tell you is, we don’t need you tonight. You can tell your people to go home.”

  Goldstone’s call sent electric shocks through the gathering at Willkie Farr. The poker game was forgotten; the car magazines were tossed in a corner. Worried looks broke out as questions swept the group loitering at Nusbaum’s office.

  What does that mean?

  What’s going on?

  Minutes later the group suffered a second, greater shock. Nusbaum took a call from a reporter, who passed along the information that Kravis had just been su
mmoned to Skadden Arps. Had Shearson?

  “No,” Nusbaum stammered, “we haven’t.”

  Nusbaum was thunderstruck.

  Kravis?

  He couldn’t believe it. Peter Cohen couldn’t believe it, either. All at once he knew something had gone terribly, terribly wrong.

  Chaos broke out among the advisers at Willkie Farr. Everyone had an idea what had happened, what to do. Gutfreund, having pocketed his poker winnings, angrily demanded that someone—anyone—get over to Skadden right away.

  “This is bullshit!” Gutfreund railed. “Get in there. Just get somebody in there. Here we are standing around playing with ourselves. Let’s get someone in there….”

  Nusbaum thought quickly. Something had to be done fast. A letter: that was the answer. As many lawyers do when nursing a grievance, Nusbaum knew it was important to get their anger down into writing. As Cohen and the investment bankers shouted and cursed around him, he began dictating.

  Bob Hope had almost finished the evening’s program at the Boys Club dinner when Linda Robinson was called from the table for an urgent telephone call. Excusing herself, she hustled into the Marriott’s kitchen to take it.

  When she returned, Eric Gleacher could tell she was fuming. She knows where we are, he thought. Gleacher couldn’t help but smile. The moment the program ended, the Robinsons were up and away from the table.

  Linda Robinson had one parting line for the Morgan Stanley banker. “Gleacher,” she said, “you’re a fucking liar.” There was the wisp of a smile on her lips.

  Gleacher looked Jim Robinson’s wife square in the eyes.

  “Linda, you just don’t get it, do you? There’s just no way this board is going to give this company to Ross Johnson.”

  Johnson, Horrigan, and the rest of the RJR Nabisco executives were passing the time over drinks at Nine West when they heard the news. Bit by bit reports dribbled in, and they were all bad. Atkins had told Goldstone he could go home, and Kravis was invited to Skadden. If that weren’t bad enough, Bill Liss—still supposedly representing the special committee—called and said he had been asked to ready a public announcement the next morning. The signs of defeat were unmistakable.