Barbarians at the Gate

by Bryan Burrough

  At Shearson, Cohen’s office was a hive of activity. Tom Hill and a dozen others shuttled in and out. Cohen stood by his desk, puffing a cigar, studying a series of new computer runs. He was ready with a bid number when Nusbaum called. He checked with Gutfreund and Strauss at Salomon, who had closeted themselves in Gutfreund’s art-deco office. All that was needed was Johnson’s approval and, not incidentally, his pledge to further cut the management agreement if the group should triumph.

  Cohen passed on both requests to Steve Goldstone at Davis Polk, who relayed them to Johnson at Skadden. When Johnson heard the bid Cohen had in mind, he began laughing. “You can’t be serious,” he said. Thoroughly detached from the action, Johnson approved any amendment of the management agreement that might be needed.

  Ten minutes later Cohen got back to Nusbaum.

  “Put in this bid,” he said. He reeled off a set of numbers, cash and stock.

  Nusbaum nearly choked. “Okay,” he said.

  The bid was $108 a share. Twenty-five billion dollars.

  Nusbaum’s mind raced. Wanting to bid was one thing; getting the board to take it was another. They had been at Skadden Arps for an hour now and were being ignored. Somehow they had to apply pressure to reopen the bidding. Nusbaum looked at his watch. It was past noon. “They don’t want us here, Peter,” Nusbaum said. “This thing is beginning to smell like a cover-up.”

  “If they won’t take a bid,” Cohen said, “we’ll just put something out ourselves.” The board couldn’t ignore a public announcement. A press release had to be drawn up.

  Minutes later, Nusbaum dialed Atkins’s office a second time.

  “Tell Mr. Atkins,” he told the secretary, “we have a new bid to put in and we’re announcing it publicly.”

  Nusbaum thought: Maybe that’ll get their attention.

  It did.

  Minutes after Nusbaum’s call, Atkins was handed the message in the boardroom. He grabbed Mike Mitchell, and the two men walked briskly out past the waiting area brimming with Kravis’s idle investment bankers and down Skadden’s internal stairway. When they reached the thirty-second floor, they turned right and headed down a hallway. They found Nusbaum standing alone in an office containing nothing but a desk and a phone. There was no chair, no art on the walls, nothing but a nice view of the Queensboro bridge, just two blocks away.

  Atkins could tell Nusbaum was nervous.

  “Look, I’ve got this letter here, which my litigators have drawn up,” Nusbaum said. “I’ll give it to you, but please disregard it. What I’m really here to say is, here is our bid.”

  No one had a pad to write it down. Mitchell fished a scrap of paper from his wallet and jotted down what Nusbaum told him: $84 a share in cash, $20 a share in PIK preferred stock, and $4 a share in convertible debentures. Twenty-five billion dollars.

  “I want to emphasize,” Nusbaum concluded, “that everything is negotiable.”

  Atkins nodded. As he and Mitchell left the office, they shared a private smile.

  “This is going to be a very interesting day,” Mitchell said.

  Nusbaum phoned in an after-action report. “I don’t know what’s going to happen,” he told Cohen. “But I think we’ve wedged ourselves back in.”

  Outside the boardroom, Beattie was roaming the hallways looking for information. So far there had been no sighting of Johnson or his people, only unconfirmed reports that they were in the building. Beattie collared Atkins as the lawyer returned from talking to Nusbaum.

  What are Johnson and Nusbaum up to? Beattie asked.

  “Well,” Atkins responded, “we’re going to have to deal with what they’ve given us.”

  “What have they given you?”

  “I can’t tell you.”

  “Come on, Peter, my guys have been here all night. They’re tired of being used. Our best bid is on the table. I’m telling you, they’re going to leave if this thing goes on. And if they do, you know as well as I the other side is free to do whatever they want.”

  “I hear you,” Atkins said, disappearing into the boardroom.

  That morning Mel Klein and three other Pritzker aides were at La Guardia preparing to board an American Airlines flight to Chicago. When the airline couldn’t seat the four exhausted men together, they decided to take the next flight. Klein walked down to the Admiral’s Club and, with nothing else to do, called Jim Maher.

  Maher passed on the news that the bidding wasn’t yet over. Kravis was offering something like $106 a share and looked like he might win. The Pritzker team began to get excited.

  Is there an opening? Klein wondered. Can we reach Jay and Tom? Could we up the cash part of our offer?

  In minutes they realized they were kidding one another.

  “Sorry, Mel,” Maher said, “it’s over.”

  It was twenty minutes before one when Atkins returned to the small office where Kravis and Roberts waited. The atmosphere inside was chilly as Atkins spoke. “We have received something, and we can’t live with your one o’clock deadline,” the lawyer said. “We need an extension.”

  “Absolutely not,” Kravis said.

  Roberts’s reply was equally sharp. “We’re not going to do that.” When Roberts was mad his lips became small and tight, slits on an angry face. “This is outrageous,” he said, barely holding his temper.

  “Peter, we’re not going to be diddled around,” Kravis said. “Last night you tell us you’re going to recommend us to the board and we’ve got a deal and everything’s fine. Now it turns out our bid’s being shopped. We’re not giving you any more time.”

  Beattie intervened. “Hold it, hold it,” he said. The lawyer turned to Atkins. “Peter, can you give us a couple minutes?”

  Atkins left. When the door closed, Beattie spoke to Kravis and Roberts in a tone he would never use in a larger group.

  “George, Henry, just settle down,” Beattie said. “They’re under a lot of pressure. They want to make sure things are done right. And we’re not helping them any here…”

  At 12:50 a headline crawled across the Dow Jones News Service. In boardrooms and trading floors across the country, brokers and investors looked up in amazement.

  “RJR MANAGEMENT GROUP BOOSTS BID TO $108 A SHR…”

  A minute later, Beattie interrupted his speech to Kravis and Roberts to take an urgent phone call. On the line was a Kohlberg Kravis associate.

  “They just bid again,” the associate said.

  “Who?”

  “The management group.”

  “What?”

  “The management team just went across the tape with a new bid. They’re at one-oh-eight.”

  “I don’t believe it. You’ve got to be kidding me.”

  “It’s true.”

  Beattie hung up and turned to Kravis and Roberts.

  “You’re not going to believe this. But the tape says they just bid one-oh-eight.”

  Kravis had to sit down. It was the realization of his worst fears, although he had to admit, it didn’t entirely surprise him. Johnson had all night and all morning to assemble a new bid.

  Now, twenty minutes from victory, everything had changed.

  The auction wasn’t over. The company wasn’t theirs. The world wasn’t fair.

  And suddenly they were behind: $108 to $106.

  Curses filled the room. “They’re not going to sign us up!” Raether said, one eye on the clock. “Jesus, what are we going to do now?”

  Then, as abruptly as their anger flourished, it cooled. It dawned on both Kravis and Roberts what Cohen had done. For the first time in twelve hours, they knew where the management group was. Maybe, they reasoned, they could make this work to their advantage. It would require finesse. No longer could they simply threaten to walk out. They debated their next move for another twenty-five minutes, then called for Atkins at one-fifteen.

  We’re prepared to extend our deadline, Kravis said, on one condition: Pay our expenses to date, and we’ll stay another hour. It made sense. Kravis be
lieved he was in a position of strength; he knew the management group’s securities hadn’t been negotiated, as his had. He saw no reason to panic and boost the bid; they would have the opportunity to do that later, if needed. This way they kept pressure on the board, at the same time making sure that, no matter what happened, they came out with something.

  How much are your expenses? Atkins asked. Raether had done the arithmetic. Their total expenses approached $400 million, but Raether, careful not to push too hard, asked for only $45 million.

  “I think I can sell that to the special committee,” said Hugel, who had stepped into the room. He returned minutes later with the board’s approval. The agreement was scribbled on a yellow legal pad. Beattie smiled. No matter what happened, he was getting paid.

  Forty-five million dollars to wait sixty minutes. Incredibly, Atkins and Company thought it was a good deal.

  Jack Nusbaum waited in the empty office overlooking the Queensboro bridge for forty-five minutes, speaking from time to time with Cohen and fielding technical questions from the committee’s investment bankers.

  Then, a few minutes past one, he took a call from Atkins.

  In lobbing in the $108 bid, Nusbaum had emphasized that all its components were negotiable. Now, Atkins said, it’s time to end this thing, once and for all. “We want your highest and best bid,” the lawyer said. “We’d like it in fifteen minutes if you can.”

  “It might take a little longer.”

  “Well, do the best you can.”

  In seconds Nusbaum was on the line with Cohen. “The bidding’s reopened,” he said. “We’re back in. They want our best bid.”

  “How long do we have?”

  “Fifteen minutes.”

  “That’s not very much time.”

  “I know.”

  Down the hall, Johnson applauded the invitation for another bid. He had long since stopped worrying about the bidding levels. To Nusbaum he said, “Let her rip.”

  Now it was Cohen’s turn to take a deep breath.

  For the second time that day, he was entering uncharted waters. He still had no idea where Kravis’s bid was. Quickly he conferred with Hill and the others in his office, then called Gutfreund at Salomon. He was surprised when Gutfreund demanded a more aggressive bid. Cohen had to think fast. Whatever level they went to, they would need more money from the management agreement. A concession from Johnson was a must.

  He called Goldstone. “We could go as high as one-fifteen,” Cohen told the lawyer. “I really think that’s what we ought to do. I want to be preemptive. It’s time to end this thing.”

  Goldstone wanted to pinch himself.

  One-fifteen? Just six weeks ago Shearson was telling Johnson this company was worth seventy-five.

  What Shearson needed in order to proceed, Cohen explained, was for Johnson to chop two more points off the management agreement, to 4 percent, almost half what he was to have received. “Now,” Cohen said, “I want to know if Ross will accept that.”

  Goldstone thought the number and the request were absurd. But he relayed them to Johnson who, when he heard what Cohen had in mind, was reduced to helpless giggles.

  “My God, that’s crazy!” he exclaimed. “How could this be a good investment? I don’t think he ought to do it, do you?”

  Goldstone thought it was time for some Merger 101.

  “Listen, Ross, they have their reasons for doing this other than just buying the company,” he explained. He mentioned the $200 million in upfront fees Shearson would reap from a successful deal. He talked about the unmatched franchise benefits it would reap from having completed history’s largest LBO. Johnson’s problem was that he insisted on thinking in terms of the real world, real money, real investments. In effect, Goldstone said, this wasn’t the real world. This was Wall Street.

  “Well, to me, that’s crazy,” Johnson protested.

  There’s something else, Goldstone said. “If you’re prepared to agree,” he went on, “they’re going to want significant new adjustments in your compensation. Will you do it?”

  This is the moment of truth, Goldstone thought.

  “Sure, why not?” Johnson said with an ironic laugh. He had given everything else away. The management group’s cut had started at 8.5 percent with an eye on 20 percent. Now it was down to 4 percent. “But if we go any further,” Johnson said, “we’re going to be owing them money.” He chuckled. “And Steve…”

  “Yes?”

  “Remember. We can’t go below zero.”

  Goldstone hung up and dialed Cohen. “You got it. Go.”

  Cohen rifled through the numbers one last time before relaying the group’s new bid to Nusbaum at Skadden Arps.

  Jack Nusbaum, Wharton Business School, Columbia Law, senior partner of one of New York’s largest law firms, had a succinct reaction to Peter Cohen’s new bid.

  “Ho-ly shit.”

  He hung up and relayed the news to Atkins: Ross Johnson, Shearson Lehman, and Salomon Brothers were boosting their bid to $112 a share. He didn’t have time to do the math. On its face, the bid was $25.76 billion. At 1:24 Atkins delivered the news to the board.

  Shearson’s new bid seriously complicated Atkins’s life. On one hand, he had Kravis at $106 a share. Because Kravis’s securities had been negotiated, the advisers were comfortable the bid’s values were close to what Kravis said they were. It was good. It was solid. It was also second.

  On the other hand, he had the management group at $112 a share. Not only weren’t Cohen’s securities firmed up to the point of Kravis’s, the management group seemed to have paid little attention to the advice they had received from Dillon and Lazard just the day before. Their securities remained “soft,” that is, they included no “reset” mechanism that would guarantee they would trade where Shearson said they would. Cohen valued his bid at $112 but, for all Atkins knew, it was worth $105. To determine its precise value would take time. And, with thirty minutes until Kravis’s two o’clock deadline, time was a luxury Atkins didn’t have.

  Sure, Atkins told himself, Kravis could be bluffing. But with $25 billion at stake, could he really afford to take that chance? Somehow, he knew, they had to push the Kravis deadline back again.

  From his perch outside the boardroom door, Dick Beattie’s soft blue eyes took in the scene as Atkins and the other board advisers hustled into a corner office across the way. Something’s going on, he thought, resisting the urge to edge across the open space toward the door.

  Inside, the advisers were locked in debate. “You’ve got to give KKR some goodies,” argued Dennis Block, a lawyer working with the board’s investment bankers. “You have to protect what is already on the table. We don’t want to be left without any bidder.”

  They had to find a way to keep Kravis at the table while they negotiated the management group’s securities. Already they had given Kravis $45 million in expenses. What more did they have to offer?

  Ira Harris came up with the idea: Give Kravis a merger agreement. Make him extend his deadline one week. Give him all his expenses—nearly $400 million—plus $1 a share, or another $230 million, in a so-called breakup fee, payable if Johnson’s group managed to top the Kravis bid during the one-week extension. At that point, Kravis would still have the right to bid once more.

  “Yeah,” Block said. “That way we keep KKR on the reservation.”

  Mike Mitchell, the Skadden litigator, wasn’t so sure. “Look, one-oh-eight is already on the tape. KKR will know it. They’ll think we’re just using them to get a higher bid out of Shearson.”

  Mitchell’s worry aside, it seemed the only solution. For Kravis, it seemed like a no-lose situation. He got a merger agreement and expenses, and gave away nothing. But the best reason of all was apparent on every man’s wrist: They were running out of time.

  A few minutes before two o’clock, Atkins led a small procession into the office where Kravis and Roberts waited. Atkins thought the two cousins looked as if they’d been carved from blocks of ice. The
ir jaws were tightly clenched, their expressions grim.

  Mitchell explained the proposal. Would they take it?

  “Absolutely not,” Kravis said. “What the fuck are you talking about? We’re here to buy this company. We want a deal. If we leave this office, we’re gone. You can kiss us good-bye.”

  As always, Beattie was the voice of reason. “Where’s the other side?” he asked. “Are you proposing something like this to them?”

  No answer. Beattie should have known better.

  “We saw on the tape management has gone to one-oh-eight,” Beattie asked. “Is that right?”

  Atkins knew his answer had better be precise. In no way could he let on that Cohen had charged ahead to $112.

  “You shouldn’t assume anything,” he said.

  Beattie indicated they would need a few minutes to think about the proposal, and Atkins & Co. departed.

  Kravis thought Atkins was bluffing. Of course Cohen was still at $108. Why on earth would he have boosted again? Atkins was engaging in brinkmanship, Kravis decided, trying once more to squeeze the last penny out of him. If they matched the management bid of $108, Kravis felt they would win.

  “We’re going to win in a tie,” Kravis said. “We’ve got better paper. And you know we’ve got better credibility than Johnson. You know the board is pissed at him after this Time thing. A tie will win.”

  If they pressed hard now, Kravis was willing to bet, the board would be forced to capitulate. Their bid was the bird in hand, and the board couldn’t risk losing it.

  Raether and Ted Ammon came up with the extra $2 a share—an extra dollar in PIK paper and an extension in the redemption period of their debentures. It was financial hocus-pocus, they knew, but the board didn’t have time to argue. If Kravis said it was worth $2, the board would believe him. At five minutes past two Atkins was summoned.

  “Peter,” Kravis said, “we’re not going to accept your offer.”

  The lawyer wore his Buddha’s face: no reaction there. “Do you want to do anything with your bid?” Atkins asked.

  Kravis explained how they proposed to boost the bid to $108 from $106. When Atkins left, Kravis and Roberts expected a decision from the board within minutes.