Barbarians at the Gate (2 page)

At RJR Nabisco

F. Ross Johnson, president and chief executive

Edward A. Horrigan, Jr., chairman, RJR Tobacco

Edward J. Robinson, chief financial officer

Harold Henderson, general counsel

James Welch, chairman, Nabisco Brands

John Martin, executive vice president

Andrew G. C. Sage II, consultant and board member

Frank A. Benevento II, consultant

Steven Goldstone, of counsel

George R. (“Gar”) Bason, Jr., of counsel

At American Express

James D. Robinson III, chairman and chief executive

At Shearson Lehman Hutton

Peter A. Cohen, chairman and chief executive

J. Tomilson Hill III, merger chief

James Stern, investment banker

Robert Millard, risk arbitrage trading

Jack Nusbaum, of counsel

At Salomon Brothers

John Gutfreund, chairman

Thomas Strauss, president

Michael Zimmerman, investment banker

Charles (“Chaz”) Phillips, investment banker

William Strong, investment banker

Peter Darrow, of counsel

At Robinson, Lake, Lerer & Montgomery, & public relations counsel

Linda Robinson

At Kohlberg Kravis

Henry Kravis, general partner

George Roberts, general partner

Paul Raether, general partner

Theodore Ammon, associate

Clifton S. Robbins, associate

Scott Stuart, associate

Richard I. Beattie, of counsel

Charles (“Casey”) Cogut, of counsel

At Drexel Burnham Lambert

Jeffrey Beck, “The Mad Dog”

At Morgan Stanley & Co.

Eric Gleacher, merger chief

Steven Waters

At Wasserstein Perella & Co.

Bruce Wasserstein

At Forstmann Little & Co.

Theodore J. Forstmann, senior partner

Brian D. Little, general partner

Nick Forstmann, general partner

Stephen Fraidin, of counsel

At Goldman Sachs & Co.,
Forstmann’s investment banker

Geoff Boisi, investment banking chief

The First Boston Group

James Maher, merger chief

Kim Fennebresque, investment banker

Brian Finn, investment banker

Jerry Seslowe, Resource Holdings

Jay Pritzker, investor

Thomas Pritzker, investor

Harold Handelsman, of counsel

Melvyn N. Klein, investor

The Directors

Charles E. Hugel, chairman of Combustion Engineering

Martin S. Davis, CEO of Gulf + Western

Albert L. Butler, Jr., Winston-Salem businessman

William S. Anderson, former chairman, NCR Corp.

John Macomber, former chairman, Celanese

The Advisers

Peter A. Atkins, Skadden, Arps, Slate, Meagher & Flom

Michael Mitchell, Skadden, Arps, Slate, Meagher & Flom

Matthew Rosen, Skadden, Arps, Slate, Meagher & Flom

John Mullin, Dillon Read & Co.

Franklin W. (“Fritz”) Hobbs IV, Dillon Read & Co.

Felix Rohatyn, Lazard Freres & Co.

J. Ira Harris, Lazard Freres & Co.

Robert Lovejoy, Lazard Freres & Co.

Luis Rinaldini, Lazard Freres & Co.

Joshua Gotbaum, Lazard Freres & Co.

Others

Smith Bagley, RJ Reynolds heir

J. Paul Sticht, former RJ Reynolds chairman

J. Tylee Wilson, former RJ Reynolds chairman

H. John Greeniaus, president, Nabisco Brands

It was as peaceful an afternoon as the younger man, a lawyer just down from New York, had ever seen. On the horizon, the sun was a sinking red ball. Below, delicate snowy egrets poked through the reeds of the Intracoastal Waterway.

It seemed a shame, Steve Goldstone thought, as a warm Florida breeze tousled his thinning brown hair, to introduce black clouds into such a postcard landscape. He took no pleasure in the dire predictions he was about to spin. But it was his job to play devil’s advocate. No one else seemed willing to do it.

Someone has to tell him.

They sat for a few moments in silence. Goldstone took another sip from his gin and tonic and glanced at the older man sitting in the patio chair beside him. Sometimes he wished he knew Ross Johnson better. They had met barely three months before. Johnson seemed so open, so trusting, so—how to describe it?—yes, naive. Did he realize the forces he was on the verge of unleashing?

Johnson was clad casually in slacks and a light blue golf shirt adorned with RJR Nabisco’s corporate logo. His silvery hair was worn unstylishly long. A gold bracelet dangled from his left wrist. Goldstone knew Johnson was pondering a move that would change his life—maybe all their lives—forever.

Why are you doing this? Goldstone had asked. You’re chief executive officer of one of America’s great companies, you don’t need any more money. Yet you’re about to start a transaction in which you could lose it all. Don’t you realize all the pain and suffering you’ll cause?

So far his arguments hadn’t swayed his client. Goldstone knew he had to press harder. “You could lose everything,” he repeated. The planes. The Manhattan apartment. The Palm Beach compound. The villa in Castle Pines. The lawyer paused to let it sink in.

Don’t you understand? You could lose everything.

That doesn’t change the merits of the transaction, Johnson answered simply. It doesn’t change the basic situation. “I really have no choice,” he said.

Goldstone bore in once more. The minute you do this, he argued, you’ll lose control of your company. Once you start this process, you are no longer CEO. You turn over the reins to the board of directors. I know you think these directors are your friends, he said.

Johnson nodded at that. After all, hadn’t he chauffeured them around the world in his corporate jets? Hadn’t he given them lush consulting contracts?

As soon as you start this, Goldstone went on, they’re not your friends anymore. They can’t be. Don’t expect favors from them; they won’t come. They’ll be under the control of Wall Street advisers, people you don’t even know. They’ll be sued by thirty different people for millions of dollars. The pressure will be intense, the lawyer insisted, and they will resent you for it.

Goldstone stopped then, and looked out at the vivid streaks of blue and red searing the western sky. No matter how dark he painted the picture, Johnson seemed unmoved. He wasn’t sure how much of this was penetrating. In five nights, he knew, they would all find out.

Later, as the two men boarded the Gulfstream jet north to Atlanta, Goldstone sensed Johnson had made up his mind. He looked hard at the president of RJR Nabisco, America’s nineteenth largest industrial company, a man who held in his hands the fates of 140,000 employees, a man whose products—Oreos, Ritz crackers, Life Savers, Winston and Salem cigarettes—filled every pantry in the country.

He’s so willing to look on the bright side, Goldstone worried, so trusting. God, he believes everyone is his best friend.

And he’s going to do it,
the lawyer thought.
He’s really going to do it.
The Atlanta air was cool and clear that October evening as the black Lincoln Town Cars began pulling up outside the Waverly Hotel. The Waverly anchored a green, suburban office park of the type common in Sun Belt cities: nearby was a multiscreen movie theater; an upscale shopping mall, The Galleria, with its array of fountains, and wide, inviting walkways; and a cluster of tall, gleaming office buildings.

Stepping from the limousines were the directors of RJR Nabisco, whose headquarters took up eleven floors in a glass tower several hundred yards away. Each had been spirited to Atlanta in a familiar RJR Nabisco jet. Through the hotel’s atrium lobby, up a glass elevator and into an upstairs meeting room they went; inside, they stood in circles, drinks in hand, waiting anxiously for the evening’s meeting to begin. The small talk was of their trips down, the World Series, and the presidential election, less than a month away.

It was the night before the company’s regular October board meeting, normally an occasion for the directors to dine informally with their chief executive, Ross Johnson, and get an update on corporate affairs delivered in Johnson’s unique, freewheeling style. But tonight the atmosphere was markedly different. Johnson had called every director and urged him or her to attend the dinner, which wasn’t usually mandatory. Only a few knew what loomed before them; the others could only guess.

Some directors were introduced to Steve Goldstone and walked off with puzzled looks. What was an outsider doing here? wondered Albert Butler, a balding North Carolina patrician. Juanita Kreps, the former secretary of commerce, pulled aside Charles Hugel, the chairman of Combustion Engineering, who served as RJR Nabisco’s titular chairman. “What’s Ross doing?” she asked. “What’s going to happen?” Hugel knew, but wouldn’t say. Instead he ducked out to tell the catering people to hurry along with dinner. They had a crowded agenda tonight.

Through the milling directors Johnson circulated, vodka-and-soda in hand, a broad smile and deep-throated laugh never far from his lips. A man who had survived his share of boardroom coups, Johnson prided himself on his ability to sway corporate directors. He was a master of disarming tense situations with the strategic joke, the well-thrown wisecrack, a veritable pied piper of the boardroom. He was always the same old breezy Ross, never taking himself or his business too seriously. Tonight,
against the wishes of his new Wall Street partners, he was flying by the seat of his pants.

Ed Horrigan hoped Johnson would be at the top of his form. Horrigan, head of RJR Nabisco’s largest unit, Reynolds Tobacco, had enthusiastically signed on with the plan Johnson would announce tonight. He was a squat, combative Irishman who brought to business the same hell-for-leather approach that led him to single-handedly storm a machine-gun nest during the Korean War. Unlike Johnson, who never seemed to have a care in the world, Horrigan was tense. He had known and distrusted these directors for years before Johnson came on the scene; he had seen firsthand their little putsches. He knew Johnson thought he had won them over with fat consulting contracts and other favors. But Horrigan wasn’t so sure. They might yet fire Johnson on the spot for his grand scheme.

In the midst of Horrigan’s reverie, a man walked into the room whom he didn’t know. He was dressed in a suit straight out of
Gentleman’s Quarterly,
every salt-and-pepper hair in place, gazing about icily. Horrigan was reminded of the old westerns where a stranger strides through the saloon doors. A few minutes later, he was introduced to the man, a Wall Street lawyer named Peter Atkins. Atkins, Horrigan was told, was there to advise the board of its rights and duties.

“Hello, Mr. Horrigan,” Atkins said coolly as the two shook hands.

Oh God…,
Horrigan thought.

Taking puffs from one of the tiny cigarillos he loved, Johnson reviewed his two-year tenure at RJR Nabisco’s helm: profits up 50 percent, sales up as well. The problem, as they all knew, was the stock, which had been sinking since a year before, when it had peaked in the low seventies. Nothing they had tried since the stock-market crash a year ago had gotten it back up. Even after the buy back that spring—here Johnson emitted a sharp, descending whistle, a bomb falling—the stock had sagged back
down into the forties. Even after the tobacco industry escaped unscathed from its toughest legal challenge in years, it hadn’t budged. Everyone in the room knew the story well, although none had ever seemed as concerned about it as Johnson.

“It’s plain as the nose on your face that this company is wildly undervalued,” Johnson said. “We tried to put food and tobacco businesses together, and it hasn’t worked. Diversification is not working. We are sitting on food assets that are worth twenty-two, twenty-five times earnings and we trade at nine times earnings, because we’re still seen as a tobacco company. As a result, we have studied alternative ways of increasing shareholder values.” Here, he paused. “The only way to recognize these values, I believe, is through a leveraged buyout.”

There was a crashing silence.

Everyone in the room knew about leveraged buyouts, often called LBOs. In an LBO, a small group of senior executives, usually working with a Wall Street partner, proposes to buy its company from public shareholders, using massive amounts of borrowed money. Critics of this procedure called it stealing the company from its owners and fretted that the growing mountain of corporate debt was hindering America’s ability to compete abroad. Everyone knew LBOs meant deep cuts in research and every other imaginable budget, all sacrificed to pay off debt. Proponents insisted that companies forced to meet steep debt payments grew lean and mean. On one thing they all agreed: The executives who launched LBOs got filthy rich.

“The wolf is not at the door,” Johnson said. No corporate raider was forcing him to do this. “This is simply the option that I think is best for our shareholders. I believe it is a doable transaction, and it can be done at prices much higher than the present stock price. We’re not far enough along this road to make firm conclusions or make a proposal at this point, though.”

Johnson stopped a moment and looked at each of the directors: mostly current and retired chief executives, their median age was sixty-five. They had given him a free hand running RJR Nabisco, and hadn’t objected when he wrenched it from its century-old North Carolina home and transformed it into a monument to nouveau-riche excess. But they had struck down his predecessor for lesser transgressions than the one he was now committing.

“I want you to understand one thing,” Johnson continued. “You people
will have to decide. If you think this isn’t the answer or there’s a better idea, there will be no hard feelings. I just won’t do it. There are other things I can do, and I’ll do them. We’ll sell food assets. We’ll buy back some more of our stock. I have no problem walking right back upstairs, going to work on plan B, and no hard feelings.”

Silence.

Vernon Jordan, the civil rights leader cum Washington lawyer, was the first to speak. “Look, Ross, if you go ahead with this thing, there’s a real likelihood this company is going to be put in play. Somebody might come along and buy this company for more than you can pay. You might not win. I mean, who knows what could happen?”

“That’s my point, Vernon,” Johnson said. “This company
should
be in play. It should be sold to the highest bidder. If somebody wants to offer eighty-five dollars [a share] or more than we can pay, then we’ve all done an even better job for our shareholders. The management of this company is not dedicated to retaining its jobs at the expense of the shareholders.”

“What stage are you at?” asked John Macomber, the former chairman of Celanese. Macomber had been a thorn in Johnson’s side for years.

“In order to preserve the confidentiality here,” Johnson said, “we really haven’t gone very far with the banks. We haven’t got a nickel. But if the board agrees with us on this proposal, we will move forward quickly.”

After a few moments, Juanita Kreps spoke. “You know, it seems a shame [that] we’re forced to take steps like these, breaking up companies like this,” she said. “On other boards I’ve been on there have been the same complaints about the stock languishing. The scenario elsewhere has been different. Managements look more to the future and beyond the immediate discounting of the stock. Why is it different here? Is it an issue of tobacco, with the decline in sales and the problems with the industry?”