Barbarians at the Gate (3 page)

“Juanita, I hear a lot of CEOs complaining about their undervalued stock, but I don’t see them doing anything about it,” Johnson said. “This is something you
can
do about it. The other guys are afraid to do anything about it.”

It all sounded so sensible, so reasonable: No one could spin an explanation like Ross Johnson. But the directors might have asked a few more questions had they known of Johnson’s plans for the company, of the favors he had doled out behind their backs, or of the unprecedented cut of the LBO’s expected profits he had wrung from his hungry Wall Street partners at Shearson Lehman Hutton. But those and other matters would
only come to light at the most inopportune moments for them all.

Charlie Hugel scanned the room: No more questions seemed forthcoming. He suggested Johnson and Goldstone leave so the board could caucus. “Who else here would be involved in the management group?” he asked.

Johnson ticked them off: Horrigan; Jim Welch, the Nabisco chairman; Harold Henderson, the general counsel; and an outside director and consultant, Andrew G. C. Sage II. Hugel suggested they leave, too.

When Johnson left, the directors took a quick break. Albert Butler came over to Hugel. “Did you see that?” he asked. “Andy Sage is part of it.”

Hugel nodded.

“Ross wants us to double his consulting contract to five hundred thousand dollars,” Butler said. “It’s on the agenda for the comp committee meeting, but I don’t think we can do that now.”

No, said Hugel, they couldn’t. He was uneasy. Johnson was his friend, but several events in the past three days had given him pause to reconsider the man he thought he knew so well. There was something here that just didn’t feel right.

Other directors headed for the men’s room in silence. Each knew the enormity of the decision they confronted. As each of the titans of industry sidled up to the urinals, a voice echoed over a stall: “We’ve got to find out if this is frivolous.” Men nodded as they washed their hands and returned to the boardroom.

Inside, Hugel turned the floor over to Atkins, who walked the directors through their obligations under the law of Delaware, where RJR Nabisco and so many large public corporations were chartered. When he finished, Hugel told the others how Johnson had phoned him in South Korea the week before and mentioned the LBO idea. Hugel didn’t voice his private concerns or the curious offer Johnson had made him just two days earlier.

As the directors caucused, Johnson paced an upstairs suite, passing the time with Horrigan and the others, including a Shearson team. He hadn’t been waiting long before a message came that the board wanted to see him. Taking Goldstone with him, Johnson nervously returned to the boardroom.

“Ross,” Hugel said, “it’s the strong sense of the board that we’re prepared to let you go forward.” The board’s debate had, in fact, been anticlimactic: If Johnson had gone this far, they had no choice but to let him continue. If he was planning a serious bid for the company, under
Delaware law it was their fiduciary duty to allow shareholders to entertain it. “But,” Hugel continued, “we want to make sure that the number you were thinking about is not frivolous.”

“Well, you’ll have to define frivolous for me,” Johnson said.

“The number has to be north of the highest price the company’s stock has ever traded.”

“Fine, I can do that.”

“In that event, the board is prepared to have you proceed. If you wish to proceed, the board will have to issue a press release tomorrow morning.”

“Peter, do you have a draft?” Goldstone asked Atkins. “Would you read it?”

Atkins did, and agreed to Goldstone’s request that he and Johnson be allowed to take it upstairs to review it.

The press release was a worrisome development, although one Goldstone had anticipated on learning Atkins had been brought along by Hugel. Lifting the veil of secrecy was ordinarily enough to kill a developing buyout in its cradle: Once disclosed, corporate raiders or other unwanted suitors were free to make a run at the company before management had a chance to prepare its own bid. Still, Johnson and his partners hadn’t panicked when the prospect of an announcement was raised. RJR Nabisco was so big that no one in the world seemed likely to top their bid—and certainly not without a friendly management team to lead the way.

Upstairs, Goldstone and Johnson searched for the team from Shearson Lehman. Tom Hill, the cool chief strategist, and Jack Nusbaum, his lawyer, had vanished from the suite. Goldstone raced downstairs and spotted the pair in the lobby, where they had returned from a short trip to RJR headquarters with their aides. “Jack,” Goldstone cried, “where the fuck have you been?”

A press release was being prepared, Goldstone explained, and Johnson badly wanted to insert the price they were considering. Without a number, Johnson feared the stock would rise out of control, perhaps forcing his group to bid more than it wanted to. They returned to the suite, where Hill repeated his earlier suggestion: $72 a share in cash and $3 a share in preferred stock. Johnson shook his head.

“None of that,” he said. “Fellows, it’s got to be seventy-five cash. You can’t put paper on the table. It looks low class.”

Johnson didn’t need to do the arithmetic to get nervous.
Seventeen billion dollars.
The largest corporate takeover in history, three times greater than the largest LBO ever attempted. They hadn’t seriously considered bidding much higher; with no competition in sight, there seemed no need.

Johnson, as usual, won the argument. As the clock was about to strike’ midnight, Goldstone was sent down to the boardroom with the revised press release.

Suddenly, after all the weeks of planning, after all the behind-the-scenes negotiations, it was all real. They were actually going to do it. “Holy shit,” Johnson told the group milling about the suite. “Now we’ve got to find seventeen billion dollars.”

Again Johnson thought of the press release. They had so hoped this could remain their little secret with the board. A public announcement would mean publicity, lots of it, and the specter of competing bids—and all the very next morning. Johnson thought he had braced himself for this, but now the full impact hit him. “Things,” he warned an aide in a postmidnight phone call, “are moving faster than we thought.”

Ross’s philosophy is, “We’re going to have a party, a very sophisticated, complicated party.”

It was the spring of 1976, and at a second-tier food company named Standard Brands, things were getting ugly. Weigl, its crusty old chairman, was out to purge his number two, Johnson, the shaggy-haired young Canadian who pranced about Manhattan with glamorous friends such as Frank Gifford and “Dandy” Don Meredith. Weigl sicced a team of auditors on Johnson’s notoriously bloated expense accounts and collected tales of his former protégé’s extramarital affairs.

Johnson’s hard-drinking band of young renegades began plotting a counterattack, lobbying directors and documenting all the underlying rot in the company’s businesses. Rumors of an imminent coup began sweeping
the company’s Madison Avenue headquarters.

Then tensions exploded into the open: A shouting match erupted between Johnson and Weigl, a popular executive dropped dead, a board of directors was rent asunder. Everything came to a head at a mid-May board meeting. Weigl went in first, ready to bare his case against Johnson. Johnson followed, his own trap ready to spring.

As the hours wore on, Johnson’s aides, “the Merry Men,” wandered through Central Park, waiting for the victor to emerge. Things were bound to get bloody in there. But when it came to corporate politics, no one was ready to count out Ross Johnson. He seemed to have a knack for survival.

Under that old order, big business was a slow and steady entity. The
Fortune
500 was managed by “company men”: junior executives who worked their way up the ladder and gave one company their all and senior executives who were corporate stewards, preserving and cautiously enhancing the company.

Johnson was to become the consummate “noncompany man.” He shredded traditions, jettisoned divisions, and roiled management. He was one of a whole breed of noncompany men who came to maturity in the 1970s and 1980s: a deal-driven, yield-driven nomadic lot. They said their mission was to serve company investors, not company tradition. They also tended to handsomely serve themselves.

But of all the noncompany men, Johnson cut the highest profile. He did the biggest deals, had the biggest mouth, and enjoyed the biggest perks. He would come to be the very symbol of the business world’s “Roaring Eighties.” And he would climax the decade by launching the deal of the century—scattering one of America’s largest, most venerable companies to the winds.

The man who would come to represent the new age of business was born in 1931 at the depth of an old one. Frederick Ross Johnson was raised in Depression-era Winnipeg, the only child of a lower-middle-class home. He was always “Ross,” never Fred—Fred was his father’s name. The senior Johnson was a hardware salesman by vocation, a woodworker
by avocation, and a man of few words. Johnson’s petite mother, Caroline, was the pepper pot of the household—a bookkeeper at a time when few married women worked, a crack bridge player in her free time. Young Ross owed an early knack for numbers and the gift of gab to her; an early entrepreneurial bent he owed to the times. The Johnsons weren’t poverty-stricken, but neither did they own their own bungalow until Johnson was eight years old.

Around that period young Ross began working at a variety of after-school jobs. He used the money he earned for serious things, like buying clothes. He started with standard kid tasks, such as delivering magazines around the neighborhood and selling candy at the circus, then branched into more innovative ventures, such as renting out comic books from his collection. When he grew older, he sold certificates for baby pictures door-to-door. It was an enterprise he would turn to whenever he needed a buck during his years in college.

Johnson wasn’t the best student in his high school, ceding that honor to his friend Neil Wood, who would go on to head the huge Cadillac Fairview real estate firm. Johnson was the kind of teenager who could rank in the upper quarter of his class, as he did, without appearing to try very hard, which he didn’t. Nor was he the best athlete in school, although he was a rangy six feet three inches by the time he graduated. He was far better at memorizing baseball statistics in
The Sporting News
than hitting a fastball.

Unlike his father, who hadn’t completed high school, Ross Johnson wanted to be a college man, and he took the crosstown bus each day to Winnipeg’s University of Manitoba. He was average inside the classroom but excellent out of it: president of his fraternity, varsity basketball, and honors as outstanding cadet in the Canadian version of ROTC. (This despite a propensity for pranks: One night Johnson and some chums ambushed a superior officer, whom they considered a superior jerk, tied him to a diving board, and left him to contemplate his sins as the sun rose.) If there was anything that marked the playful young Ross Johnson, it was an ability to hold sway over his fellow students, even those who were far older. His college class was largely made up of returning World War II veterans, but it was Johnson, a teenager, who did the organizing and leading.

Upon graduation, Johnson plunged into the middle levels of a string of Canadian companies, where he would muddle along for nearly twenty
years with little distinction. His first job, as an accountant at Canadian General Electric in Montreal, lasted six years. Bored, he moved to the marketing side in Toronto to try his hand as a salesman. “It’s where the good parties are,” Johnson explained to friends. There, as a low-level manager given the pedestrian task of marketing light bulbs, Johnson first displayed a zest for salesmanship. He dreamed up an idea for a premium-priced bulb, painted on the inside, and researched a name: Shadow Ban. The product did well. Johnson also did wonders for the division’s Christmas-tree bulb sales.

As good as he was with light bulbs, it was in his expense accounts that Johnson’s real creativity shone. He cut back the expense budgets of his salesmen, marshaling much of the money for himself. He used the additional funds to entertain customers royally, taking particular delight in plotting and executing what he called “the hundred-dollar golf game,” which involved a day on one of the city’s finer courses, followed by drinks and dinner at one of the city’s finer restaurants. It took a prodigious effort to drop $100 in the early 1960s, but Johnson was up to it. By combining his flair for spending with his gift for flattering older men, Johnson moved steadily up the corporate ladder. “Spending money was always a joyful, joyous thing to Ross,” recalled William Blundell, a Canadian friend. “He was convinced that all of the decisions got made by the senior people in the accounts. He thought he could leverage that money pretty well.”

From the start Johnson was a party animal. He loved nothing better than sipping Scotch and schmoozing into the wee hours. The next morning he could walk into work without missing a beat. At GE he perfected a flip, wisecracking approach to business. If there was a choice between saying something straightforwardly and saying it humorously, Johnson always chose the latter. If it was self-deprecating, so much the better. “An accountant,” Johnson would say during his bookkeeping days, “is a man who puts his head in the past and backs his ass into the future.” He attracted a group of young protégés who felt the same. Johnson held sway over them with an hypnotic, singsong voice, both deep and nasal, and he alternately spoke
sotto voce
and
fortissimo.
“Come along with me,” his manner and mien beckoned young acolytes. “We’re going to have fun.” When he got married, his groomsmen capped an all-night bash by going water-skiing in their tuxedos.

Yet after thirteen years, at age thirty-two Ross Johnson was still a nobody. He was making only $14,000 a year, teaching nights at the
University of Toronto to augment his income. His first child was on the way. Except for a patina of charisma, he was like a thousand other bright young men in Toronto, struggling to get ahead. He was impatient. When his bid to be transferred to GE’s U.S. operations—the big time—was turned down, he jumped ship.

Landing as a midlevel bureaucrat at T. Eaton, the big Canadian department-store chain, Johnson found a mentor, a man named Tony Peskett. Eaton was fat, sleepy, and slow, but Peskett, as head of personnel, was committed to bringing the company into the twentieth century. Johnson had come from the gray flannel of General Electric in the 1950s. Now, as a member of a guerrilla band of managers known as the “Pesketteers,” he entered the 1960s. Peskett encouraged him to indulge his natural proclivity for thumbing his nose at authority. The Pesketteers believed in change for change’s sake, and set out reshaping their dowdy old employer. They believed in constantly shaking things up, monitoring and reacting to the competition down the street at Sears Canada. The Pesketteers subscribed to a Bob Dylan line of the time: “He who’s not busy being born is busy dying.” Tony Peskett, who imbued Johnson with a lifelong belief in the creative uses of chaos, put it another way: “The minute you establish an organization, it starts to decay.” Johnson, who carried that idea to every business he ever ran, boiled it down into a personal philosophy called “shit stirring”: a love for constant restructuring and reorganizing.

When Peskett fell out of favor, Johnson once more jumped ship, this time landing at a Toronto company named General Steel Works, Ltd. GSW, as it was called, offered the prospect of authority (Johnson would be the number-two executive), money (a $50,000 salary), and social contacts galore. Through the company’s rich owner, Johnson joined Toronto’s upscale Lambton Country Club and came to know many of the city’s elite, men such as hockey great Bobby Orr and Alan Eagleson, a lawyer who headed the National Hockey League players’ union. Johnson loved rubbing elbows with them and found he was good at it.

Despite his social ascension, Johnson started off miserably at GSW, a tiny maker of appliances, garbage cans, and manure spreaders. When an economic downturn slowed its appliance business, Johnson’s impulse was to throw money at the problem, and he fell back on the expensive marketing schemes he’d developed at Eaton and GE. His new boss, a tightfisted hard case named Ralph Barford, rejected each one in turn. “Ralph’s
philosophy was buy low, sell high, and argue over the bills,” recalled Jim Westcott, a Johnson friend who would frequently commiserate with him over lunch. “Boy, did Ralph rip the skin off my back today,” Johnson would moan.

Johnson chafed at life in a smaller company. GSW was operating on the edge, with lots of debt, and Johnson suffered through weekly grillings by its bankers. “It was a shock,” he recalled. “You learned that the guy who writes the ads for the bank isn’t the guy who loans the money. They break your balls.” It was Johnson’s introduction to the harsh realities of corporate debt, for which he developed a lifelong aversion.

Eventually, Johnson and his boss reached an accommodation of sorts and worked together for another five years. Johnson came to appreciate Barford’s ability to change directions at a minute’s notice. “If you could convince him you were right, he’d do a one hundred and eighty degree turn,” Johnson would recall. “It was just that getting him to do that could take a panzer division.” Johnson became an accomplished quick-change artist himself, an attribute that would bewilder subordinates for the next twenty years.

By the early 1970s Ross Johnson was forty years old and still hadn’t run his own show. When a headhunter offered him that chance, he leapt at it, jumping this time to become president of the Montreal-based Canadian arm of an American food company, Standard Brands. Standard Brands had been created in 1928 by the House of Morgan, which had merged Fleischmann Distilling & Yeast Company, Royal Baking Powder, and Chase & Sanborn Company into one entity. That alone told Johnson something about the company’s problems. Chase & Sanborn coffee was a tired old brand, and yeast and baking powder seemed like pioneer-era remnants. A ponderous, second-tier organization, Standard Brands over the years had evolved into an employer of quiet tinkerers, who came up with a sugar substitute called high-fructose syrup and developed Fleischmann’s Margarine, a low-cholesterol spread. Year in, year out, the company’s timeworn credo fronted its annual report, affirming Standard Brands’s “commitment to use the fruits of the earth to provide a good quality of life for those we serve.”