Barbarians at the Gate (30 page)

He was already on edge because of
Business Week
’s latest “Inside Wall Street” column. “Smoke signals say: Buy RJR Nabisco,” the headline advised. Citing the huge gap between the company’s liquidation value and its stock price, the article quoted a money manager as saying, “RJR is a big restructuring or buyout play waiting to happen.” It went on to speculate: “Whispers have it that to avert a takeover, management plans to take the company private and then sell the tobacco unit.” Only half right, Johnson thought; food would be sold, as he and Benevento had decided,
and tobacco, with its huge cash flows, would be kept. He tried to put the item out of his mind.

The real shocker, though, came that afternoon a few minutes before six o’clock when news crossed the Dow Jones News Service that Philip Morris was launching a surprise $11 billion tender offer for Kraft. In vivid contrast to Johnson’s plans, Hamish Maxwell had chosen to expand his empire rather than dismantle it. His announcement prompted the usual flurry of calls from investment bankers wondering if Johnson might be interested in topping the bid for Kraft. By now their song was familiar.
This is a once-in-a-lifetime opportunity…. Kraft is a great business…. You ought to take a look…. You ought to move fast.

The only call Johnson noted came from Steve Waters of Morgan Stanley. Waters got through to Jim Welch, asking about Kraft. Before hanging up, he brought up the matter he’d mentioned to Welch just twelve days earlier. “Where are you on KKR, by the way?”

“Well,” Welch said, “we’re thinking about it.”

That day Johnson began calling directors, urging them to attend Wednesday night’s dinner. When board members asked why, Johnson was cagey. “It’s important,” was all he said. To those earmarked for the special committee, he asked whether they might be willing to serve as part of a group to study restructuring alternatives. Davis was grouchy but said he would do it. Macomber was agreeable. Hugel got through to Anderson, who accepted. Only John Medlin backed off. “I’m just too doggoned busy,” he told Hugel. Privately, he was uncomfortable with the potential conflict of interest of sitting on the committee while heading one of RJR Nabisco’s major banks. “Couldn’t you get somebody else?” Medlin asked. “What about Albert Butler?”

The docile Butler was Hugel’s only choice. “Has Ross already talked to you about this?” he asked Butler later that day. “No,” Butler said, “but he did tell me a few weeks ago about the study of alternatives.”

Butler agreed to join the committee. Just one thing, he said. A few weeks before, Johnson had graciously asked him to remain on the Reynolds Tobacco board past his seventieth birthday in May. “That doesn’t have anything to do with this, does it?” Butler asked.

An alarm went off in Hugel’s mind. “How deep did he go into this?” he asked.

It had been a definite offer, Butler said.

“Let me get back to you.”

Hugel hung up, miffed. He knew tobacco would be the surviving core of the post-LBO company, and he didn’t like the idea of Johnson’s offering a seat on its board to a current director. Directors were supposed to be neutral in this process, and that kind of offer might not look right. He called Johnson and told him so.

“Albert got confused,” Johnson said. “At the time I was talking to him, I hadn’t even decided to go forward with this. What I meant was that I wanted him to go on the tobacco board” as it was.

Hugel wasn’t so sure Butler was confused. “You know, Ross, you’ve got to be careful on this,” he warned. “This is bad stuff.”

Johnson then said something that Hugel would never forget. There would be, he noted, a couple of slots on the post-LBO board for independent directors. “It’s something I’d like you to consider, Charlie. You’ll have to make up your own mind, and we’ve got to get the deal done first. But we’ve worked so well together, I’d like you to come over. And as a director, you’d have the ability to get equity.” A piece of the action.

“Well, how are you handling equity?” Hugel asked, suspicious.

Johnson laid it out. Hugel could get the same sweet deal management would be getting. He would get a loan to buy stock from Shearson, Johnson said, then watch it grow like Topsy. A $5 million stake would probably be worth $20 million in five years.

Hugel didn’t know what to say. Did Johnson know what he was saying? Did he realize he was offering, in essence, a bribe? Was he scheming or merely naive? With Johnson you never knew. “I can’t do that,” Hugel said hurriedly. “I’ll be chairman of the special committee.”

Confused and more than a little worried, Hugel ended the conversation, suggesting Johnson call Butler to straighten out his board seat. Later he called Butler himself. “I wouldn’t say anything about this,” Hugel said, “to anyone.”

Johnson was irritated. With less than forty-eight hours to go until the
meeting, it was silly to have crucial matters like this unresolved. He decided to gather the group and call Shearson and settle it, once and for all. Laurie Johnson started working the phones, tracking people down. Goldstone had returned to New York for the evening, but she reached his Harvard-trained assistant, George (“Gar”) Bason, Jr., finishing a Wendy’s hamburger in his hotel room. In Goldstone’s absence, the baby-faced thirty-four-year-old would be their negotiator. Horrigan was tracked down at the Waverly, dining with two tobacco executives. John Martin came from down the street. Benevento and Henderson were located having dinner together.

By the time they assembled at Johnson’s house, it was past ten o’clock. As Laurie got the group Diet Cokes, Johnson sat at the desk in his study down the hall and dialed Peter Cohen in New York. While the phone rang, he gazed at the celebrity-studded pictures on the study wall.

To his surprise, Jim Robinson answered the phone. The Robinsons had just slipped into bed at their Manhattan apartment. Johnson realized he had hit the wrong speed-dialing number. “Oh shit, Jimmy. I was trying to reach Peter.”

What’s wrong, Robinson asked.

Johnson’s voice was uncharacteristically angry. “These jackasses at Shearson,” he said, “they’re trying to screw us to the wall. They’re just being totally unreasonable. These items they’re changing on us just seem like birdshit to me, and I’m fed up with ’em.”

Robinson, who hadn’t been following the group’s progress in detail, didn’t understand everything Johnson said. He extricated himself from Johnson and dialed Cohen at his Fifth Avenue apartment. “I don’t know what the hell is going on,” he told Cohen, “but apparently Jim Stern and Tom Hill have managed to piss off The Pope. Could you settle things down?”

Cohen dreaded calling Johnson. He had hoped Hill and Stern could handle the management agreement themselves. Besides, he was scheduled to get up at the crack of dawn for an interview on “Good Morning America.” Reluctantly, he picked up the phone and reached Atlanta. Can’t we do this another time? Cohen wondered. It’s late.

“No, this has got to be done now,” Johnson said. “Come on, let’s get this baby done, Peter. From my standpoint, you know, this thing is just ridiculous. It’s just a bunch of birdshit. Peter, either we get this goddamn
thing solved tonight, or we pack up. If I have this kind of trouble with you now, what’ll it be like later?”

Cohen backed off; Johnson sounded upset. We’ll work something out, he said. Cohen hung up and summoned his personal assistant, Andrea Farace, to his apartment. Farace lived just three blocks north and was at Cohen’s door within minutes. He also got Jack Nusbaum on the line. Soon all three men were on the phone with Gar Bason, who had taken a seat in Johnson’s study. “Love the chair,” he told Johnson.

“If you get this deal,” Johnson said, “I’ll buy you one.”

On the other end of the line, Cohen found himself in a difficult position. He remained uncomfortable with the sheer size of the cut Johnson was demanding. He knew how much Shearson was giving away, both in terms of control and money. But it was clear some accommodation had to be reached quickly if the deal was to be salvaged. Somehow Johnson had to be placated.

It was over in less than two hours. Cohen capitulated to virtually every demand Bason put on the table. Typed up by Sage’s secretary that night, the management agreement gave Johnson’s seven-man group 8.5 percent of the equity, complete with a tax-compensated loan from Shearson. If Johnson hit all his “bogeys,” the group’s stake could easily march up to 18.5 percent. The package’s total value could go as high as $2.5 billion in the coming years. Johnson was free to divvy up his share of the pot as he chose; his personal 1 percent share—Horrigan also took 1 percent—could be worth as much as $100 million in five years, according to Steve Goldstone. Johnson also received a veto and control over the board. It was unlike any major LBO agreement ever signed.

Cohen allowed himself to rest somewhat easy, having wrested from Johnson the understanding that the pact would be renegotiated if the price topped $75 a share, as it almost certainly would. For the moment, though, both sides got what they wanted. Johnson had history’s richest management agreement. Cohen kept the ball rolling and was able to tell his colleagues that nothing was final.

When Jim Stern learned of Cohen’s compromise, he was incensed. “Fuck it!” he shouted, banging his fist violently onto his desktop. “I’ll do this at seventy-five, but not one penny more. At seventy-five-oh-one,
it’s over!
”

The second woman’s psychic was even worse. “I don’t see this as the job for the rest of your life,” the psychic said.

“What do you see?” she asked.

The psychic closed her eyes and appeared to concentrate for a long moment. Then she said, “It just kind of goes…poof.”

Johnson waited nervously Tuesday, checking the stock every hour. The next morning he invited Goldstone, who had returned from New York, to his house for breakfast. The lawyer, growing nervous, still didn’t know whether Johnson would recommend an LBO or simply discuss the possibility. Johnson ran through his speech, adding that he would indeed recommend the LBO. “Just lay it out for them,” Goldstone said. “It’s their choice.”

After breakfast Johnson went to the office and again checked the stock. Still quiet. He made the final rounds of the inner circle, checking with each man to make sure he remained comfortable with the furies they were about to unleash. Sage, for all the Sturm und Drang of his negotiations with Tom Hill, remained ambivalent; he would support Johnson whatever happened. Ed Robinson was all for the project. “Go for it,” he told Johnson. John Martin was also on board. “Pay your money,” he said smiling, “and take your chances.”

Horrigan, eager to enter battle, again reminded Johnson to be wary of the board. Just because Johnson kept a jar on Marty Davis’s desk brimming with Fig Newtons didn’t mean Paul Sticht’s old allies were going to hand him the company. “Guys like Bill Anderson are creatures of the establishment,” he warned. “They aren’t going to like LBOs. Albert Butler is as Old Guard as they come. Macomber is a whiner, a second-guesser.”