Barbarians at the Gate (54 page)

He would do it.

Screw Cohen. We don’t need him, Forstmann said. Cohen is so inexperienced he’s bound to fail. This would be Forstmann versus Kravis. The good guys—P&G, Ralston, and Castle & Cooke—versus the junk-bond hoards of Drexel Burnham and Merrill Lynch.

“You know the conditions,” Forstmann told Boisi. “No junk paper. None of that crazy shit. And we have to be invited to bid.”

“Okay,” Boisi said. He would have pledged his left leg and his bonus at that point.

And, Forstmann added, Forstmann Little must have a veto over the bidding group’s moves. Boisi agreed to that, too.

Two schools of thought were forming as to the best way to approach the bid. The Salomon team, led by Gutfreund and Strauss, was leaning toward an immediate bid, something that would show the world and the board they were for real. Something around $92 a share, just enough to top Kravis’s $90. It was a trader’s instinct: Bid fast, top the other guy by a fraction of a point, and wait to see what happened next.

Another faction, led by Steve Goldstone and Tom Hill, judged that approach shortsighted. Topping Kravis now, they argued, would only lead to a drawn-out bidding war that would send prices spiraling upward. An auction was the last thing they wanted. Somehow they had to bring a swift end to the process: a single, sharp, decisive blow that would knock out Kravis and secure the board once and for all. A bid of $100 a share wasn’t out of the realm of possibility to Hill and Goldstone. By evening’s end, Goldstone felt the group was leaning toward his position.

Tuesday morning Goldstone took a call from Peter Atkins, the attorney working with Hugel’s committee. It had been a week since Kravis’s bid, and with his due diligence underway, Atkins was curious as to when he could expect a bid from Johnson. Goldstone decided to try an idea out on him. If we gave you a massive bid—a preemptive bid—Goldstone said, would the board consider entering into a merger agreement? It would allow the board to lock in a high price, Goldstone suggested, while in effect setting a bidding floor. Atkins didn’t seem to give the proposal
much thought. His message was clear: Just make your bid, Steve. Make your bid.

Afterward, Goldstone chewed over the idea further. A blockbuster bid in return for a merger agreement. He liked it. Johnson, too, thought it sounded like a sensible approach. But how to get Atkins to take the bait? Goldstone got an idea from Johnson.

From conversations with Hugel, Johnson knew the board was deathly afraid the management group would cut a deal with Kravis, eliminating the competition, and, Hugel feared, leading inevitably to a lower bid. Maybe, Goldstone reasoned, the board would leap at the chance to seize a high bid as a way of spoiling any chance of further talks between the two sides.

Goldstone talked to Atkins again Wednesday morning. “Here’s what I have in mind,” Goldstone told the lawyer. “We would like to negotiate a merger agreement with you. It’ll establish a floor. I can tell you, if you’re willing to proceed on that basis, we will give you a very, very good bid. A preemptive bid.”

“Look,” Atkins said, “why don’t you just give me the bid now. The board is very interested in receiving your bid.” Atkins thought: Hadn’t he heard this before?

“But Peter, it’s not that simple,” Goldstone countered. “Why should we give you a bid if there’s no quid pro quo? We’re not getting anything back. Right now we have the opportunity to negotiate with our competition. If we do, and we’re successful, you’ll see a bid much lower than this. I’m not going to throw a bid out to you now until we’re through talking with our competition.”

It was a bluff. Goldstone had no idea whether Johnson’s group could work something out with Kravis. As heated as the public rhetoric had become, the chances seemed low. But Atkins didn’t know that. Goldstone had to use his own fear against him.

“Oh, I see the leverage,” Atkins said. “You’re really giving us an incentive.” Goldstone almost heard the light bulb click on over the lawyer’s head.

“That’s right.”

“I see,” Atkins said. “Now you’ve given us something to think about. Well, I’ll discuss it with the appropriate people and get back to you. Do you have a proposed merger agreement in mind?”

“Yes, I do.”

“Why don’t you send it up to me.”

Goldstone was excited. He instructed Gar Bason to send over an agreement that afternoon, and late, he rushed over to lunch at Shearson.

The Salomon chieftains, Gutfreund and Strauss, were already waiting in Cohen’s office when Goldstone arrived. They repaired to Cohen’s dining room for lunch, where Goldstone briefed the group on his conversation with Atkins.

Gutfreund was immediately skeptical. A preemptive bid? Goldstone’s strategy, he said, would push the group into a bid well above $90 a share. Why go so high? “Aren’t we wasting our money?” Gutfreund asked. “Why should we do this? Can you tell me we’ll actually get a merger agreement if we do this? What are the chances it’ll work?”

“I’d say less than fifty-fifty,” Goldstone admitted.

Goldstone was baffled. Hadn’t these people told him just two nights ago they were in favor of a preemptive bid? The lawyer tried to read Cohen, but couldn’t. He thought Jack Nusbaum shared Gutfreund’s concerns about overpaying.

After lunch Goldstone returned to his office, worried. He didn’t call Atkins back. For the first time he realized he was making promises his group, especially Gutfreund, had no intention of keeping. He was irritated. Gutfreund didn’t seem to understand even the most fundamental bidding strategy. Now, Goldstone knew, he had to move very carefully. He may already have gone too far.

Their bid was at a crossroads. After seizing the initiative from Johnson’s group a week before, they were losing momentum. Nothing seemed to be going right. Due diligence had been a disaster. Short of a miracle, Kravis and Roberts were facing the biggest deal of their lives with little more financial guidance than that available to an RJR Nabisco retiree.

If that weren’t bad enough, Kravis was hearing ominous rumblings among his investors. Friday had seen a spate of newspaper stories suggesting that some of Kohlberg Kravis’s largest backers were uneasy about the aggressive tack Kravis had taken. The involvement of state pension funds in a “hostile” bid spawned headlines and partisan political squabbles in
Oregon, Michigan, and Massachusetts.
*
Kravis and his people tried to calm their investors, but the pressure on them was mounting. He’d even had Eric Gleacher ask Hugel to assure his investors he wasn’t a hostile bidder.

Kravis suspected Tom Hill and the management group were behind some of the trouble in his rear, and he was right. One of Kravis’s most influential backers was Doug LeBon of Los Angeles-based Wilshire Associates, a pension fund adviser that called the shots for a number of Kravis’s largest investors, including the states of Massachusetts, Oregon, and Iowa. LeBon’s clients accounted for roughly 25 percent of the money behind Kravis. No sooner had Kravis announced his tender offer than Wilshire’s clients came under pressure from all sides to denounce the move. LeBon himself got angry phone calls from RJR Nabisco executives, including Harold Henderson, who heatedly pointed out that Wilshire’s agreements with its clients forbade backing hostile deals.

Of all his woes, though, none bothered Kravis more than the press. Kohlberg Kravis was getting killed. Following a week of controversy over Kravis’s “franchise” remarks, Monday had brought the first full burst of major media attention. “The Debt Binge: Have Takeovers Gone Too Far?” blared the cover of
Business Week. Time
weighed in with a handwringing report, “Big-Time Buyouts.” Major business leaders seemed to be popping out of every boardroom with pithy denunciations of LBOs and dire predictions of an America drowning in debt. Every story seemed to take a shot or two at Kravis.
Newsweek
was the worst. Its coverage included a sidebar on Kravis and Roehm—“The ‘High Voltage Life’ of a New York Supercouple”—that contained such juicy details as Oscar de la Renta’s threat to Kravis to make Roehm an honest woman.

The press attacks deeply wounded Kravis. George Roberts, who led a private life in California, also found the coverage unnerving. Friends sidled up to him at cocktail parties and asked him whether his business was really good for America. Remarkably, in thirteen years of public life it was the first time the two cousins had been pulled into the glare of a major bidding contest. While Kravis had long been a fixture of the society columns, color pictures and articles in
Newsweek
and
Time
were another thing altogether. This kind of publicity could ruin their business. It could
also bring down the wrath of Washington, a fact never far from Roberts’s mind.

“You people in New York are crazy,” he said. “This is a terrible environment. We’re taking a real beating.”

Kravis had to agree.

“I can’t wait to get back to San Francisco,” Roberts said. “This town is crazy.”

The due diligence, the worried investors, the press—there had to be a way to end this. Maybe, the pair agreed, it was time to jump start talks with Johnson. As they discussed it, Kravis found himself rationalizing the benefits of a joint bid. “We like Jim Robinson,” he said. “We like Peter Cohen, I guess. It wouldn’t be so bad when you think about it…”

His contempt for Johnson aside, Roberts found himself warming to the idea. Shearson doesn’t run food companies for a living, he thought. Cohen will lose interest once he has his fees. Give him half the deal now, Roberts suggested, and we’ll probably be able to buy back the rest later on.

However distasteful he found approaching Johnson on bended knee, Kravis knew it was the right thing to do. Depressed by the prospect, he looked at his list of telephone messages. As usual there were several calls from Linda Robinson. Jim Robinson’s wife seemed to have Johnson’s ear. Linda had no obvious ax to grind here; that had to account for something. He picked up the phone.