The takeover battle for RJR Nabisco in late 1988 sent shock waves from Wall Street to Winston-Salem. The stakes were unimaginably high, and the players - Henry Kravis, New York deal-maker extraordinaire and Ross Johnson, RJR's extravagant and abrasive president - seemed larger than life.In the end, Kravis's $25 billion, $109-a-share-acquisition of RJR Nabisco became the largest takeover in Wall Street history, a fitting finale to a decade of excess. In Winston-Salem, the repercussions of the buy-out are still being felt.
What follows is an inside look at major episodes in the RJR takeover story.
I: LIVING THE GOOD LIFE ATROSS JOHNSON'S RJR NABISCO
After clawing his way to the top of corporate America in a string of board-room coups, Ross Johnson celebrated by turning RJR Nabisco into a monument of free-spending, nouveau-riche excess. His lavish style would later backfire, though, attracting hungry Wall Street predators who saw profits to be made in cutting back the company's overhead.
Under Johnson, who took over in 1986, the top 31 RJR executives were paid a total of $14.2 million, an average of $458,000. Some of them became famous locally for handing the shoeshine girl at a nearby hotel $100 tips. Johnson's two maids were put on the company payroll. No expense was spared in decorating the new Atlanta headquarters: a $51,000 vase, a $36,000 end table; a $100,000 rug for Johnson's office, antique books by the yard.
It was, literally, the sweet life. A candy cart came around twice a day, dropping off bowls of bonbons at each floor's reception area. Not Baby Ruths or Butterfingers - products made by the company - but fine French confections.
Under Johnson, RJR Nabisco erected the Taj Mahal of corporate jet hangers, dwarfing that of Coca-Cola's next door. The cost hadn't gone into the hanger itself, but into an adjacent, three-story building of tinted glass, surrounded by $250,000 in landscaping, complete with a Japanese garden. Inside a visitor walked into a stunning three-story atrium. The floors were Italian marble, the walls and floors lined with inlaid mahogany.
Among the building's other features: a walk-in wine cooler; a ``visiting pilots' room' with television and stereo, and a flight-planning room, packed with state-of-the-art computers to track executives' whereabouts and their future transportation wishes. All this was considered necessary to keep track of RJR Nabisco's 36 pilots and 10 planes, widely known as the RJR Air Force.
The RJR Air Force was Johnson's ticket to the high life. Each weekend, planes brought to Johnson's side the likes of former football star and announcer Don Meredith from Santa Fe, N.M., or former hockey great Bobby Orr from Boston, or Canada's prime minister Brian Mulroney and his wife.
Johnson signed up many of his famous pals as spokesmen for Team RJR Nabisco. Meredith got $500,000 a year, announcer Frank Gifford $413,000 (plus a New York office and apartment), golfer Ben Crenshaw $400,000 and golfer Fuzzy Zoeller $300,000. The king was golfer Jack Nicklaus, who commanded $1 million a year.
For all the money Johnson doled out, some of his friends proved something of a disappointment when it came to performing on behalf of RJR Nabisco. Nicklaus was notoriously difficult. He refused to do more than six appearances a year, he didn't like playing golf with RJR's best customers, and he didn't like to work the room at the RJR events he did attend. Then there was former football great O.J. Simpson, who was making $250,000 but was a perennial no-show at RJR events.
Johnson, however, didn't care. He was having a grand time with his famous friends. ``A few million dollars,' he always said, ``are lost in the sands of time.' II: KRAVIS'S BANKERS:TALK, TALK. LEAK, LEAK?
Johnson stunned corporate America when, teamed with the investment bank Shearson Lehman Hutton, he proposed to acquire RJR in a leveraged buy-out in October 1988. But nobody was more surprised than the man who considered himself the impresario of the LBO game, Henry Kravis.
Why, he had talked with Johnson more than a year ago about doing an LBO. Now, Johnson was stealing his idea and throwing in with Shearson.
Kravis met with Shearson CEO and the Johnson team head, Peter Cohen, but, in a tense faceoff, the two succeeded only in angering one another. Kravis then gathered a war council of his top investment bankers in his offices overlooking Central Park.
Kravis was close to springing his own surprise bid for RJR. But as the meeting broke up that Sunday night, he told the group of bankers he and his partners wanted to think things over. As Kravis was preparing to leave, two of Wall Street's top bankers, Bruce Wasserstein and Eric Gleacher, walked into his office. ``We'd like to talk to you about fees,' one of them said.
Kravis was irritated. The request was premature. ``Why should we talk about the fees now?' he asked. ``We've never had any problem with that before.'
The two advisers figured their firms should each get $50 million. It was an awesome number, far greater than any investment bank had ever gotten for merely providing advice. Kravis thought the request ridiculous. Here he was, on the verge of launching the biggest move of his career, and his advisers seemed more concerned with their compensation than their tactics. ``You're just not even close,' he told the pair. ``We're not even going to talk about this. This is the last time we'll talk about it.'
``Well, fine,' Gleacher said after a moment. ``We'll just have to trust you on it.'
If Kravis went to bed that night disgusted with his advisers, he had an even bigger surprise in Monday morning's newspapers: The Wall Street Journal and the New York Times spelled out his entire plan for going after RJR before he had even decided to proceed. Kravis was livid. He immediately suspected his investment bankers. Because Drexel Burnham was mentioned prominently in one article, his number one suspect became Drexel's Jeff Beck.
Later that morning, Kravis phoned and confronted Beck, a colorful deal maker known in Wall Street circles as ``The Mad Dog.'
``I don't believe you did this to me,' Kravis seethed.
Beck immediately grew panicky. ``I didn't do it. Henry, you gotta believe me. I didn't do it!'
``These articles sure lead me to believe you did,' Kravis said icily. ``I don't want anyone around that can't be trusted. I don't want anyone on this team who's out for their own selves. We've got no use for that. That's it, Jeff. I don't want you at any more meetings.'
Beck became hysterical. He had a multi-million dollar fee, not to mention his reputation, on the line. ``Henry, it wasn't me,' he said. ``I didn't do it! I didn't do it! You gotta believe me! It was Wasserstein! It had to be Wasserstein!'
All that day, every 30 minutes or so, Beck phoned Kravis, but not a single call was returned. Beck pleaded with KKR partner Paul Raether and others, swearing his innocence, and even turned to newspaper reporters to back up his story, to no avail. For days Beck would hang in limbo, unable to sleep, unsure of his standing with Kravis, who would eventually allow him back into the deal.
III: HERE'S TO YOU,MRS. ROBINSON
The leak forced Kravis to go ahead with his bid, leaving his team and the Shearson-Johnson team in a competition neither side wanted. Realizing a drawn-out battle would only drive up bidding prices and generate ugly publicity, both sides had discussed the possibility of declaring a truce and dividing up RJR.
Enter Ross Johnson's PR consultant, Linda Robinson. No ordinary flack, she is tall and willowy, with a knowing smile, a grueling work schedule, and an obvious lover of gab. And she is married to one of the business community's most powerful men, American Express Chairman James D. Robinson III, whose company happened to own a majority stake in Cohen's Shearson.
Unbeknown to even Cohen, who thought he was running the show for the Johnson team, Linda Robinson began doing her own negotiating with Henry Kravis himself.
While the Kravis and Johnson parties were still feeling each other out and plotting their next moves, Kravis's wife, designed Carolyne Roehm, had a fashion show at the Plaza Hotel. Amid a tableau of flashing cameras and flashing teeth, Linda Robinson - with only her husband's and Kravis's secret approval - took the occasion to discretely update Kravis on her efforts to reconcile the two sides. ``So,' Kravis asked, ``How's it going?'
``I'm working on it,' Linda Robinson said. ``I think it can work. I know you and Ross can work together. I've got to set something up.'
``Fine. That sounds constructive,' he said.
``Now,' she chided. ``If we do this, I want you to be rational. I'm going to tell our guys to be rational, too.'
Kravis assured her he would be on his best behavior.
After ducking backstage to congratulate Roehm with a peck on the cheek, Linda Robinson returned to her office to take a phone call from Kravis. For the next hour, the nation's most powerful deal maker and this increasingly powerful PR woman negotiated the initial terms of what was to be the biggest joint merger proposal in history. They reached a broad agreement on three main points: equal control of the board, and a Kravis bank, Drexel Burnham, would manage the bond offering to finance the deal.
Linda Robinson said the third condition would be a slight problem but believed it could be worked out. Later that night, the warring parties met and ratified what she and Kravis had worked out earlier. Afterward Jim Robinson sidled up to Kravis and smiled. ``You better send a big bouquet of flowers to my wife for this,' he said. ``She went way out on a limb for you.' IV: SALOMON JUNKSTHE COMPROMISE
Kravis never got a chance to send the flowers. While the new deal seemed acceptable to everyone else, it wasn't to the partner that the Shearson-Johnson team had brought on for the second round of bidding: The Wall Street firm of Salomon Brothers. Salomon's principal mission was selling bonds. And it was willing to sacrifice Johnson's interests - indeed, his entire deal - to avoid the perception that it was taking a backseat to its hated rival, Drexel.
In an effort to save their newfound spirit of cooperation, the Shearson-Johnson-Salomon group and the Kravis group met most of the night, first at the Plaza Hotel, then at RJR's New York offices to try to settle things.
``We've just got to' run the bond offering, Salomon President Tom Strauss insisted. ``Why don't you trust us?'
Irked, Kravis explained the importance he placed on Drexel's handling the bonds. ``They're the best. They're cheap. This is the biggest deal ever. We can't afford to take any chances.'
By 2 a.m. Cohen was shuttling back and forth between Kravis and Roberts, who were in Johnson's office, and a 10-man Salomon contingent headed by Chairman John Gutfreund located in a conference room around the corner. Kravis was willing to let Salomon sell some of the bonds, as long as Drexel was in charge.
But from Salomon's view, that was unacceptable, because when the bond deal would later be announced to the outside world, Drexel, as lead bank, would get the coveted position on the left side of the so-called tombstone advertisement that would run in The Wall Street Journal and the New York Times. Salomon's name would be on the right.
As Strauss explained later, ``With Drexel on the left, we would have been perceived as an afterthought.' In other words, Gutfreund and Tom Strauss were prepared to scrap the largest takeover of all time because their firm's name would go on the wrong side of a newspaper advertisement.
After Kravis and Gutfreund got nowhere in a man-to-man negotiation, the two sides went home for some sleep and promised to reconvene later in the morning. Early that next morning, Drexel bankers met with the Kravis team and offered to drop out of the deal. Kravis said no. Drexel then offered yet another compromise. It would be on the left of the tombstone for the first bond offering of the deal, and Salomon could be on the left for the second offering. Kravis took the proposal to Cohen.
After a lengthy argument among the Johnson troops, Cohen and Jim Robinson of American Express returned to Kravis's office. ``What's the response to the proposal we gave to Peter (Cohen) this morning?' Kravis asked.
Then Jim Robinson dropped the bomb. The Shearson-Johnson-Salomon group was ending negotiations with Kravis and making its own, higher bid for RJR. ``We're putting it on the tape right now,' he said. ``What?' Kravis said, amazed. As far as he was concerned, they were still in negotiations. ``Why?' he asked.
``We may win or we may lose,' Jim Robinson said. ``But if we lose, it'll be with a structure that's best for our company and our investors.'
When the group left, Kravis erupted, as did Roberts. History's largest takeover battle was back on. V: 'THE GANG THATCOULDN'T SHOOT STRAIGHT'
The RJR board set a deadline of 5 p.m. Nov. 18, for final bids on the company. Knowing that the Kravis group would bid higher than their own $92-a-share bid, the Shearson-Johnson-Salomon group gathered at Shearson on the day of the bidding to set their final offer. It was a day Johnson will never forget: a real lesson in the supposedly sophisticated ways of Wall Street.
Johnson, his tobacco unit chief, Ed Horrigan, and their associate Andy Sage had walked into Cohen's office that morning and found the Shearson chief standing behind his desk, ``OK, guys,' Cohen had said. ``What's the price going to be?'
Cohen called his secretary to get someone on the phone. Horrigan wondered what the Shearson chief had up his sleeve. A secret weapon? A moment later, Cohen picked up the phone. ``Hello?' he said. Horrigan listened in anticipation.
``Yes, my wife and I have talked it over. Forget the coat. We'll go with the jacket.'
Three hours later, they still hadn't begun talking about their bid.
Horrigan was nearly foaming at the mouth as he and Johnson sat around the paisley-wallpapered Shearson dining room while butlers in white jackets took lunch orders and hovered over them with coffee and baskets of rolls. They were supposed to be discussing their bid, but so far all they had done was pass menus.
By 1:30 p.m., even Johnson was growing impatient.
``Let's get on with it, Peter,' he said.
``Christ,' Sage blurted out, ``we need a goddamn number. It's getting late.'
Johnson's lawyer, Steve Goldstone, arrived at Shearson and was surprised to find Cohen, Gutfreund and more than 30 others eating a leisurely lunch, debating bid structures amid a tableau of white tableclothes, hovering waiters, and clinking china. Back at Davis, Polk & Wardwell, Goldstone's partner, Gar Bason, was growing anxious. He phoned Goldstone. ``Gar, it's aborning,' the lawyer said.
``Hey, come on,' Bason pleaded, his voice strained over the phone line. ``We need a number. We're running out of time. Steve, if they don't make up their minds soon, we'll have no bid at all.'
Bason got his number just after 3. Across Manhattan, at a half-dozen banks, law offices, and accounting firms, fingers flew across calculators, toting up interest rates, payment schedules, and other key ratios. By 3:45 the lawyer could see details of the bank letters were falling into place. But it was also clear that, to beat the deadline, the 6-inch-thick bid package would have to be rushed uptown to the RJR board's law firm, Skadden, Arps, Slate, Meagher & Flom, at 55th Street and Third Avenue.
At 4:20 Bason ordered Salomon Brothers' lead counsel, Peter Darrow, a 26-year-old Davis Polk associate named Richard Truesdell, and two other lawyers, armed with a portable telephone, into a cab for the trip uptown. Several key documents the lawyers carried were incomplete, so the four were to pencil in the remaining numbers in the cab.
Goldstone arrived back at Davis Polk and began calling the team in the cab every five minutes. ``Where are you now?' he asked repeatedly. ``What block are you on?' With 15 minutes to deadline, the cab turned off the parkway and onto First Avenue. Ten minutes later, it crawled to a stop in Friday afternoon traffic, two long blocks from its destination. Panicking, Goldstone barked into the phone. ``Get out of the cab and run!'
The attorneys dashed onto the sidewalk and began sprinting for the law offices. Johnson, who along with Horrigan and Sage had arrived at Davis Polk, laughed uncontrollably. ``I hope your guy was a cross-country runner, because there's no way he's going to make it by five o'clock,' he said.
As the four spilled from the elevator onto the the 34th floor, their way was blocked by an enormous security guard. A minute later, Truesdell was escorted into a room where he handed over a binder containing the group's bid. Peter Darrow looked at his watch. It was 5:01. The largest takeover bid in corporate history was late. He prayed no one would notice. VI: WHERE IS HENRY KRAVIS?
Despite its tardiness, the Shearson group's bid would have defeated the bid of the Kravis group if it weren't for a wild card: a third group, headed by First Boston Corp, and the Pritzker family of Chicago, submitted a complicated, last-second bid that required plenty of study by RJR's board and its advisers. In order to take that time, the board nullified this round of bidding and called for a new one.
The Kravis group wasn't sure what it should do next, but it did decide to use the uncertainty to its advantage - a ploy that many players on both sides say tipped the final bidding in Kravis's favor.
``We're exactly where we want to be,' said George Roberts. His statement was met with a questioning glance from Kravis. ``Look,' he continued, ``let's just lay low. We'll put out the word we don't know that we're going to do. It's the truth. There's no reason to say we're really going after this deal...'
Kravis agreed. Roberts smiled as the outline of a plan formed in his mind. He had the perfect venue from which to launch their little misinformation campaign: Wasserstein and their talkative investment bankers. ``I think we ought to put on a real show for Bruce,' Roberts said.
The investment bankers weren't their only targets. Shortly after the plan was hatched, Dick Beattie, the senior Kravis attorney who was in on it, phoned his old friend Peter Cohen. ``That bid was a winner, Peter,' Beattie said, adopting a defeated tone. ``I got to tell you. Nice job. Terrific.'
``Yeah, well, thanks,' Cohen said, adding ``What do you think of the First Boston thing?'
``It's crazy. It won't work...' Beattie said.
``That's what we think, too,' Cohen said ``....what are you guys doing?'
``Oh, I don't know,' Beattie said. ``Everybody around here's pretty depressed. I don't know what we're going to do about a second round. We may not do anything... I think Henry is going skiing.'
When Linda Robinson phoned her old friend Henry Kravis, Kravis decided to lay it on thick. ``I'm really tired,' he said, announcing his plans to go to his home in Vail, Colo., for the Thanksgiving weekend. ``I really don't know what we're going to do about next week. We probably won't even bid at all.'
By the weekend, the drumbeat was growing louder. From every investment banker and lawyer, the rumor spread: Kravis won't be there.
Henry Kravis ultimately won RJR Nabisco after launching a surprisingly strong bid that swamped a lower bid from the Shearson team. Afterward, many members of the Shearson team saw the Kravis group's fakeout as the pivotal play in this drama. Tom Hill recalls his boss Cohen telling him at the time he ``had reason to believe from Beattie that KKR was out of it.'
Hill himself acknowledges he also believed the Kravis group wasn't bidding after Kravis spent the weekend in Vail. ``That, in fact, was an excellent head fake,' Hill says. Adds Jack Nussbaum, Cohen's lawyer and closest confidante: ``There is no question we were fooled. No question. How could anyone say anything else?'
Kravis's $25 billion, $109-a-share-acquisition of RJR Nabisco remains the largest takeover in Wall Street history. Upright in defeat, Johnson resigned, enjoying a $53 million ``golden parachute' payment. Kravis, ironically, replaced Johnson with Jim Robinson's No. 2 executive at American Express, Louis Gerstner Jr., who set to work dismantling Johnson's luxurious empire.
Only Johnson's prized hangar proved unsalable. ``It's just too grandiose,' Beattie fretted. ``We can't give the thing away.'