65 pages • 2 hours read
Bryan Burrough, John HelyarA modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
The RJR Nabisco directors “had watched in growing horror as Ross Johnson turned their company into the centerpiece of a $20 billion circus” (348). They were equally horrified by the management agreement. Johnson’s secret meeting and agreement “was the crowning blow” for the board (348). Tobacco workers considered the latter “the ultimate in ‘insider’ trading,” and shareholders were equally angry (349). RJR Nabisco's workforce was afraid to lose their jobs and even considered making their own bid. In public, a heated debate about the dangers of LBO and its massive debt was taking place. The Federal Reserve questioned “how LBO loans would fare in a recession” (349).
As anti-LBO backlash kept growing, “Kravis grew concerned that it might be doing irreversible damage to the firm’s reputation” (353). As a result, Kravis and Roberts decided to give an interview to a New York Times journalist. At the same time, Peter Cohen’s letter to Ted Forstmann, in which he expressed his deep disappointment about his actions, was leaked to the press. Forstmann felt insulted and believed Cohen had sent the letter, “for purposes of public relations rather than communication” with his firm (357). He responded in kind, calling Cohen’s letter “factually erroneous and totally unwarranted” (357).
Within the upper management of RJR Nabisco, things were falling apart. For instance, Charles Hugel was angry when he learned from the SEC (Securities and Exchange Commission) filing that Johnson had doubled Andy Sage’s compensation to $500,000. Hugel did not buy Johnson’s story that this compensation had been approved by the board: “It was the second time in a week he thought he had caught Ross Johnson in a lie” (363). Nabisco President John Greeniaus “had been numb” as a result of Johnson’s behavior. In his view, “Johnson wanted to take his machine and sell it for spare parts” (363). Greeniaus believed that Johnson was using “technology for technology’s sake,” and that “Team Nabisco” was “a waste” (370). Ronald Grierson demanded that Johnson resign altogether along with the management group, “It was completely improper, in his view, “for them to continue running the company while attempting to acquire it” (367).
Meanwhile, an analysis of RJR Nabisco’s numbers by Scott Stuart for Kravis also revealed puzzling categories such as “Other Uses of Cash,” the purpose of which was unclear (369). Nonetheless, Kravis considered boosting his bid to $100 a share, while Forstmann was comfortable with $85 per share. However, “The returns weren’t adequate unless they used junk bonds” (373). Thus, Forstmann decided to pull out of the deal.
Peter Atkins, a lawyer with Skadden Arps, led the special committee that examined the bids by the three investor groups: Shearson, KKR, and Forstmann Little, which did not drop out until the next day. Everyone headed toward the Friday deadline for making a bid, “and Atkins was confident their bids would satisfy both the board as well as its increasingly restive shareholders” (375). All the necessary documents, including due diligence and confidentiality agreements, were either ready or moving ahead.
First Boston felt left out of the RJR Nabisco bidding as “every major Wall Street investment bank and a host of minor ones were noisily feeding at the trough of RJR Nabisco” (376). Its key professionals—Bruce Wasserstein and Joseph Perella—left First Boston to establish their own Wasserstein Perella & Co. investment bank. Because of their extensive experience with mergers and acquisitions, many of First Boston’s clients followed them, as did some of the leading dealmakers at First Boston. Henry Kravis hired Wasserstein and Perella for the RJR Nabisco bid. First Boston’s co-head of investment banking and mergers and acquisitions, James Maher, was “in the most torturous period” because he considered Wasserstein and Perella the bank’s “most important assets” (376, 378).
Maher tried to get in on the RJR Nabisco deal in many ways, such as proposing to represent the board, but his efforts failed. He decided to work with investment banker Kim Fennebresque, who focused on attracting new business, and Gary Swenson. Phillip Morris hired First Boston to examine a potential bid for RJR Nabisco even though it was fighting for Kraft. Maher decided to focus on a tax loophole that was to expire on December 31, 1988, which allowed the deferral of taxes on the notes for up to 20 years, “creating tax savings of as much as $4 billion” (386). The loophole was so successful that Congress got rid of it that year but extended its usage to year-end. Kravis learned about this third-party bid. At the same time, the special committee “seemed to be snubbing” First Boston and did not allow them a chance to perform due diligence (392).
At this time, Johnson was spending nights at the apartment of Jim and Linda Robinson. He focused on pricing strategies and discussed the management agreement which was “being gently renegotiated” (393). The revised agreement, which significantly reduced the incentive bonuses and spread the stock among 15,000 RJR Nabisco employees, received approval on November 16.
On Friday morning, the day of the bid deadline, First Boston considered the Winthrop lawyers' draft letter a disaster. They reworked the letter throughout the day. Two hours before the deadline, Maher scrapped another draft delivered to him and dictated it himself “like a teacher disciplining a room of second graders” (397). Maher was focused on getting the letter in before the deadline, as “the logistics of time-sensitive midtown deliveries were familiar to all Wall Street law firms” (399). By 7 pm, First Boston did not have a bid. Before 9 pm, Maher sent the letter through First Boston bankers Brian Finn and Scott Lindsay, who found that, “upstairs, no one waited to take their bid” (402). Earlier that day, RJR Nabisco’s Steven Goldstone had made four attorneys leave a taxi and run to Skadden Arps on foot. Salomon’s Peter Darrow had “prayed no one would notice” that they dropped off their bid at 5:01 pm, “The largest takeover bid in corporate history was late” (401). Casey Cogut dropped off the KKR bid 10 minutes prior to the 5 pm deadline. Photographers were outside the building as part of the continued media coverage.
On the day of the bidding deadline for RJR Nabisco, multiple joke bids came to the committee by fax along with prank phone calls. For instance, a Toronto banker sent in a bid at $123 a share, “He proposed paying each member of the special committee $7 million for his vote, ‘to pay respect for their many years donated to the company’” (404). Some of the directors found bids like this funny.
Kravis bid $94 a share totaling $21.62 billion. Johnson proposed $100 a share, beating him by over a billion dollars. First Boston’s proposal promised somewhere between $105 and $118 a share. Atkins considered the latter proposal to be “only half-formed,” but was intrigued by its tax argument (405). He consulted Matthew Rosen, the tax counsel. Rosen was concerned about a potential conflict of interest. He realized that some of the ideas in the First Boston proposal came from his conversations with his friend, First Boston’s Brian Finn, even though they did not discuss RJR Nabisco specifically. Rosen criticized some of the defects of the First Boston proposal such as the lack of financing information, but he could not definitively claim that the tax strategy was erroneous. Atkins thus felt comfortable with the First Boston bid and sent them a letter asking “basic, mechanical, tax oriented” questions (412). First Boston’s Jerry Seslow was pressured into signing a confidentiality agreement by Peter Atkins.
Kravis’s team was invited to Skadden Arps on Saturday morning. There, Kravis realized that he was working with team B featuring junior attorneys, which was not a good sign. There, the group realized that the company data the special committee was using differed from the numbers obtained by Kravis, “They’re cooking the books!” (410). Henry Kravis warned Peter Atkins in a letter that KKR would want to discuss their offer based on “more accurate information” (410). Atkins took the warning “very seriously” (410).
Meanwhile, Johnson was spending time with the Robinsons and “was growing pessimistic” (417). In the first round, KKR “finished third in what was supposed to be a two-horse race” (419). When Johnson learned the news, he “saw all hope for victory evaporate” (419). There was going to be a second round of bidding for RJR Nabisco. Some at Shearson, however, considered themselves to be “in a good position,” because, in their opinion, “The First Boston thing will fall through” (419). Others, like Cohen, “began to realize what a liability Johnson had become” (420). Kravis was shocked that Johnson’s management group topped his bid with a $100 share, but “It wasn’t like Kravis to scuttle off with his tail between his legs” (421). His wife thought that “Henry Kravis had a plan” (421).
This section is focused on maintaining suspense. In terms of narrative structure, these chapters feature rising action directed toward the making of the first bid for RJR Nabisco. The authors skillfully weave the narrative to maintain suspense in several ways. First, the reader does not know which of the Wall Street competitors will ultimately be making the bid. In the end, Forstmann Little drops out, but First Boston jumps into the action with an incomplete bid which is accepted. Second, the authors describe the time-sensitive deliveries of bids just before the deadline. Some of the participants even have to jump out of their cabs and move like “a cross-country runner” to make it to Skadden Arps before the deadline (400). The uncertainty about whether they will make it on time builds suspense.
Thematically, the authors continue pursuing the theme of Corporate Excess and Wall Street Greed in 1980s America. First, they consider the impact on Winston-Salem, which historically grew around the original RJ Reynolds company, “What have they done for the community in Winston-Salem other than uproot the loyalties of the community?” (349). With the fate of the LBO unclear, so is the fate of RJR Nabisco and its tens of thousands of employees. Second, Burrough and Helyar focus on token aspects of wealth and power, such as the preponderance of “pretty, young, second wives” they refer to as “Jennifer Syndrome” (352). Mingling with celebrities and statesmen, including Henry Kissinger and Jacqueline Kennedy Onassis, is another obvious example. Overall, the authors compare the bidding situation to “noisily feeding at the trough of RJR Nabisco” (376), comparing the bankers, rather unflatteringly, to a group of pigs.
Further developing the theme of The Human Factor in Business, the authors underscore the ego clashes between the key players in this book as the driver behind the bidding war. Noting for instance that, “For all Maher’s levelheadedness, Wasserstein never considered him a top-notch deal maker” (377). It was also at this point that the attitude toward Johnson began to definitively change. The company board was already fed up with the Wall Street feeding frenzy to which RJR Nabisco was subjected, while the company’s future was uncertain. Now, even Johnson’s allies, such as Peter Cohen of Shearson Lehman “began to realize what a liability Johnson had become” (420).
Finally, Burrough and Helyar continue to emphasize the role of the media in the RJR Nabisco buyout. Here, key players like Henry Kravis decided to give an interview to The New York Times to tell their side of the story following the leaks of private information and negative publicity. On the day of the bidding, photographers met the participants outside of Skadden Arps. Overall, the media played a central role in shaping the direction of the buyout and the public opinion about it.