(FORTUNE Magazine) – THE AIR at the Castle Pines golf club, about 25 miles south of Denver, is so thin even a smallish CEO can smack a ball halfway into the next quarter. Which is exactly what a group of friends and customers of RJR Nabisco boss F. Ross Johnson were trying to do late last August. Johnson had more on his mind than his long game, though. Market tests of Premier, the smokeless cigarette that was supposed to puff up RJR's stock on Wall Street, were not promising. A man who prefers gut instinct over research, Johnson sought some straight dope on the product from trusted clients on the course. Those who lit up confirmed what the market researchers had told him: Premier tasted like a smoldering Hefty Bag. That revelation crystallized Johnson's decision to embark on a leveraged buyout of RJR Nabisco -- a deal that ultimately led to the largest, looniest auction in the history of capitalism. Johnson judged his own record by RJR's stock price, and he figured that with Premier flagging, an LBO was now his best chance of increasing shareholder value. If you think you have read all you want to read about what happened from there on out in this thoroughly chronicled saga, think again -- you may have missed something. Did you know, for instance, that before Johnson strolled down LBO lane, he tried to negotiate a merger of RJR's Nabisco food business with that of archrival Philip Morris? Or that in the heat of the bidding contest, Johnson came within an eyelash of reaching an agreement with a new archrival -- the leveraged-buyout firm of Kohlberg Kravis Roberts -- under which the two could have bought RJR Nabisco together for $4 billion less than KKR ultimately paid for it? In the end, of course, Ross Johnson blew his big chance. But how? And why? Though the RJR buyout played in the press like a two-reel cliffhanger, the critical issues that shaped the outcome have been overlooked. A sometimes pathetic tale, it is full of insight about how business really works when good intentions struggle with pride, ambition, and a thousand other human frailties in the red-hot crucible of competition. The lessons for management begin with the dangers of faulty assumptions. Johnson went into the LBO with the deluded notion that it was his deal, and that all his investment bankers had to do was find the money to finance it. He thought that RJR's directors would give him the deference due a chief executive, never realizing that the board would have no choice legally or morally but to treat him like an outsider. The execution of the buyout strategy was as flawed as the assumptions that went into it. Johnson's primary partner in the deal, the investment banking firm of Shearson Lehman Hutton, suggested an offering price of $75 a share. This low-ball bid made Johnson and his management group seem a bunch of quick- buck artists trying to grab the company cheap. Had either Johnson or his bankers rummaged through RJR's files -- as the investment banking advisers to ; the board of directors later did -- they would have found some analyses that could justify the directors in rejecting as insufficient any bid less than $100. This was just one piece of evidence that led the board to wonder whether Johnson had something more than the shareholders' interests at heart. The greed issue grew even more obvious in the contract Johnson negotiated with his partners at Shearson Lehman. The bankers knew that the management contract was incendiary, and they told him so. Unfortunately for him and for them, they did not tell him no. The management group was originally going to put up a mere $20 million for 8.5% of the company. Its members stood to make $100 million in five years and come away with 18.5% of the equity, potentially worth billions if they could meet an ambitious set of operating targets. But who was the management group? Though Johnson insisted that the 8.5% in equity would be divided among some 15,000 RJR workers -- and that insistence is consistent with his past practice -- only six names emerged besides his own: Edward A. Horrigan Jr., the head of R.J. Reynolds Tobacco; James O. Welch Jr., chairman of Nabisco Brands; Edward Robinson, the parent company's chief financial officer; Harold Henderson, chief counsel; John Martin, an executive VP; and Andrew Sage II, a former investment banker and an outside director. Too much for too few, it seemed to the shocked directors. The biggest deal attracted egos to match. Peter Cohen, 42, the chairman of Shearson, had a $1 billion LBO fund to play with and the drive to plant Shearson's name at the top of the merchant banking heap. He was working under the watchful eye of his boss, American Express Chairman James D. Robinson III, 53, a friend of Johnson's who frequently advised the RJR chief about strategy. Competitiveness contributed to Cohen's failure to reach an agreement with his chief rivals, KKR principals Henry Kravis, 45, and his cousin George Roberts, also 45, to pursue the LBO jointly. One of the sticking points was the reluctance of Salomon Brothers, the powerful bond house that was allied with Cohen, to work with KKR's bankers, the scandal-racked junk bond firm of Drexel Burnham Lambert. Although the competing sides were friends, they did not trust one another when it came to business. Conflict between the bidding groups left the buyers in disarray and the sellers with the whip hand. The dynamics of distrust sent the ultimate price spiraling ever higher -- in an auction where a single dollar per share added about $225 million to the final price. Ultimately there was barely a nickel to choose between the final bids, leaving a special committee of RJR directors ample discretion to pick a winner. If, by the end of the process, Johnson had any friends among the directors -- a group he had taken pains to treat royally -- they did nothing to help him. Says a member of the special committee, Gulf & Western Chairman Martin S. Davis: ''You either play with the managers or you play with the shareholders. We chose to play for the shareholders.'' Out of this tumultuous fray RJR Nabisco's stockholders emerged as the only unambiguous winners.

A SELLER, NOT A BUYER It would be hard to think of any chief executive less temperamentally attuned to orchestrating and running a leveraged buyout than F. Ross Johnson, 57. For one thing, his whole career was built on being a seller of companies, not a buyer. In that capacity he always seemed to come out on top. As CEO, he peddled Standard Brands to Nabisco in 1981; then he later took over the top job from Nabisco's Robert Schaeberle. He merged Nabisco with R.J. Reynolds in 1985, and the board obligingly anointed him successor to Chief Executive J. Tylee Wilson. An accountant by training who hails from Winnipeg in Manitoba, Canada, Johnson abhorred debt. He didn't come across to his investment bankers as a free spender either. Says a Shearson executive: ''Ross told us categorically that there was a price at which he didn't want to own RJR.'' Johnson didn't say what that price was, but his Shearson friends pegged it in the low-80s per share. That fiscal prudence is at odds with his public image as a corporate jet- setter who runs with a pack of sports and celebrity buddies. A stylish dresser who towers well over six feet, Johnson has a golf handicap of nine, which underscores his belief that there's no sense in running a business if you can't have fun. He did all he could to make sure RJR executives joined the party; they had generous expense accounts and referred to the company as ''first-class.'' Johnson's plan for RJR would have allowed him to preserve that odd combination of hard-eyed number crunching and flamboyant style. He planned to sell the food companies quickly to pay down the debt and avoid making about $2 billion in capital expenditures over the next three years. The average Nabisco bakery is 30 to 35 years old. The tobacco company that he would hold on to was already highly automated, but he planned to spend $900 million on development, principally for Premier, which he wanted to continue despite the discouraging reviews. Unfortunately for Johnson, the board of directors of RJR Nabisco has not always been a group of happy campers. His predecessor, J. Tylee Wilson, had built a rocky relationship with the board and was barely on speaking terms with some members by the time he was ousted. Johnson alienated old Reynolds hands by moving the headquarters to Atlanta from tradition-steeped Winston- Salem, North Carolina, where it is still the leading employer and has thrived for more than 100 years. As his ambassador to the board, Johnson recruited his friend Charles Hugel, 60, chief executive of Combustion Engineering, and placed him in the curious role of ''nonexecutive'' chairman in the fall of 1987. As both men understood it, Hugel's role was to run the board meetings and work with Johnson and the board. In the best of times this could not have been an easy role to perform diligently while running your own $3.5-billion-a-year corporation.

STIRRINGS OF AN LBO The idea of a leveraged buyout had been brought to Johnson many times. For example, Donald Kelly, who had done a highly successful leveraged buyout of Beatrice Foods with Henry Kravis, urged Johnson to meet with Kravis. The two had dinner at Kravis's East Side Manhattan apartment in September 1987. Kravis explained why an LBO would make sense for RJR, but with RJR's stock near $70 in the pre-crash market, Johnson didn't believe there would be a big enough premium to stockholders to justify the deal. Kravis didn't give up. A number of investment banking firms approached Johnson on his behalf, to no avail. RJR retained a consultant named Frank A. Benevento II in November 1986 to investigate a variety of capital structures and reorganizations for the company. Drexel Burnham Lambert also made a number of proposals that were kept in a file code named Sadim, or Midas spelled backwards. Johnson was working on something much more ambitious to raise the stock price: the joint venture with Philip Morris. In the summer of 1988, he tried to entice his rival chief executive, Hamish Maxwell, into marrying Philip Morris's limping General Foods division to RJR's muscular Nabisco Brands and Del Monte. The two tobacco companies would each own 40% of the new entity, which would have revenues of $18 billion, and the remainder would be sold to the public in a stock offering. In this way, Johnson reasoned, RJR shareholders would benefit from the P/E multiple that attaches to food companies, which runs about half again as high as the tobacco multiple. True to form, Johnson volunteered to head the combined concern. Maxwell wasn't about to be enticed. He doubted that a joint venture of such magnitude could succeed, and he was not wholly convinced that Philip Morris's stock price would benefit. Johnson then floated preliminary proposals past Pillsbury and Quaker Oats, but got no nibbles.

PUTTING RJR IN PLAY Coming on top of these refusals, Johnson's disappointment with Premier convinced him that RJR Nabisco's stock would remain irretrievably undervalued unless an LBO freed it to soar. But his plans to embark on that course were derailed by terrible news: His son Bruce, 26, had sustained severe head injuries when his car drove off the road in Westchester County, New York, on September 7. Johnson spent two weeks in New York until his son's condition stabilized and then flew back to Atlanta to rededicate himself to making a decision. (Bruce Johnson later lapsed into what doctors describe as an irreversible coma.) On October 7, Shearson Chairman Peter Cohen and J. Tomilson Hill, the mergers and acquisitions chief, made a full presentation on an LBO to Johnson and other members of the management group. Johnson asked that Hill and some of his colleagues join him at a dinner in Atlanta with the directors on October 19, the night before the scheduled board meeting. At this dinner Johnson planned to discuss his idea for an LBO. A week before the dinner Johnson advised Hugel to put together a special committee of outside directors to consider the LBO question. Hugel tapped Davis of Gulf & Western; John Macomber, the former CEO of Celanese, who had sold his company to West Germany's Hoechst AG in 1987; William Anderson, the recently retired chairman of the executive committee of NCR Corp.; and Albert L. Butler Jr., who owns a real estate company called Arista in Winston-Salem. Hugel also phoned Peter Atkins, 45, a poker-faced partner at the law firm of Skadden Arps Slate Meagher & Flom, who had just piloted the Fort Howard paper company through a litigious LBO. Atkins agreed to become the legal adviser to the special committee. When the fateful night of October 19 arrived, the outside directors along with Horrigan and Johnson gathered at the Stouffer Waverly Hotel close by corporate headquarters. During dinner Johnson talked about his various schemes to enhance shareholder value and why they hadn't worked. Dividend hikes, outstanding earnings growth, and stock buybacks failed to get the stock moving. In his estimation the only road was a leveraged buyout. As the directors digested their dinner and his words, he added, ''If you don't want to go ahead with this, just say so -- and no hard feelings.'' Somewhat disbelievingly, one director said, ''You're putting this company into play.'' Replied Johnson: ''It should be in play.'' Several members of the special committee were shocked at the way things unfolded. They had expected to discuss the LBO concept generally -- and had no idea Johnson would come loaded for bear, with a lawyer and an investment banker in tow. Says one of the committee members: ''There's no substitute for trust and no excuse for surprises between management and the board.'' Johnson was surprised too. Neither he nor Shearson was prepared to put the company in play that night. But soon he and the other directors, who were now potential buyers, were asked to leave the room. The remaining directors immediately focused their attention on what price the company could command. After about 45 minutes Johnson was called back. ''We want to make sure that the number you were thinking about was not frivolous,'' Hugel said. ''Define 'frivolous' for me,'' said Johnson. Hugel told him that anything short of the highest price at which the stock had ever traded -- $71 a share -- was unacceptable. Johnson left the room to confer with his advisers under the impression that he needed to name a price. ''It was not our intention to generate a number,'' says Peter Cohen. Tom Hill, on hand for Shearson, told Johnson the firm was comfortable with $75 a share in cash, about 35% more than the stock was selling for that day. Cohen still contends that $75 was a logical place to start. Shearson predicated its work on buying the company entirely for cash, and based on conversations with commercial bankers a week before, Cohen felt certain he could find $75 a share -- a total of $17 billion. When he reentered the room, Johnson told the board his group was prepared to put up a minimum of $75 a share, but that he couldn't say exactly what price they would offer. One director, civil rights leader Vernon E. Jordan Jr., a partner in the law firm Akin Gump Strauss Hauer & Feld, raised the possibility of a higher bidder. ''Suppose it goes to $82 or $84?'' he asked. ''So be it,'' Johnson replied. ''It proves what I've been saying.'' ''All the criteria indicated it was a responsible price,'' says lawyer Peter Atkins. Perhaps. But it was remarkably cheap in light of the mushrooming amounts commanded by food companies in the fall of 1988. Shearson's $75 a share was tied to selling the Nabisco businesses for $13 billion, a figure that turned out to be low compared with the market rate for food companies. Grand Metropolitan's offer for Pillsbury on October 4 came to $60 a share, or 27 times earnings, and should have sent Shearson a message. And Philip Morris's astonishing initial bid of $11 billion for Kraft, 22 times earnings, occurred on the eve of the RJR board meeting. That night Johnson lost control of his destiny forever, essentially becoming a junior partner in the latest Wall Street deal rather than the dealmaker himself. From there on he played a diminishing role in the negotiations. The board chose to announce the next morning that the company was entertaining the idea of a management buyout at the suggested retail price of $75 a share. Enough information had been discussed to compel the board to make the announcement.

HIT FROM BEHIND WITH A BASEBALL BAT Henry Kravis had been discussing other deals with Shearson and was upset to discover that Shearson was not cutting his firm in on the huge new buyout. That Friday, October 21, Tom Hill, Shearson's mergers and acquisitions chief, called and asked for a meeting to discuss deals that the two were already involved in. Kravis did not disguise his annoyance. ''I see you guys are now our competitors,'' he told Hill. Hill called him back later, asking for a meeting to talk about RJR. That evening Kravis, Hill, and Cohen convened at Kravis's office. The Shearson bankers wanted to know whether Kravis had plans regarding RJR. Kravis said he hadn't made up his mind, adding, ''All I can tell you is that I'd be surprised if you buy this company for $75.'' The press has reported that Kravis demanded to be let into the deal, alluding to the LBO business as his ''franchise.'' He gets testy about that: ''There was no franchise discussion. I never said I've got to be in this deal.'' But RJR was one of 20 or so names KKR kept tabs on as potential targets even after Johnson had rebuffed them. Late Sunday night the phone rang at Jim and Linda Robinson's New York apartment. Both Robinson, the American Express chairman, and his wife, a public relations strategist, were advising Johnson. As it happens, Linda Robinson is also a good friend of Henry Kravis and his wife, Carolyne Roehm, a fashion designer. The caller, a reporter, told Mrs. Robinson that KKR was going to launch a $90-a-share bid in the morning. Did she want to comment? No, she didn't. She was staggered. She called Peter Cohen. It's a bluff, he told her. A bid didn't make any sense to Cohen. He had planned to meet with Kravis the next day, although Kravis says there was nothing in his appointment book. Neither Cohen nor the Robinsons called him. Cohen woke up that Monday, October 24, to find a $90 offer, $78 of it cash, the rest in securities, on the table from KKR. Kravis had just hit him from behind with a baseball bat. What made Henry jump? He was afraid that Shearson was about to beat him to the punch with the first official offer. Over the weekend he had tried unsuccessfully to reach one of his bankers and learned he was tied up in discussions with Shearson. He also discovered that Shearson had a board meeting scheduled for Tuesday, followed by the parent American Express Co.'s meeting. The boards were ready, he thought, to approve the offer. ''I know what you were doing,'' he yelled at Cohen over the phone on Monday. Cohen told Kravis that the board meetings had been scheduled for months. The two agreed to meet again, but trust had been shattered. Although Cohen met with Kravis on Tuesday, October 25, to discuss the possibility of a joint offer, the friction between the two was increasing. Later, Kravis offered Shearson a 10% cut in the equity and up to $125 million to go away and let KKR pursue the buyout alone. The proposal turned the atmosphere from chilly to frigid. But Cohen nonetheless told Johnson that Shearson would step aside if he wanted it to. Johnson said no. Argues Cohen: ''If management's game was to max out for themselves, they had a number of ways to do it. This was one.'' Around midnight Cohen called Kravis at his home and told -- not asked, told -- him to come to RJR's Manhattan offices on the 48th floor of 9 West 57th Street, the building where KKR happens to be headquartered. Why now? Kravis asked him. ''Because if we want to work something out, now is the time,'' Cohen snapped. Kravis, with his partner George Roberts and KKR's outside counsel Richard Beattie, met with Cohen, Hill, Johnson, Jim Robinson, and Steven Goldstone, a lawyer who was representing Johnson. While Shearson and KKR continued their dance, every house on Wall Street was looking for some way to cut in. Salomon Brothers figured RJR was worth $100 a share and within two days lined up a major European company as a partner. When KKR announced its $90 bid, however, the Europeans vanished. Salomon Brothers' President Thomas Strauss, 46, realized that Shearson would need to raise more money if it were going to match KKR's bid. So he called Cohen, a friend and safari partner, and told him: Peter, you've got a problem. Salomon was the solution Cohen was looking for. With Salomon's banking and bond-selling ability, he could make a fully financed offer for more than $90, without slicing the pie with KKR.

AN AGREEMENT BLOWS UP By the week of October 31, Shearson and the management group were ready to strike back with their first firm offer: $92 a share, $2 better and richer in cash than KKR's $90 bid. Although Kravis had blind-sided him a week earlier, one-upmanship didn't seem a smart idea to Cohen now. He called Kravis to see if he was still interested in talking. ''I think we should meet again,'' said Kravis. Cohen held back on the bid. The second, critical set of meetings between the Johnson and KKR factions began at around six on the evening of November 2 in a deluxe suite at the Plaza Hotel. What started on a premise of compromise ended some 15 hours later in a virtual spitting match. The players were deeply suspicious of one another, and no leader emerged to knock heads together. Even today neither side can agree on what they were really disagreeing about. The meeting began with just Kravis and Roberts for KKR, Cohen and Jim Robinson for Shearson, and Johnson. The five met from 6 to 7 P.M. and made enough progress so that the group decided to bring in the lawyers. They resumed talks, minus Johnson, around 9 P.M., joined by KKR lawyers Beattie and Casey Cogut; Jack Nusbaum, Shearson's outside counsel; Goldstone; and Salomon's Tom Strauss and his firm's outside counsel Peter Darrow. Some major issues, such as control of the board and ownership of the equity, were broadly resolved fairly early on. Beattie began to draft an agreement that KKR and the Shearson group would pursue RJR jointly as equal partners in the deal. This was a major concession from KKR. The management contract that Johnson had cooked up with Shearson was also aired. KKR had no quarrel with Johnson and his management team receiving 8.5% of the equity in the new company -- as long as it didn't come out of KKR's pocket. Shearson agreed to include Johnson's piece in its half of the equity. The group broke up at 11 P.M. so each side could huddle and then reconvene at RJR's offices around the corner on West 57th Street. Alas, this was a vastly different scene from the plush, quiet surroundings of the Plaza. Lawyers, bankers, advisers, principals, and assorted staff, as many as 50 wheeler-dealers of various pin stripe, swam through the 48th floor office overlooking Central Park.

Kravis and Cohen tussled over who would manage the junk bond underwriting that would provide the financing: Drexel Burnham, KKR's longtime investment banker, or Cohen's partners at Salomon. The quarrel had that noxious mixture of money -- some $200 million in fees were at stake -- and turf. Drexel was the object of a criminal investigation and needed the prestige of leading the deal. Salomon had clashed repeatedly with its upstart competitor as Drexel's junk bond business flourished in the Eighties. Salomon and Shearson thought the financing that KKR proposed required more junk securities than was prudent and wanted more bank debt. Tom Strauss insisted that Salomon, along with Shearson, play a significant role in the financing. Gradually the distrust that pervaded earlier meetings resurfaced. Kravis had spotted John Gutfreund, Salomon's chairman, wandering around, but Gutfreund was not at the meetings. At times Strauss disappeared, leaving Cohen to carry on alone. Says Kravis: ''We had no idea who was running the show. One minute there's John Gutfreund, then there's Tom Strauss, then we didn't see either of them anymore and Peter Cohen is going back and forth talking on their behalf.'' Exasperated, Kravis and Roberts asked to talk to Gutfreund. He was strolling along 57th Street when Johnson found him. Cohen was having a hard time keeping his aggression holstered. But he hammered away at Salomon all night and finally persuaded Strauss to soften his position -- co-management with Drexel was possible. But Cohen, too, was disturbed by men who weren't there, notably Leon Black, Drexel's mergers and acquisitions chief, and Peter Ackerman, one of its leading dealmakers. He had the same doubts Kravis did. Just who was calling the shots? At 5 A.M., with each side confused about who was saying what for whom, the group stopped talking. For the next several hours various emissaries tried to reconcile differences, but finally around 9 A.M. Jim Robinson and Shearson lawyer Jack Nusbaum took the elevator six floors down to KKR's offices. ''We've made a good-faith effort and we came a long way, but we just can't agree,'' Robinson told Kravis. ''We are announcing a bid of $92 for the company.''

THE ROBBER BARON It had taken plenty of cajoling before Steven Goldstone, Johnson's lawyer, was willing to show KKR the management group's contract. The document was complicated and still not specific as to whom it covered. Beattie, KKR's lawyer, argued that his client needed to see it, and Goldstone finally relented. Before he handed it over, he said to Beattie: ''I must have your word that you won't reveal any of this or make any copies.'' Beattie agreed, but KKR's staff learned some of the details. Then three days later, on Saturday, November 5, the contents of the contract appeared on the lead business page in the New York Times under the headline ''Nabisco Executives to Take Huge Gains in Their Buyouts.'' The course of business history was about to change. Beattie denies discussing the contract with the Times. However the newspaper got the scoop, Johnson became the biggest symbol of corporate greed since the robber barons. Charles Hugel, the chairman of RJR's special directors committee, couldn't quite believe what he was reading when he picked up his Times that Saturday morning. The board did not know that the contract existed. As the day wore on, directors kept calling Hugel. All were concerned and some were angry: Was Johnson trying to make fools of them? Hugel telephoned Johnson. Why wasn't the board aware of the contract? he demanded. Johnson explained that the agreement had never been finished and that he didn't have a complete version to give to the board. He also denied trying to walk away with $100 million for himself and he promised to send a letter to Hugel immediately to clarify the details.

THE AUCTION BEGINS The contract controversy obscured the momentous benefit that the fight between KKR and Shearson was bestowing on RJR Nabisco's shareholders. The auction that was now under way would be a true one, no collusion, no holds barred. On November 7, the committee sent all bidders a letter outlining the rules. In particular, the committee asked prospective purchasers to provide ''a substantial common stock-related interest'' in their offers for current shareholders. The committee's advisers, the investment banking firms of Lazard Freres and Dillon Read, believed that the RJR shareholders should have an opportunity to reap what could be considerable long-term gain down the line, so they recommended that the board solicit offers that combined cash and securities that could be converted to stock at a future date. The rules also said that the committee could change the rules. The investment bankers at Shearson plotted their strategy around three words: Cash is king. By this they meant that they believed the special committee analyzing the bids would consider cash a superior form of payment than securities. To Johnson, historically a seller, the three little words made a lot of sense. And he heard them from none other than Charlie Hugel, chairman of the special committee. Hugel confirms taking this position with Johnson, but points out that he did so before the committee promulgated the bidding rules. Unfortunately, Johnson served as the only link between Shearson and the committee, and he kept missing the importance of ''continuing equity.'' The bids were due at 5 P.M., Friday, November 18, in the law offices of Skadden Arps Slate Meagher & Flom on Third Avenue. Shearson and Johnson were going to put their best foot forward. The management group, believing that it had been hurt by security leaks, deputized Duncan Stewart, an outside lawyer, as its messenger. What Stewart delivered to Skadden Arps was a bid of $100 a share -- $90 in cash, $6 in preferred stock, and $4 in preferreds convertible to 15% of the new company. The bid topped KKR's $94 offer -- $75 in cash and $19 in securities convertible to 25% of the company. But there were two important differences: KKR had more ''continuing equity.'' And KKR said that it would keep as many of the food businesses as it could. Shearson and the management group planned to sell them all off and so became tagged as bust-up artists. By this time another noted merchant banker, First Boston Corp., had also joined the fray, adding a twist of its own. First Boston was teamed with Resource Holdings, a merchant banking outfit headquartered in New York City and partially bankrolled by the Pritzker family of Chicago and Philip Anschutz, a Denver businessman. The First Boston plan had one catch. It depended on a tax loophole that was closing at the end of the year. Both KKR and Shearson were aware that a bid from Resource Holdings and First , Boston was likely to come in. Earlier in the week the First Boston group tantalized the special committee of the board by asserting that its offer could be as much as $118 a share. But, unhappily, the financing was incomplete. Hugel was worried about extending the auction deadline to accommodate the third bidder, fearing that KKR might drop out. For KKR there was always the next deal. But for Hugel, KKR's exit would leave only the management bid on the table and the iffy proposition from First Boston. Directors Davis and Macomber wanted an extension, convinced that a board-led restructuring might produce even higher values, or at least force a better price. The directors still had no firm idea of the breakup value of the company and were afraid of selling it too cheaply. Says Macomber: ''I pushed hard on the restructuring issue. It had to be considered. We had to be ready to move.'' Atkins informed the committee on Sunday that prudence dictated an extension to consider the First Boston bid fully. Then the special committee got a jolt from KKR: a letter, written by lawyer Beattie, that said the information the firm was receiving from RJR managers was inaccurate and misleading. Based on that information, KKR said, it may have underbid. Throughout the previous week KKR had been reviewing RJR's businesses with the operating executives. The food company managers, furious with Johnson for selling them down the river so he could keep the tobacco works, were open with his opponents. The alleged information shortage centered on the tobacco business. Digging in behind their boss, Edward Horrigan, a member of the management group, tobacco executives gave KKR the cold shoulder. Says a KKR source: ''We were meeting with some people who seemed to have amnesia. They remembered their names and their positions.'' Initially Kravis and Roberts decided to say nothing to the committee about their difficulties. But on Saturday, November 19, after discussing their bid with one of the committee's investment advisers, KKR got the ''distinct impression,'' says a participant, that it was behind in the bidding. That's when it lobbed in the letter. The committee voted to extend the auction ten days. The management group and Shearson believe the special committee's investment bankers used the First Boston bid as a stalking horse to set up the second, more expensive round of bidding. Their ire centered on one of the committee's financial advisers, J. Ira Harris, 51, a partner at Lazard Freres and a onetime Salomon Brothers executive who allegedly left that firm on bad terms with John Gutfreund. They believe he had a hand in bringing in the Pritzker family. Jay Pritzker, the top financier of the clan, denies the allegation, as do First Boston and Harris. He also denied leaving on bad terms with Gutfreund. Harris told FORTUNE: ''It's ludicrous. This is a flagrant attempt by the management group and its advisers to cover up the consistent mistakes they made in handling this transaction.'' As the high bidder in the first round, the Shearson-Johnson team was in a serious bind going into the second. First Boston, deciding it couldn't get the deal done fast enough to take advantage of the tax loophole, folded its tent. The management group did not want to bid against itself in the event KKR decided to drop out. Furthermore, the group was still committed to pushing the cash part of the deal as high as it could. Shearson's Tom Hill thought this maneuver would thrust the sword at his rival's weakness: ''We knew KKR could not make a deal having a huge cash level and keep the food companies.'' Besides, Johnson still believed the committee would find cash more compelling than junk. Having received KKR's letter of complaint, the special committee directed the offending RJR executives to be more voluble. KKR immediately set out to put the pedal to the metal, challenging its staff to find a price it could go to the wire with -- one that would let KKR keep the food assets and still satisfy the lenders that the firm would have the ability to service its debt. The staff debated the pricetag in interminable meetings on Tuesday and Wednesday. Kravis wanted the management group to think KKR was less than serious, so he went skiing in Vail, Colorado. Johnson went to Hell, media version. From the day he put his company in play, he had refused to talk to the press. Even after the management contract hit the papers, he kept his mouth shut. But a few days before Thanksgiving, Time magazine (owned by Time Inc., the publisher of FORTUNE) persuaded Johnson to be interviewed for a cover story on the buyout. Although he was coached before the interview, Johnson at once reverted to form: glib and outrageously candid, a reporter's dream and a publicist's nightmare. The interview made him look only slightly less sensitive to the welfare of his employees than Vlad the Impaler. Discussing potential layoffs in the Atlanta headquarters, he said with seeming nonchalance that those workers had ''portable'' jobs and could find employment elsewhere.

THE FINAL ROUND While Johnson was wiping the egg off his face, KKR was hatching ideas. On Tuesday, November 29, the day the new bids were to be submitted, KKR's staff gathered for a final meeting: Kravis and Roberts went around the room of associates asking each for a price. The agreed-upon figure: $106 a share, $80 in cash. KKR had already told the committee that if its bid were accepted, it would dump Johnson. No hard feelings, just one of those things. Says Kravis: ''It became clear he was going his way, and we said fine. We'll go our way, but if we end up buying this company, the best thing to do is to find a new CEO.'' The Shearson-Johnson team assumed, with catastrophic consequences, that it did not have to be the highest bidder in the second round. Since the special committee changed the rules the first time, the Shearson bankers reasoned, it might do so again, and they didn't want to lead with their chins. Says Tom Hill: ''We just wanted a place at the table.'' Peter Cohen played safe, raising his price one dollar to $101 share, and sending a message to the committee that his group was willing to negotiate ''any and all'' provisions of its bid. The bids were submitted again at Skadden Arps at 5 P.M. and the Shearson- Johnson contingent retreated to Nusbaum's office at Willkie Farr & Gallagher at Manhattan's Citicorp Center. There they waited for an opportunity to negotiate their price. And wait they did. At 8 P.M. Johnson left for dinner, telling his colleagues they were losers ''no matter what we do.'' He believed the board was a captive of its investment banker advisers, and that his group's bid would have to win by a wide margin before the committee would award him the deal. Cohen went home to celebrate his 20th wedding anniversary. Around 10 P.M. Nusbaum found out from a reporter that the committee's advisers were negotiating with KKR. ''We were really astounded,'' he says. He sent a letter to the committee demanding to see KKR's bid and insisting on the right to negotiate. Johnson called Hugel, who told him ''it wasn't close,'' but Hugel wouldn't tell him the difference. Cohen came tearing back from dinner and initiated a series of computer runs to evaluate the variety of combinations of cash and debt he could offer to raise the nominal value of Shearson's bid. Johnson showed up at Skadden Arps's offices the next day, November 30, + wanting to address the committee. By now the special committee was reviewing with its investment bankers the KKR offer as it had been completed the night before. The committee also asked KKR to discuss its plans for running the company should it acquire RJR. Hugel, aware that the management group wanted to make another bid, then asked George Roberts to extend the 1 P.M. deadline he had put on the offer the night before. Roberts said no. Cohen reached Johnson and Nusbaum as they cooled their heels. Full of vinegar, he had a new number to play, $108 a share, and a new way to play it. ''We'll use a stick,'' he told Nusbaum. ''We just called the bid in to Dow Jones.'' It was noon. The committee now had a new $108 offer from management and a $106 offer from KKR that was ticking away. Says Hugel: ''We felt KKR was serious about the deadline, but we had a fully negotiated agreement with them. You don't dismiss that out of hand.'' Hugel went back to KKR and asked again for an extension. Roberts relented. He would delay one hour, but at a price: 20 cents a share reimbursement for expenses the firm figured it would incur during the contest. Hugel agreed. For 60 minutes the special committee had KKR in hand, but it was uncertain about the Shearson-Johnson group: Was it still playing the game and willing to bid higher? Around 1:30 P.M. Atkins, the committee's lawyer, told the management group to ''sharpen your pencils and put your best bid on the table.'' Cohen was ready. He offered $112: It broke down into $84 in cash; $24 in payment-in-kind (PIK) securities, which accrue interest but don't pay cash for a period of years. The additional $4 was in preferred stock. Atkins appeared in the KKR caucus room and tried to buy more time. He asked if the firm would enter into a merger agreement at $106 a share under the condition that if the offer was topped within seven days KKR would receive a $1-a-share kill fee. Kravis said no, but surprised Hugel with a new bid of $108, upping the PIK securities in his package. No fuse was attached to this offer because Kravis believed there would be no more bidding and that the committee was beginning its final deliberations. WITH KKR on ice, the committee had the leisure of spending the rest of the afternoon with the Shearson crew, negotiating the terms of the securities included in its bid. Some five hours later Hugel approached Kravis and Roberts and asked if the firm would like to make its ''best and final'' offer. Kravis and Roberts agreed to up the ante by $1 in cash to $109. But Roberts didn't make the same mistake twice. Thirty minutes, he told Hugel, or KKR was voting with its feet. ''Every time we went into that room we could see George clench,'' Hugel recalls. ''We had to get out before we froze to death.'' With the score standing at $112 a share to $109, the committee had to make a choice. It was easy: $109. In the end KKR bested its rival because the firm was more flexible in negotiating with the special committee than were its opponents. At the committee's request, for example, KKR changed the conversion provision of the debentures in its package. At first it offered to convert the debentures into RJR equity after two years, but the committee talked KKR up to four years. The longer conversion period ensures shareholders a greater possibility of future bounty. Lazard Freres and Dillon Read, the advisers to the committee, figured the convertibles would trade at par or above it. If the securities trade at par they are as good as cash. The king was dead. The management group refused to entertain modifications the committee's investment bankers wanted -- or at least the investment bankers felt that way. The committee's advisers discounted the management group's securities more heavily. Including discounts, KKR's bid was calculated to be worth $108 to $108.50 a share, and management's $108.50 to $109. The committee's investment bankers threw their hands up, declaring the bids ''substantially equivalent.'' It was now the special committee's turn. After 12 hours of deliberating the committee called the board to order. After another 15 minutes of discussion, Martin Davis of Gulf & Western made a motion to sell the company to KKR. The oft-pronounced verdict on the directors' decision is that they awarded KKR the company to avoid charges of inside dealings with a management group that would reap a fortune in the buyout. But by then Johnson's management contract was a shadow of its original. In the last-gasp effort to make their offer more attractive, Shearson and Johnson agreed to slice the management equity down to less than half its initial size. ''If this goes on any longer,'' Johnson joked with Cohen, ''I'm going to be paying you guys.'' Of his committee's deliberations, Hugel says sternly: ''Nobody said, 'Let's screw Ross Johnson.' '' ULTIMATELY the directors bet on the come. The returns from the surviving , food and tobacco company -- if the various projections are correct -- might create an enormous profit for shareholders who hold on to their convertible securities. Hugel, for one, says he is hanging on to his. For a fellow $22 billion in debt, Henry Kravis is sanguine. He is confident that the 3-to-1 debt-to-equity level he structured for RJR has quite a margin of safety to it, even if the tobacco business doesn't. To replace Ross Johnson and call the shots at RJR, Kravis has hired -- no small irony -- Louis V. Gerstner Jr., the president of Shearson's parent, American Express, and Jim Robinson's right-hand man. His reported $2.3 million starting salary and $10 million to $15 million signing bonus makes Johnson, who was earning $1.8 million, look underpaid. At Shearson, Peter Cohen is not talking like a loser. The RJR contest, he says, demonstrated his firm's ability to raise huge amounts of cash and has led directly to three or four other big deals. As for Ross Johnson, he watched horrified -- as if numbed -- as the numbers kept going up and up and up. At the end, he admits: ''I was a spectator at a tennis match.'' But don't feel too sorry for him -- he floated away on a golden parachute of at least $23 million. And don't expect any regrets either. Johnson says he would do it again: ''The thing that makes me so comfortable is that I did what I was paid to do -- get value for shareholders.'' The shareholders of RJR Nabisco are the ones who really made out like bandits.