NEW YORK — "Roses are red, violets are blue; I hear a rumor, is it true?"
Strange as it sounds, that strained line of poetry set off the fiercest buyout battle since the epic bidding for RJR Nabisco in the late 1980s, a contest that was chronicled in the book and movie "Barbarians at the Gate."
The ditty, written by the real estate mogul Samuel Zell in an e-mail message last month, invited a rival bid topping an offer of $48.50 a share for his Equity Office Properties, the biggest office landlord in the United States, with buildings in New York, Chicago, Atlanta and other major cities.
The reply: "Roses are red, violets are blue. I love you Sam, our bid is 52."
The rhyme was true, but the comeback was not good enough.
Blackstone Group, the private equity giant that was the initial bidder, won the bidding war for Equity Office on Wednesday with an offer of $55 a share, or $39 billion.
The takeover battle, perhaps the most entertaining of recent years because of the big financial players — and big egos — involved, was called "New York at the Gate," because it pitted two very different New York financiers against each other: Stephen Schwartzman of Blackstone, a leading figure on the New York financial and charity circuit in recent years, and Steven Roth of Vornado, the former strip-mall king of New Jersey.
The deal for Equity Office encapsulates two of the hottest trends in deal- making: the wave of capital flooding into commercial real estate and the growing power of private money. While residential real estate has slowed, commercial real estate, office buildings in particular, looks more attractive as the market finally shakes off the effects of the bursting of the technology bubble in 2000. Many investors expect office vacancy rates to continue to decline in the next couple of years, with a corresponding rise in rents.
And private equity firms like Blackstone have been among some of the most aggressive investors in commercial real estate. These firms have accumulated huge war chests: even now Blackstone is raising a new $10 billion real estate fund. The surge in buyouts — which accounted for a fifth of the record $3.8 trillion in deals last year — shows no sign of slowing.
The Equity Office deal is the biggest leveraged private equity buyout ever, surpassing the $32 billion deal last summer for the U.S. hospital chain HCA, which itself was the first to surpass the previous high-water mark, the $30 billion deal for RJR Nabisco.
In this deal, Blackstone was a winner, but Zell was an even bigger one. Even his detractors are saying he ran a masterly sale, encouraging a bidding war that drove up the price for Equity Office by $3 billion. Zell stands to make more than $130 million on his shares and options in the company.
The battle for Equity Office started earlier than any headline suggested. Last July, Roth secretly proposed merging Vornado with Equity Office to Zell. The two friends began negotiating back and forth for months.
Not long after, Jonathan Gray, a 37- year-old rising star within Blackstone's real estate group, took Equity Office's president, Richard Kincaid, to breakfast. After small talk, Gray asked whether Equity Office's board would ever consider selling the company. Kincaid told him: "If you came with a 'Godfather' price, the board would have to listen."
Two months later, Gray asked Equity Office's banker at Merrill Lynch, Douglas Sesler: "What would a 'Godfather' price be?" A price that could not be refused, he was told, would be at least $45 and closer to $50.
In November, Blackstone reached a deal with Equity Office for $48.50 a share, and the assumption of $16 billion in debt, for a total of $36 billion. The deal by Blackstone floored Roth, who had been kept in the dark.
And despite the huge price tag, industry insiders thought it was remarkably low. Barry Sternlicht, the founder of Starwood Hotels and chairman of Starwood Capital, called the deal "the greatest capital markets heist of all time" last autumn.
Roth decided to plot a new bid. He reached out to several possible partners, according to people involved in the process.
Sternlicht and Neil Bluhm, a Chicago real estate mogul who was Sternlicht's mentor in the late 1980s, approached Roth before Christmas about working together and buying ancillary properties.
They declared war on Jan. 18, lobbing in a bid of $52 a share.
Schwarzman and Gray scrambled to salvage their deal. They negotiated to increase their offer to $54 a share if Equity Office would raise the breakup fee to $500 million, from $200 million
Roth plotted returning fire. A week later, Vornado bid $56 a share in cash and stock. But Equity Office said it would still back Blackstone and set a shareholder vote for Wednesday.
Roth spent the weekend considering his options. He did not want to raise his bid, thinking that paying more than $56 a share was too much. He decided Vornado would not pay more, but it agreed to pay the cash part much more quickly, making its bid more attractive.
The next day, Blackstone went to Equity Office with a new bid of $55.25 a share. Zell asked for an additional 25 cents; in exchange, the breakup fee was increased to $720 million. And then everyone waited for Roth's response. But there was none. Blackstone had won.
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