Barbarians at the Gate is movie that was released by HBO in 1993. It was a very interesting movie about a targeted buyout of RJR Nabisco. There was a buyout craze for Nabisco by multiple bidders including the most notable being Ross Johnson who was the CEO of RJR Nabisco and Henry Kravitz of KKR which stands for Kohlberg Kravis Roberts. The pursuit of buying out Nabisco I feel is main plot to this movie and a lot of work was put into evaluating RJR Nabisco and determining how much money to bid per share. In the end of the movie the bids from both Ross Johnson and Henry Kravitz exceeded more than 100 USD per share. It was incredible to me to the lengths they both have gone to pursue ownership of RJR Nabisco. RJR Nabisco stands for Richard Joshua Reynolds who was the founder of Nabisco.
The movie is centralized on Ross Johnson who was a business man from Winnipeg, Canada. He has been working since he was 9 years old selling newspapers, photography, and ultimately being the CEO of RJR Nabisco. Ross Johnson’s team had attempted to buyout RJR Nabisco during much a money against rival Henry Kravis of KKR which resulted in a bid war. Henry Kravis was unhappy that Ross Johnson stole his idea of buying out RJR Nabisco which I feel resulted in Kravis wanting to get involved in buyout. Henry Kravis said he wanted to have RJR Nabisco for the sake of credibility when his wife asked him why not buy another company instead. Ross Johnson had decided to attempt to buy out RJR Nabisco after the $350 million smokeless cigarette project, Premier, was on the brink of failing. In the end, Henry Kravis won the bid war at 109 dollars per share which was actually 3 dollars less per share than Ross Johnson’s final bid. Ross Johnson’s deal upset many people in which his greed was responsible for his downfall.
Barbarians at the Gate covers topics discussed in finance in which a few are covered in our class. It made me glad that I understood and remembered because I understood the movie much better. Junk bonds were brought up in a conversation in junk bond specialist Michael Milken was arrested. Another subject covered in finance that relates to the movie is inside trading. It is a felony in the USA that is taken seriously and can prove costly in the world of finance. In the movie, a stock trader named Ivan Boesky was convicted and sentenced due to inside trading. Another fact is that there are people who might not know what financial terms mean. Ross Johnson’s wife for example stated that she didn’t know what junk bonds and insider trading meant.
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Securities were another subject brought up in the movie when Henry Kravis discussed the benefits of management takes over along with securities. Another topic in finance associated with the movie is leverage buyout. In the movie, RJR Nabisco is the target of a leverage buyout and to turn in from a public to private company. A subject in finance that I learned from the movie is a golden parachute. The word got out in the press when people of RJR Nabisco found out about the benefits of Ross Johnson would be. This was brought up as to why Ross Johnson’s bid was turned down despite his bid being higher than Henry Kravis.
Junk bonds as stated in the textbook on chapter 5, are defined as bonds rated lower than BBB by bond rating agencies. For that reason, junk bonds are not investment grade and are considered more hazardous and unpredictable. For example, notable junk bond ratings from Moody’s and Stand and Poor’s include Caa, C, CCC, CCC, and D. Because junk bonds always have higher interest rates than investment grade securities, in other words they can be described as high-yield bonds which are bonds that pay higher with a credit rating that is low. The movie noted Michael Milken’s arrest which was also noted in Chapter 7 as it stated that he was arrested along with Drexel Burnham as both were not able to support the junk bond market. Michael Milken described there were problems with the junk bonds which included they were being hurt by poor liquidity and in the junk bond market, the probability was high that issuing firms would default on those payments of bond.
Next, inside trading is a topic in the movie that had investors arrested. One of them notably was Ivan Boesky. Insider trading was discussed in the textbook in chapter 22 which means unpublicized facts known only to the management of a corporation. This crime has put many investors in prison. There is a federal agency of the United States that helps regulate big businesses to help prevent insider trading. The SEC or Securities and Exchange Commission has stepped in to set regulations and monitor securities. Another fact from the book is that not only does the SEC regulate a business firm’s investment banking operations, but it also prohibits dealers and brokers from inaccurately presenting securities. The reason why insider trading is treated as a crime is because it prohibits a growing economy to increase capital. Smaller investors wouldn’t be able to use funds and the markets could fail.
Securities are another financial term that people should be aware of. Henry Kravis briefly explained about selling securities therefore I believe it is a term people should know. Securities are defined in the textbook as a financial instrument which is a claim on the borrower’s future income and/or assets that is sold by the borrower to the lender. Investopedia.com explains that securities representatives of one’s ownership position in a corporation that is publicly traded. Securities are also broken down into 2 categories which are debts and equities. Issuers are those who design the securities for sale to those who will purchase them are investors.
The main plot of the movie revolves around a topic in finance called a leveraged buyout. A leveraged buyout is defined by Investopedia.com as an acquisition of another company by means of using a major amount of money that has been borrowed to meet the needs of the cost of acquisition. Quick definition of an acquisition by the book is when a firm acquires ownership of another firm by means of purchasing its stock. Henry Kravis in the movie had the idea initially when he was in a meeting with Ross Johnson, however Ross acted first without Henry knowing resulting in a bid war for Nabisco. The drive of a leveraged buyout is to permit companies to make huge acquisitions without the commitment of using a lot of capital.
A term in finance that resulted in Ross Johnson’s downfall in my opinion was a golden parachute. The executive board of RJR Nabisco and others were upset when they heard the news from the newspaper about how Ross would benefit through the takeover of the company. In the end of the movie it was decided that Henry won the bid war against despite Ross offering more dollars per share. Ross’s greed cost him and the board felt more confident about Henry because Ross wouldn’t be involved. A golden parachute as defined in Investopedia.com involves extensive benefits given to the highest executives if a company is taken over by another business and the existing executives are dismissed resulting of the takeover. Some examples of benefits would be cash bonuses, stock options, and plentiful severance pay. Parts of a golden parachute make it easy to maintain top executives and if an employee were to be fired, he or she would receive very profitable benefits.
