### Barbarians at the Gate: RJR Nabisco's Leveraged Buyout Saga

Richard Coffin explores the dramatic RJR Nabisco leveraged buyout in his latest video, revealing corporate greed's impact on finance.

### The Drama of RJR Nabisco: A Deep Dive into "Barbarians at the Gate"
* 🎬 This video, hosted by Richard Coffin, explores the 1993 film "Barbarians at the Gate," which dramatizes the **1988 leveraged buyout of RJR Nabisco**, a company known for products like **Oreo cookies and cigarettes**.
* 💼 The film highlights the corporate greed of CEO Ross Johnson, who is portrayed as a **flamboyant executive enjoying lavish spending** while the company's stock price **stagnates despite positive news**.
* 📈 Ross is introduced to the concept of a leveraged buyout by investor Henry Kravis, emphasizing that such buyouts involve **using borrowed money to purchase companies**, aiming for **high rewards despite high risks**.
* 💵 The bidding war escalates as Ross attempts to secure a deal with Shearson Lehman, offering **$75 per share**, while Kravis counters with a **$90 offer**, igniting competition among investors.
* 📰 The film depicts the chaotic environment of Wall Street, including **corruption and insider trading**, as Ross’s plans get leaked, revealing he stands to gain **$2.5 billion** from the acquisition.
* 🏦 Ultimately, despite a higher bid from Shearson Lehman, the board chooses KKR's offer of **$25 billion**, leading to Ross's downfall, though he still walks away with a **$53 million settlement**.
* 📊 The events surrounding the buyout drew public attention to the **unethical practices in finance**, serving as a **cautionary tale about corporate greed** and the **impact of private equity on businesses and employees**.
* 🔒 The video concludes with a promotion for Incog, a service aimed at **protecting personal data from brokers**, highlighting the **importance of data privacy** in today's digital age.

This video is sponsored by Incognito. Visit the link in the description and use code Bagel to get 60% off an annual subscription. Hey everyone, welcome to the Plane Bagel. I'm your host, Richard Coffin. We're back again with another episode of everyone's favorite series, Investment

Analyst Watches Obscure Finance Film and Ruins It by Over-Explaining the Scenes. Real crowd pleaser on this channel today. We're going over a movie based on the book of the same name, Barbarians at the Gate, a 1993 film, so a

bit of an older one, uh that's based on the 1988 leveraged buyout of RJR Nabisco, a company that you might not initially recognize by name but whose products you've probably enjoyed before, namely their key invention of Oreo

cookies, uh something they sold right alongside their other key product, cigarettes, because the 80s were a wild time. Now, I can tell that you're all thrilled to hear about a movie you've never watched before about a company you may have never heard of before, uh but I've

actually been wanting to cover this movie for quite some time because, one, uh the takeover of RJR Nabisco was a pretty notable event. Not only was there quite a bit of drama, at least relatively in the finance world, but also it was the largest takeover in corporate history at

that point, and the movie does a pretty good job of staying true to the events that transpired and even the characters that are involved. And two, the movie is chalk full of finance jargon, uh references to other big companies and uh financial events that uh give us a lot

to dig into and kind of dissect here and that's exactly what I plan to do with this video today we'll be covering the major plot points of the film talking about the different terms and the like that come up and just giving overall more context and background

information about the things that uh transpire and in case it's not clear a spoiler alert we will be covering kind of the main storyline of the film just for those of you who had this on their list of two watch movies that they were surely going to get to but without

further ado let's hop into it the movie begins with an introduction to our main character Ross Johnson who from a very young age a bit of a go-getter smooth salesman who by 1988 has become the CEO of RJR Nabisco with him attending a

corporate event for the company with his wife and it's in this scene that we get introduced to a bunch of the main characters of the movie uh there's Charlie Hugall the chairman of the board of directors effectively Ross's boss in a way the board of directors they're

meant to represent the shareholders of publicly listed companies while they don't get involved with the day-to-day operations they can hire or fire executives determine compensation and decide ultimately whether to accept or reject takeover bids that'll matter for later there's also Ed Horan who works

under Ross as the president of tobacco and Johnny Grenis who works under Ross as the president of Nabisco the cookie side of the business with Johnny constantly pestering Ross about his excess with these events and his uh corporate spending just this kind of

spending is crazy Ross oh John the company's making so much money we're green something that's a bit of a theme throughout the whole movie and pretty important to the plot uh because Ross for his part really enjoys being flippant with company money giving

Rolexes away to clients uh throwing big parties and even enjoying a fleet of his own private jets all of which is pretty accurate to the real Ross Johnson who was known for greatly increasing his own executive pay while working at companies uh and enjoying many company perks with

him sort of developing this image as the epitome of corporate greed but at the event Ross appears to be well-liked again very personable with everyone there and we see people celebrating this news story played on the TV around an individual Anthony  Kone being awarded

$400,000 in Damages by cigarette companies a tip for Tony Cipolone again a real lawsuit where Anthony sued tobacco companies for his wife's death from lung cancer that at the time was seen as a victory for big tobacco given that it really seemed to

limit their liability uh in cases related to the dangers of cigarettes but the next day Ross is seemingly annoyed that the stock for the company despite this positive update hasn't really budged that's not really moving higher and at a company sponsored golf tournament one of his investors pitches

him on the idea of carrying out a leveraged buyout to try and solve the stagnant stock price with his friend Don suggesting that Ross meet up with Henry Kravis because Henry's the best he was the first to do a company buyout he

practically owns a patent on the process and again all these people are real Henry Kravis is actually one of the Ks of private equity company KKR, nicknamed that today manages over half a trillion dollars in assets under management and the movie does have a few scenes trying

to explain how a leveraged buyout works, uh including the golf tournament itself, Ross's introductory dinner with Henry Kravis where he gets pitched on the idea and then later when Ross's wife explicitly asks him to explain leveraged buyouts. All a buyout means is that

management, the team that runs the company, they buy out all the shareholders and the company goes from being public to being private. Uh, but to quickly kind of summarize the high-level idea to that point, uh, a leveraged buyout is when a group of investors raise a

bunch of money, most of which is debt, hence the name leveraged, uh, use that to buy what's typically a publicly listed company and then once they have private ownership of the business, doing everything they can to raise profits, uh, raise cash and overall squeeze more

money out of the business to pay down that debt. It's a high risk but also high reward strategy given how little money investors are putting forward of their own capital and the potential upside if the company is able to pay down the debt with its own money. And something that

Henry Kravis did play a pretty important role in popularizing although uh, technically he, he didn't carry out the first one. That was actually by a Lewis Coleman who acquired Orkin Exterminating Company back in 1964 with just $11,000.

of cash up front, a strategy that at the time was actually referred to as a bootstrap acquisition. As for why they called it that, I don't know. I think it has to do with the idea of pulling yourself up by your bootstraps or sort

of making something out of nothing or very little, but I'm not really sure. Uh, so don't quote me on that. Anyway, we see this all explained as being an attractive offer for everyone involved. The investors will get a higher stock price PR for their shares. Henry Kravis

will charge a 1% management fee, or basically get 1% of whatever the company ends up being sold for, and Ross will continue to be able to run the company as Henry Kravis promises the way he sees fit, uh, and likely get some sort of

payoff for being involved with the deal. However, as recently talked about on the channel, leveraged buyouts carried out by private equity companies, uh, do have a bit of a bad reputation for being ruthless with companies, seeing their assets stripped and employees laid off

all for the sake of slashing costs and squeezing more profit out of the business. Uh, something that we actually see alluded to in this scene. That's French for firing people, isn't it? Henry? As few as possible, of course. A few dozen? 10,000? As I

said, as few as possible. And on that sort of sketchy note, in the next scene we get a glimpse of some of the corruption that's running rampant on Wall Street at the time with the news story playing in the background about a junk bond trading specialist, Michael Milken, uh, which as a

quick sort of fun fact, actually, he holds a record for being one of the highest paid employees ever with him receiving compensation of over half a billion dollars in 1987 alone. But in the scene, we hear about his firm Drexel Burnham Lambert uh being implicated with

an Ivan Boesky, uh someone who's been charged with insider trading, which will matter later. And mind you, when we talk about junk bonds, we're talking about uh bonds issued to investors that are just high risk. And during the 80s, they were a

popular method for raising the money needed or specifically the debt needed for leveraged buyouts. That kind of Easter egg aside, however, we see Ross ultimately sort of brush off the offer uh mostly because he's concerned that he won't be able to spend as much company

money if he has private equity investors sort of breathing down his neck trying to control costs. And besides, he believes that the company is about to see its stock price skyrocket thanks to a new innovation that's bringing to the market. Premiere's a new smokeless cigarette that

supposedly healthier than typical cigarettes. Again, something the company did actually try to release to revolutionize the industry with this supposedly non-cancer causing product that would heat up the tobacco inside the cigarette rather than burning it. Which, as a fun fact here and a bit of

subtle foreshadowing, is often highlighted as one of the biggest product flops in US history for reasons that we see in the next scene as Ross hears back from early test uh survey results on the product. They all said they tasted like

Like, was the consensus yes, sir. So with Ross's key catalyst for the stock now completely underwater, and I'm even potentially facing a firing over this, we see him decide to proceed with a leveraged buyout, but not with KKR, but rather a friend of his, uh, Jim

Johnson, the chairman of American Express, and namely the company's investment bank arm, Shearson Lehman, uh, which yes, is in fact the same Lehman that would eventually go and kick off the 2008 financial crisis with its own failure, but that's decades from now. Going back

to the 80s, we have a typical work montage, after which we have this meeting where the president of Shearson Lehman, Peter Cohen, is meeting with Ross to outline their leveraged buyout deal for RJR Nabisco, with them highlighting that while the stock is currently trading at 53 and

an eighth, uh, they'll go ahead and offer $75 a share for the company, uh, which is notably higher than any previous high the stock has ever reached. Now, we touched on this before, but as for why we're hearing the stock priced with a

fraction, it's actually how stocks used to be quoted up until 2001, which is when we switched to decimals. Before that point, the smallest price unit between stocks was actually 1/16 of a dollar, which, from what I've read on the matter,

is because America used to use Spanish coins as legal tender, uh, which themselves were divisible into eighths, and this convention of uh, dividing dollars into eighths and later 16s was just carried over into the New York Stock Exchange when it was first founded.

with us again only seeing all stocks on the exchange quoted in decimals by the end of 2001. And as for why Ross and his gang are offering a higher price than the current stock price that they could otherwise get on the open market, uh, that's because they're trying to

convince the board of directors to vote in favor of this acquisition. Uh, which would mean they wouldn't have to go to the open market and buy all the shares of the company, which can get complicated. Yes, there's currently a lower price that they could acquire at, but as they try

and buy more and more of the shares, that's likely going to push the stock price higher and could end up being more expensive than this uh tender offer, which just involves the board of directors voting and deciding whether to move forward with it. And as a movie, it also

highlights a higher stock price will help fend off competition uh and other bids that might come for the company. And despite how much more they're paying for the company to acquire it, we see it alluded to that Ross is still going to make a massive payoff uh if this deal

moves forward. Are these figures for real? Unfortunately for us, however, before he's able to quietly uh seal the deal, news of the arrangement gets out and starts making headlines given that it again represents the largest takeover in corporate US history. And we quickly see

the Barbarians at the gate as a bidding war ensues and everyone tries to get a piece of the action. Henry Kravis himself, seemingly out of pride and anger that Ross took his idea and went ahead with someone else, makes his own tender

offer for the company at $90 a share, a bunch of small retail investors start buying in, including some strangers who overhear the executives talking about their deal. And we really see all the chaos as Ross attends a seemingly square-dance political fundraiser where

everyone's soliciting him to try and get in on the deal. Wally MCN, I'm with Drexel Burnham, with one of the notable individuals being Ted Forceman, again, real person and key competitor to KKR, who tries to convince Ross that the

company's basically evil and that he should really not work with them and should work with him instead, with him later being the one to allude to the title of the film: "The bastards are at the city gates. Let's stand at the bridge together. Let's stand at the bridge and

push the barbarians back." Right, which to his passionate point, in addition to the cutthroat operations and the sketchy sort of junk bond dealings, uh, private equity has been accused of being pretty detrimental to the areas that it operates within, not just decreasing the quality of service

in important areas like healthcare, but but notably carrying out sizable layoffs and contributing to unemployment, especially within the retail sector. And even in the film, we see these sort of dark consequences mentioned, uh, with the previous KKR takeover of Safeway, the grocery chain. 18 years he drove a truck

for them. Ross, 18 years. Parked the truck one last time, he went home and he shot himself. But for Ross, that's not really the deal breaker. Uh, while he does try to negotiate with Henry Kravis and KKR to try and see if they can work together at

$90 a share to avoid any further competition, uh, things ultimately fall apart as one, Henry Kravis, demands that they use Drexel Burnham Lambert to raise the funds for the deal rather than Shearson Lehman, and two, despite what

they talked about in their initial discussions, they now expect Ross to reign in his spending and that he won't be able to really control the ship as he wants, which for Ross, obviously unacceptable, and the competition's back on now. Fast forwarding a little bit, we

get another 80s montage of everyone, uh, working. I guess a few things happen. We find out that KKR is working with an insider to price out their deal, none other than the president of Nabisco himself, John Green, who I said with

matter earlier, come on, keep up, people. Also find out that Premier tastes like crap, but the big twist that ultimately leads to Ross's downfall here is that his deal with Shearson Lehman to take over the business gets leaked to the press, uh, with the world finding out that Ross

stands to receive $2.5 billion if Shearson Lehman is successful in acquiring the business with this representing the share of the company Ross would stand to acquire at essentially no cost to himself. A headline that ultimately costs Ross the deal, while Shearson Lehman does

come out with the highest bid at the end of $112 a share, the board ultimately decides to go forward with KKR's final bid of $109 a share or $25 billion for the entire company because they're seemingly just peeved off by Ross's

Greed, I'd say the deciding factor, the one thing that made the Kravis offer more attractive was the fact that you were not part of it, and so RJR Nabisco goes to KKR for a whopping $25 billion. Investors get a massive payoff.

And our poor protagonist Ross flies home commercial, but don't worry because in the closing scenes as the film concludes, we find out that he would end up with a $53 million settlement as he went out the door, or $23 million after tax. And that's the film and the spectacle that

was the RJR Nabisco leveraged buyout, all of which again stayed pretty true and accurate to the real-life events. And today, RJR and Nabisco do continue to exist, albeit now under different companies as someone finally realized that made more sense. And when may not

have heard of any of this, these events did play a pretty important role in drawing more public awareness and criticism to the greed of Wall Street and just the general unethical practices that happen in the space, which, speaking of, let's take a moment to talk about

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I had to resolve. Canada Revenue Agency filed a lawsuit against your name, so either Incog helped with that or they're about to come for me, so I'll keep you posted on that. Regardless, I found some benefit with the service, and if you'd like to try them out yourself,

you can visit the link in the description below and use code Bagel to get 60% off an annual plan subscription. So thank you Incog, and thank you guys for joining me today. I hope you enjoyed this video. If you did, please do make sure to like, subscribe, all that good

stuff it does help the channel tremendously and let me know your thoughts on the movie 'RJR Nabisco', especially if you were around when all that played out. We love to hear uh your own kind of experience with the situation, but for me it's just a movie I

saw that I thought made a good candidate for diving into. Thanks again for joining me, see you in the next one.

Finance Movie Review: Barbarians at the Gate

Investing and personal finance educational videos with a hint of economics, posted regularly.

I'm a CFA and CFP professional working as an analyst for an investment management company in Ottawa. I'm a huge finance nerd and am passionate about the field - I think people lack the resources they need to make educated financial decisions, and hopefully this channel helps with that!

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DISCLAIMER:
The videos on this channel are for education purposes only and do not constitute financial advice. Richard Coffin does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers and his content should not be used as a basis for investment trades.

The Plain Bagel

Video sponsored by Incognito, offering 60% off with code Bagel.

Episode focuses on the movie 'Barbarians at the Gate'.

Overview of RJR Nabisco and the Movie's Plot

Movie based on the 1988 leveraged buyout of RJR Nabisco.

The takeover was a significant event in corporate history.

The movie contains finance jargon and references to other events.

Spoiler alert: The main storyline of the film will be discussed.

Introduction of Key Characters and Events

Introduction of Ross Johnson, CEO of RJR Nabisco.

Introduction of other main characters: Charlie Hugall, Ed Horan, Johnny Grenis.

Ross's extravagant spending habits are highlighted.

Discussion of a lawsuit and its implications for the tobacco industry.

An investor suggests a leveraged buyout to address stagnant stock price.

Explanation of how a leveraged buyout works.

Discussion of the risks and rewards of leveraged buyouts.

Mention of Lewis Coleman and the first leveraged buyout.

Discussion of the negative reputation of leveraged buyouts.

Mention of Michael Milken and junk bonds.

Discussion of the smokeless cigarette and its failure.

Ross decides to proceed with a leveraged buyout with Shearson Lehman.

News of the deal leaks, leading to a bidding war.

Various individuals try to get involved in the deal.

Discussion of the negative consequences of private equity.

Negotiations between Ross and Henry Kravis fall apart.

Another montage showing the ongoing work and events.

It is revealed that John Green is working with KKR.

Ross's deal with Shearson Lehman is leaked to the press.

The board chooses KKR's bid due to Ross's greed.

Ross receives a settlement after the deal.

Concluding Remarks and Data Privacy Discussion

Discussion of the impact of the RJR Nabisco buyout.

Discussion of data privacy concerns and data brokers.

Introduction of Incog, a service to remove personal information from data brokers.

Personal anecdote about the benefits of using Incog.

Call to action: Like, subscribe, and comment.