Welcome to the AP Economics Blog for Students of Boston College High School. It is in this forum that students will discuss issues in AP Economics class.
Sunday, September 4, 2011
Barbarians At The Gate
This is the story about a leveraged buyout offer (LBO) of RJR Nabisco in the 1980's. The made for television movie is important because of the hostile nature of the company's takeover.
Barbarians at the Gate is, quite simply, an adaptation of the book of the same name, which chronicles CEO F. Ross Johnson’s attempted leverage buyout of his own company, RJR Nabisco. While currently well-known for their Oreo products now, RJR Nabisco in 1988 was known for more than that, Oreos and tobacco products. In the midst of the series of events that are the focus of the film, Johnson has to deal with the $300 million failure of the Premier cigarettes, and attempt at smokeless cigarettes. What starts off as a simple leverage buyout (as simple as a multi-billion dollar leverage buyout of a major corporation can get, anyways) becomes increasingly convoluted as everyone and their neighbor find out about the buyout and investors such as Henry Kravis attempt to ally with Johnson or outbid him and seize RJR Nabisco for themselves, ultimately resulting the financial equivalent of a thirty gamble pileup.
The protagonist of the film, F. Ross Johnson, is shown to be a natural salesman throughout his life. His persuasive language, smooth talking, and adamant nature are all qualities that make him a very likeable character. In the film, these characteristics shine through when he successfully sells magazine subscription to a neighbor as a child, sells pictures to a housewife as a young man, and convinces several members of RJR Nabisco to sell the company (to himself, of course). Johnson, however, is only human, and wields some dislikeable aspects, namely his greed and hubris which serve to bring about his defeat. Johnson’s hubris is gained from his frequent successes in business endeavors throughout his life, and leads to Johnson attempting to implement Kravis’s plan to buyout the company on his own, which winds up with RJR Nabisco falling into Kravis’s hands. His greed manifests itself in his share of the profits gained from the buyout, combined with his desire for total control of RJR Nabisco and his reluctance to sacrifice a single private jet from the fleet. This greed, once revealed in the Wall Street Journal, ultimately convinces the Board to sell the company to Kravis, despite Johnson placing a higher bid.
In the movie, “Barbarians at the Gate”, Henry Kravitz is extremely confident in both his company, KKR and in himself. This character trait is imperative in business and is needed in corporate leverage buyouts as well. However, I did not appreciate how Kravitz’s ego overpowered his confidence. He was confident when he initially told F. Ross Johnson that he and F. Ross Johnson should do a leverage buyout of the company R.J.R. Nabisco. On the other hand, when he heard that Johnson had taken his idea and put it into action without him, he took it as a personal assault. Because it was his idea, he felt that he should be part of the glory and the financial windfall. So he decided to do whatever was necessary to buy R.J.R. Nabisco. For example, F. Ross Johnson wanted to buy out the shares for $75 a share which would have more than satisfied the company’s shareholders because the stock was only valued at $50 a share at the time. Therefore, shareholders would have agreed to the purchase. However, because Kravitz found it necessary to get involved, he offered a maximum bid of $109 a share. This made the shareholders very happy, but enraged F. Ross Johnson, who actually cared about the company. Because Kravitz offered to buy the company at such a high price, it was driving R.J.R. Nabisco deeper into debt. But Kravitz did not care. His ego was driving him to win the company at any cost. Had Kravitz just accepted the fact that Johnson took his idea to make a fortune and did nothing, it would have made Kravitz look much less egotistical and would have been better for the company overall. What Kravitz could have done to become more successful is to have been more diplomatic with F. Ross Johnson. Both parties were not happy with the other’s involvement, but F. Ross Johnson wanted to work something out so that this huge debt of R.J.R. Nabisco could be avoided. But Kravitz disagreed entirely. He let his head get the best of him and decided that he wanted the company in its entirety. Therefore, the bidding began. Had Kravitz agreed to work with Johnson by using his confidence rather than his ego, they would have been able to buy the shares for less, put the company in less debt, and make a fortune of money in business together. However, Kravitz’ egotism led to nothing more than putting the company in debt. In this way, I believe that Kravitz’ egotism not only made himself look bad, but put the future (at the time) of R.J.R. Nabisco in jeopardy as well.
“It’s who you know not what you know,” this aphorism is common in the business world. In the case of the main character the people that he knew were also treated extravagantly. Take, for example, the scene early in the movie, perhaps a dozen or so minutes into it, in which the main character is thanked for a Gucci watch left in a gift bag of a party he attended. Then, only moments later, he remarks to his protégé of sorts that spending millions on the golf tournament they are currently in attendance for will pay off in the stocks. This scene, one that is typically breezed over, highlights an important practice in the business world: flattering.
Yet most striking in my opinion was the mantra that F. Ross Johnson seemed to live by: you must sell yourself to sell your product. This practice is something that I greatly admired and a practice that I liked. One must be content with his or herself prior to convincing someone else that they must buy their product. Fascinating! Admitting defeat modestly was also a, more life than business, practice that I also liked. Recall the final scene of the movie, one in which F. Ross is flying coach and makes the remark “we all have to make adjustments.” The scene flashes to a dog stuck in the luggage bins, reminding the audience that the entire family must adjust to the change in income. Classy.
To Mike, It seems as though over-confidence and greed is a common trait in the business world. As with the former CEO of Enron, Jeffrey Skilling, Henry Kravitz comes off as a man who "counts his chickens before they hatch." Their individual assets become more important than the much larger companies and they drive it into debt. Soon the debt is too high and weight of the financial burden is passed to everyone involved in the company.
In response to your piece, Mr. Blake2Ryan on Barbarians at the Gate, I find that, like you, the fact that such seemingly affluent people were so readily flexible when faced with "lower-class" situations is an agreeable thought. It is nice to think that money may not permanently change every person for the worst. It seems also that the extravagance you described in the first paragraph, however, is rather distasteful as it portrays excess to an extremem in the face of what was probably a tough time for 99% of the world. I do not find that Gucci watches are needed to win the friendship of others, especially if they can afford their own.
In respone to Blake on Barbarians at the gate, I noticied that people with good looks and good charisma are needed to survive in this business world. Now with those qualities who have a peson who can rise to the challenge but we must realize that most of these charismatic people are guided by the need for money. Now greed plays an important role in every person life.
In Response To Ryan, A well done analysis of Barbarians at the Gate. I only take exception with one of the points that you made and your interpretation of it. The mantra that you spoke of, of F. Ross, is that you must be willing to sell yourself to sell the product. You took a positive lens in your interpretation of thei ideology. I would say that this is actually more of a negative than a positive. I believe that "selling oneself" is not the best practice in terms of trying to sell a product. Yes, of course, the seller, if of any degree of moral character, must beleive and trust his product. However, in no way does that mean that one sells himself. When I hear that phrase, I think of "selling your soul," which is the lowest form of business placation and supplication. Sell the product, in all of its advantages and benefits, but never compromise your beliefs.
This practice of selling your ideals in order t become rich is one that occurs in all of the films that I have seen. It is probably the worst practice of business. People begin to concentrate on how they can make themselves rich instead of concentrating on how they can improve their business in order to benefit everyone. This is a practice that may make an individual or a select few individuals rich in the short term but long term, hurts everyone.
Barbarians at the Gate is, quite simply, an adaptation of the book of the same name, which chronicles CEO F. Ross Johnson’s attempted leverage buyout of his own company, RJR Nabisco. While currently well-known for their Oreo products now, RJR Nabisco in 1988 was known for more than that, Oreos and tobacco products. In the midst of the series of events that are the focus of the film, Johnson has to deal with the $300 million failure of the Premier cigarettes, and attempt at smokeless cigarettes. What starts off as a simple leverage buyout (as simple as a multi-billion dollar leverage buyout of a major corporation can get, anyways) becomes increasingly convoluted as everyone and their neighbor find out about the buyout and investors such as Henry Kravis attempt to ally with Johnson or outbid him and seize RJR Nabisco for themselves, ultimately resulting the financial equivalent of a thirty gamble pileup.
ReplyDeleteThe protagonist of the film, F. Ross Johnson, is shown to be a natural salesman throughout his life. His persuasive language, smooth talking, and adamant nature are all qualities that make him a very likeable character. In the film, these characteristics shine through when he successfully sells magazine subscription to a neighbor as a child, sells pictures to a housewife as a young man, and convinces several members of RJR Nabisco to sell the company (to himself, of course). Johnson, however, is only human, and wields some dislikeable aspects, namely his greed and hubris which serve to bring about his defeat. Johnson’s hubris is gained from his frequent successes in business endeavors throughout his life, and leads to Johnson attempting to implement Kravis’s plan to buyout the company on his own, which winds up with RJR Nabisco falling into Kravis’s hands. His greed manifests itself in his share of the profits gained from the buyout, combined with his desire for total control of RJR Nabisco and his reluctance to sacrifice a single private jet from the fleet. This greed, once revealed in the Wall Street Journal, ultimately convinces the Board to sell the company to Kravis, despite Johnson placing a higher bid.
In the movie, “Barbarians at the Gate”, Henry Kravitz is extremely confident in both his company, KKR and in himself. This character trait is imperative in business and is needed in corporate leverage buyouts as well. However, I did not appreciate how Kravitz’s ego overpowered his confidence.
ReplyDeleteHe was confident when he initially told F. Ross Johnson that he and F. Ross Johnson should do a leverage buyout of the company R.J.R. Nabisco. On the other hand, when he heard that Johnson had taken his idea and put it into action without him, he took it as a personal assault. Because it was his idea, he felt that he should be part of the glory and the financial windfall. So he decided to do whatever was necessary to buy R.J.R. Nabisco. For example, F. Ross Johnson wanted to buy out the shares for $75 a share which would have more than satisfied the company’s shareholders because the stock was only valued at $50 a share at the time. Therefore, shareholders would have agreed to the purchase. However, because Kravitz found it necessary to get involved, he offered a maximum bid of $109 a share. This made the shareholders very happy, but enraged F. Ross Johnson, who actually cared about the company. Because Kravitz offered to buy the company at such a high price, it was driving R.J.R. Nabisco deeper into debt. But Kravitz did not care. His ego was driving him to win the company at any cost. Had Kravitz just accepted the fact that Johnson took his idea to make a fortune and did nothing, it would have made Kravitz look much less egotistical and would have been better for the company overall.
What Kravitz could have done to become more successful is to have been more diplomatic with F. Ross Johnson. Both parties were not happy with the other’s involvement, but F. Ross Johnson wanted to work something out so that this huge debt of R.J.R. Nabisco could be avoided. But Kravitz disagreed entirely. He let his head get the best of him and decided that he wanted the company in its entirety. Therefore, the bidding began. Had Kravitz agreed to work with Johnson by using his confidence rather than his ego, they would have been able to buy the shares for less, put the company in less debt, and make a fortune of money in business together. However, Kravitz’ egotism led to nothing more than putting the company in debt. In this way, I believe that Kravitz’ egotism not only made himself look bad, but put the future (at the time) of R.J.R. Nabisco in jeopardy as well.
“It’s who you know not what you know,” this aphorism is common in the business world. In the case of the main character the people that he knew were also treated extravagantly. Take, for example, the scene early in the movie, perhaps a dozen or so minutes into it, in which the main character is thanked for a Gucci watch left in a gift bag of a party he attended. Then, only moments later, he remarks to his protégé of sorts that spending millions on the golf tournament they are currently in attendance for will pay off in the stocks. This scene, one that is typically breezed over, highlights an important practice in the business world: flattering.
ReplyDeleteYet most striking in my opinion was the mantra that F. Ross Johnson seemed to live by: you must sell yourself to sell your product. This practice is something that I greatly admired and a practice that I liked. One must be content with his or herself prior to convincing someone else that they must buy their product. Fascinating! Admitting defeat modestly was also a, more life than business, practice that I also liked. Recall the final scene of the movie, one in which F. Ross is flying coach and makes the remark “we all have to make adjustments.” The scene flashes to a dog stuck in the luggage bins, reminding the audience that the entire family must adjust to the change in income. Classy.
To Mike,
ReplyDeleteIt seems as though over-confidence and greed is a common trait in the business world. As with the former CEO of Enron, Jeffrey Skilling, Henry Kravitz comes off as a man who "counts his chickens before they hatch." Their individual assets become more important than the much larger companies and they drive it into debt. Soon the debt is too high and weight of the financial burden is passed to everyone involved in the company.
In response to your piece, Mr. Blake2Ryan on Barbarians at the Gate, I find that, like you, the fact that such seemingly affluent people were so readily flexible when faced with "lower-class" situations is an agreeable thought. It is nice to think that money may not permanently change every person for the worst. It seems also that the extravagance you described in the first paragraph, however, is rather distasteful as it portrays excess to an extremem in the face of what was probably a tough time for 99% of the world. I do not find that Gucci watches are needed to win the friendship of others, especially if they can afford their own.
ReplyDeleteIn respone to Blake on Barbarians at the gate, I noticied that people with good looks and good charisma are needed to survive in this business world. Now with those qualities who have a peson who can rise to the challenge but we must realize that most of these charismatic people are guided by the need for money. Now greed plays an important role in every person life.
ReplyDeleteIn Response To Ryan,
ReplyDeleteA well done analysis of Barbarians at the Gate. I only take exception with one of the points that you made and your interpretation of it. The mantra that you spoke of, of F. Ross, is that you must be willing to sell yourself to sell the product. You took a positive lens in your interpretation of thei ideology. I would say that this is actually more of a negative than a positive. I believe that "selling oneself" is not the best practice in terms of trying to sell a product. Yes, of course, the seller, if of any degree of moral character, must beleive and trust his product. However, in no way does that mean that one sells himself. When I hear that phrase, I think of "selling your soul," which is the lowest form of business placation and supplication. Sell the product, in all of its advantages and benefits, but never compromise your beliefs.
Response to Ryan Blake
ReplyDeleteThis practice of selling your ideals in order t become rich is one that occurs in all of the films that I have seen. It is probably the worst practice of business. People begin to concentrate on how they can make themselves rich instead of concentrating on how they can improve their business in order to benefit everyone. This is a practice that may make an individual or a select few individuals rich in the short term but long term, hurts everyone.