Cadbury is better managed than Kraft, but the City doesn’t give a toffee when there’s quick money to be made
Once upon a time the City used to pretend that the takeover game was about dispatching lazy and incompetent managements. The process might be brutal but in the long run we were all supposed to be richer as talented executives were entrusted with bigger empires. Nice theory, but it is complete nonsense. Cadbury is just the latest company to fall victim to the modern version of the takeover business, where the desire for short-term profits trumps long-term investment.
Consider the relative performances of the two companies. Cadbury had a rocky patch a few years ago but had been turning out sparkling numbers for the past 18 months. Kraft, on the other hand, has found the label “low-growth conglomerate” impossible to shake off. That is because the description is basically correct: Kraft is a sprawling company that has been a disappointment to its investors for the past five years. Yet Cadbury’s assets have ended up in the hands of inferior managers. That is not the result the system is meant to deliver.
Why did it happen? Look at the people who will deliver Cadbury to Kraft – the shareholders. It’s no good blaming the hedge funds, which had consumed 25% of Cadbury by the time the board rolled over and accepted 850p a share. Those hedge funds were only able to buy a quarter of Cadbury because other investors had sold shares to them in recent weeks, generally at below 800p. The desire to bank a profit on an asset trading at 550p last summer was too great – turning down a 45% return over five months can kill a career.
Yet many of the same Cadbury investors must know Kraft has got a bargain. Even at the close of a five-month battle, Kraft could boast that buying Cadbury for £11.9bn will be “accretive” to its own earnings from the second year. In other words, Kraft expects this deal to start paying for itself by the end of 2011. That is not a surprise. As Cadbury’s defence document showed, a bidder would have had to pay 900p-plus even to get close to past takeover valuations in the confectionery industry. A few Cadbury loyalists – Standard Life Investments and Legal & General – had accepted this point.
Can anything be done to protect valuable, but vulnerable, UK companies such as Cadbury in future? “All things being equal it is easier to take over a company here than anywhere else in the world,” Lord Myners, the City minister, declared during the battle of Bournville. He’s right. We know that Cadbury-style deals would not happen in France or Germany and that US companies often run off to Delaware to adopt a variety of poison-pill defences. True, Anheuser-Busch, brewer of Budweiser, the American national beer, is now in Belgian hands, but that’s one that got through the net.
So how about giving committed long‑term UK investors, such as L&G, a bigger voice during takeovers – enhanced voting rights, in the jargon? There is no guarantee such a system would have saved Cadbury but it might have improved its chances.
In the end, the only surefire method is to put up the shutters sometimes and declare the public interest to be paramount. That’s what we used to do. In 1988, the Tory trade minister Lord Young, hardly an instinctive protectionist, referred to the Monopolies Commission a bid for Rank Hovis McDougall from the Australian group Goodman Fielder Wattie. The grounds were the “possible effects on competition, especially in the market for bread, arising out of the financing of the proposed acquisition”. In retrospect, Young’s actions look like shameless political interference.
Lord Mandelson, two decades on, might struggle to mount a public interest case for saving the maker of Curly Wurlys. But he would face less difficulty in defending, say, Pilkington, Boots, Npower, P&O Ports, Powergen or BAA, all of which have fallen to foreign bidders. Too late now, of course, but the argument that the UK is better off for its open-doors policy is hard to sustain.
France and Germany, quicker out of the recession than the UK, are not noticeably suffering from a grave mis-allocation of capital. Their companies tend to be more competitive internationally for a simple reason: their managements are not afraid to invest because they are not constantly feeding the City’s appetite for special dividends, instant profits and deals. The idea that the takeover train delivers greater productivity and long-term wealth is now a bad joke.