The Cadbury’s takeover
There are a number of issues at stake with the takeover of Cadbury’s by Kraft. Inevitably free market fundamentalists have accused doubters of being protectionists and little Britishers but the case against this takeover goes much wider than a defence of the iconic nature of the Creme Egg. But unions are right to fight back.
The biggest issue is that this is going to be largely funded by debt. This will mean that Kraft will have to extract significant value out of the business to pay interest and the loan capital. It is a perfectly reasonable public policy objective to discourage highly-leveraged bids of this type.
What makes this worse – as Nick Clegg very effectively pointed out at yesterday’s Prime Ministers’ Questions – is that some of the loan finance is coming from the publically-owned RBS. It is indeed strange that RBS is funding something that the government has opposed.
With many predicting an upsurge in mergers and acquisition activity as we move out of recession it is right to ask whether the UK economy really gains from having such an easy come, easy go approach to takeovers. As the TUC said here
A November 1999 report by KPMG looked at over 100 of the largest crossborder deals between 1996 and 1998. By analysing the share price a year after the merger in each case KPMG found 53% of the mergers studied reduced shareholder value and 30% made no discernable difference .
Or if you prefer the Daily Telegraph, here’s Jeremy Warner. And you certainly don’t need a KPMG study to show that employees are usually even bigger losers.
The market fundamentalists argue that strong companies take over weak companies and that therefore across the economy there is a net gain greater than the individual pain in the company that has been taken-over.
But it is far from clear that this is what really motivates mergers. As Robert Peston points out it is the banks who really profit from this takeover, and Cadbury’s is no exception. One driver of the financial bubble has been that banks ended up serving their own bonus culture at the expense of both customers and shareholders. Short-term market pressures encourage mergers and acquisitions irrespective of whether they make long term economic sense for their shareholders, their employees or the wider economy. And as Birmingham based Professor David Bailey argues here, with particular reference to Cadbury, there are alternative ways of running merger policy.
There is a further question about whether it matters that so much of the UK economy is now owned by overseas owners. One does not have to be a protectionist or opposed to foreign owners in principle – not a sensible option in today’s globalised economy – to wonder whether this is healthy. Will Hutton for one certainly does not think so.
Let us hope that local MP Liam Byrne is right that Kraft is more interested growing Cadbury’s overseas operations than closing down its UK operations.