Cadbury shows takeovers need reform
Here’s a post I had earlier today on Comment is Free:
Perhaps it is because Cadbury is such an iconic British brand with a long and proud history as a good employer. Or perhaps it is because Kraft promised Cadbury employees that it would reprieve Keynsham’s Somerdale factory, only to cynically change its mind once their takeover had gone through.
But whatever the reason, takeover rules are back on the agenda. For many years, both Labour and Conservative ministers were happy to leave it to the market, and were proud that it is easier for hostile takeovers to succeed in the UK than anywhere else in the world.
There is an argument for easy takeovers. It is meant to keep management on their toes, and allow strong companies to take over and shake-up the weak. There may be some short-term pain, but in the long term – at least in theory – there is economic gain.
But in the real world, it is not working like that. Too many takeovers end up being not just bad for the staff who lose their jobs, but also for shareholders of the winning company.
Cadbury workers are clearly angry, but so is Warren Buffett, the king of US investors and a big shareholder in Kraft. His hard-nosed verdict is that he will lose from the deal.
So what has gone wrong? The problem is that there is a huge set of incentives for takeovers to happen. City deal-makers; hedge funds holding short-term shares for a quick buck; lawyers and other advisers make pots of money whether takeovers succeed or fail. Sometimes this even includes the directors who can find themselves with a clear conflict of interest.
It is even worse when you factor in the fashion for takeovers fuelled by debt. You end up with perfectly good companies with a strong underlying business brought down by being saddled with huge debts that they have to pay back. Just look at EMI or even Manchester United to see this at work.
I welcome overseas investment in the UK. To take one example, without it we would not have much of a car industry. In today’s global economy, we cannot say “stop the world, we want to get off”. But that does not mean we should not worry that so many of our big employers have overseas owners. Nor should it stop us wanting to obtain the economic advantage that having the headquarters of global players in the UK brings.
The weak pound means that British companies are vulnerable to a foreign takeover boom, so if we are going to set new rules then action is urgent. The easiest reform is to make new shareholders wait before they gain voting rights. This would stop the carpetbaggers hunting a short-term buck from deciding a company’s fate.
Next, we need new tests that takeovers must pass. At present, the only block on a takeover is whether it will work against the consumer. But we do not have to go back to the days when a vague public interest test allowed ministers to decide the fate of a takeover on a whim.
Instead, we need a new kind of economic test handled by an independent mergers and takeovers commission. It would make bidders show that a takeover would be good for the target company. It would take into account the interests of the wider economy, employees, suppliers and local communities. Takeovers funded by unrealistic debt or driven by speculation would be unlikely to pass. Those that make industrial sense would.
Employees should have a proper say and better protection. European requirements for information and consultation are not working properly, and do not even apply to take-overs of solely-owned private companies. The worst reason for a takeover is that it makes it easier to reduce the terms and conditions of the staff once they have a new owner. This is why we have Europe-wide rules of transfers of undertakings, but they do not apply to the takeovers that take place by share transfer – common in the UK, but rare elsewhere. This, too, must end.
It certainly would not mean that there would never be another takeover again. But we need a new balance. It is not even quite right to say that company ownership has become a chip to be played in casino capitalism, for at least gambling is regulated, and there is a limit on what the house can take.
And if this encouraged companies to grow by investing in new products and new services that customers want to buy, rather than by financial engineering, we would all gain.