Mergers, acquisitions and takeovers: the takeover of Cadbury by Kraft - Business, Innovation and Skills Committee Contents

Conclusions and recommendations

Attendance by witnesses

1.  Notwithstanding the seniority of Marc Firestone's position within Kraft, we strongly believe that Irene Rosenfeld herself should have given evidence before us, not least because the statements regarding Somerdale's future—its re-opening and then its closure—were made and announced by her. Irene Rosenfeld's attendance would have given an appropriate signal of Kraft's commitment to Cadbury in the United Kingdom and provided the necessary authority in respect of the specific assurances offered to us during our evidence session. (Paragraph 6)

The closure of the Somerdale factory

2.  We believe that Kraft acted both irresponsibly and unwisely in making its original statement that it believed that it could keep Somerdale open. A company of Kraft's size and experience ought simply to have acted with better judgement. By making its announcement and the subsequent reversal Kraft has left itself open to the charge that either it was incompetent in its approach to the Somerdale factory or that it used a "cynical ploy" to cast a positive light on Kraft during its takeover of Cadbury. We can neither prove nor discount either conclusion. We are aware of speculation in the press that the Takeover Panel is examining this issue. We would expect this to be the case; such serious questions deserve the detailed scrutiny that only the Panel can give. (Paragraph 19)

3.  What is clear is that Kraft's actions in respect of Somerdale has undoubtedly damaged its reputation in the United Kingdom and has soured its relationship with Cadbury employees. It will now have to invest significant time and effort into restoring both. (Paragraph 20)

Kraft's undertakings

4.  We note Kraft's undertakings to continue to manage Cadbury from within the UK and that Dairy Milk and Cadbury's other products currently produced in the UK will continue to be produced here. (Paragraph 24)

5.  We note the fact that Kraft will honour Cadbury's undertakings given to the Somerdale workforce. (Paragraph 26)

6.  We are disappointed that while there has been frequent contact between Unite the Union and Kraft's UK human resource team, Kraft's American senior management have yet to engage in any meaningful dialogue with the Union. We believe that it is vital that Kraft's senior management from the US meet representatives from Unite the Union and the workforce as a matter of urgency in order to start to restore trust. (Paragraph 31)

7.  We note Kraft's assurances that there will be no further compulsory redundancies amongst manufacturing employees and no additional plant closures in the UK for the next two years. However, a guarantee for a longer period would have been welcome. We strongly believe that it would be in both Kraft's commercial interests as well as the UK's national interest for Kraft to regard the existing manufacturing plants in the UK as long-term investments which require sustained investment to remain competitive and at the leading edge of technology. Theoretically the undertakings given in respect of Dairy Milk guarantee the future not only of Bournville but also of Chirk, near Wrexham and of Marlbrook in Herefordshire, which supply the ingredients. However, we note the lack of a specific guarantee about the future of these two plants and we ask the Government to invite Kraft to provide further clarification of their intentions and to put the reply in the public domain. (Paragraph 32)

8.  We both note and welcome Kraft's acceptance of its obligation to support Cadbury's existing pension arrangements. (Paragraph 36)

9.  We note Kraft's commitment to maintain Cadbury's R&D facilities in the UK. We also note Mr Firestone's careful use of words and that there is no specific commitment to the current level of employment and world class skills in R&D at the centres of excellence at both Reading and Bournville. We invite Kraft to reflect on the reputational consequences for their company in the UK of not honouring the spirit of Mr Firestone's assurances and warm words. We ask the Government to invite Kraft to clarify its intentions and to put its response in the public domain. (Paragraph 39)

10.  We note the commitment by Kraft to continue Cadbury's support for the Cocoa Partnership and uphold Cadbury's undertaking to extend its use of Fairtrade. Any dilution of Cadbury's commitment would reflect very seriously on Kraft's reputation and integrity. (Paragraph 45)

11.  We welcome the announcement that Kraft has confirmed the funding arrangements for the Cadbury Foundation for the next three years. We also note Kraft's undertaking to adhere to Cadbury's commitments for community investment. We look forward to seeing how Kraft will maintain and build upon Cadbury's heritage of philanthropy both during the initial three-year period and beyond. (Paragraph 49)

12.  We welcome the commitment given by Kraft to rebuild and maintain the Fry Club at Somerfield. (Paragraph 51)

13.  We note that Kraft intends to uphold Cadbury's commitments to the environment. (Paragraph 54)


14.  The Kraft takeover of Cadbury has been marred particularly by the controversy over the closure of Somerdale and has heightened the feelings of mistrust in which Kraft is held. Kraft now faces a significant challenge to restore its reputation in the United Kingdom. Our evidence from Kraft did, however, give some welcome clarity on Kraft's intentions for brand management, the Cadbury workforce and the many philanthropic activities for which Cadbury is rightly admired. These commitments—which have been personally endorsed in writing to us by Irene Rosenfeld—are now in the public domain, and therefore will be subject to close scrutiny over the next few years. If Kraft is serious about restoring its reputation in the United Kingdom, it is vital that it delivers on all of them. Any back-tracking from these commitments, or any evidence that support management and other functions, especially Cadbury's world class Research and Development, are indeed being transferred to the United States would be a serious breach of trust. We recommend that the Department for Business, Innovation and Skills monitors Kraft's compliance to these commitments. If it is serious about them, Kraft will have nothing to fear from such scrutiny. (Paragraph 55)

Short-termism in decision-making

15.  We are deeply concerned by reports that the takeover of Cadbury by Kraft was ultimately decided by institutional investors motivated by short-term profits rather than those investors who had the company's long-term interests at heart. As a template for takeovers, this is not in the interest of UK companies or the UK economy. (Paragraph 62)

16.  We welcome the Government's focus on the issue of 'short-termism' in decision-making on the future ownership of UK companies, and its efforts to engage with institutional fund managers as part of the process. However, we are sceptical about the extent to which informal engagement alone can instigate any fundamental change in institutional shareholder behaviour, in particular where there are financial incentives for fund managers and others to act in the short term. (Paragraph 63)

Review of takeover regulations

17.  We welcome the fact that the Government is considering a review of the rules and legislation governing takeovers in the United Kingdom. We also welcome the current consultation by the Takeover Panel on its City Code on Takeovers and Mergers. Such consideration of the underlying issues must not be seen as protectionism against foreign takeovers but as seeking to ensure that all takeover activity, whether entirely domestic or by foreign companies, is conducted in the interests of the UK economy. (Paragraph 69)

18.  While we have not taken sufficient evidence at this stage to enable us to come to a view on the merits or otherwise of extending the powers of intervention by the Secretary of State, we strongly believe that this issue should be considered as part of the wider debate on takeover regulations. (Paragraph 75)


19.  The takeover of Cadbury by Kraft has highlighted a number of important issues in respect of the way in which foreign takeovers of UK companies are conducted. It has been the catalyst for a wider debate, both in Government and in the City, about how takeovers are conducted. In highlighting the Kraft takeover of Cadbury, we have contributed to that debate which now needs to continue, and with urgency. Time does not allow us to consider the wider proposals for reform in detail but it is clear that the Companies Act 2006 has not resolved these major issues in corporate governance. We urge our successor Committee to consider this Report as a starting point from which to conduct a detailed inquiry into these important issues and into the role of shareholders and managers of companies more generally. Recent experience of the behaviour of boards and shareholders in situations ranging from the fall of RBS to the Kraft acquisition of Cadbury indicate that it is time to reconsider many aspects of corporate governance. (Paragraph 76)

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Prepared 6 April 2010