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

Memorandum submitted by Professor Christopher Bones (Dean, Henley Business School)


  The approach by Kraft to acquire Cadbury plc generates five issues that have a potential public policy interest for the department for Business, Innovation and Skills. Whilst each individually may be acceptable consequences of a full and fair open market transaction the combination may well raise some issues of concern for government and policy makers in the area and potentially may stray into the much more controversial issue of the role of government-owned banks in merger and acquisition activities.

  There is also a question as to whether those who will decide on the merits of any final and revised bid actually have the interests of the ultimate owners of the company in mind when they reach their conclusions.

  The five issues associated with acquisition are:

    1. A further potential threat to the UK's manufacturing base

    Cadbury are committed to the long term development of their Birmingham and Sheffield production plants in the UK as part of a pan-European production network. Their announced closure of their Bath factory is nearly complete with many workers clear as to their financial and career futures. The Kraft commitment to keeping Bath is reported in the press as seen by Unions and Management alike as a PR ploy rather than a really well thought through proposition. Keeping it open would have inevitable consequences for manufacturing jobs in Birmingham a city where Cadbury's manufacturing activity keeps the requirement for skilled jobs at a critical mass attracting inward investment and maintaining an education and skills base. Any dilution could be damaging in the medium term for the supply of skills to other manufacturing organisations and for those areas continuing to attract inward manufacturing investment on the basis of available highly skilled labour.

    A further concern for government is that Kraft approach their commitment to the Bath factory (or the ones in Birmingham or even Sheffield if they keep Bath open but need to take out costs) is the same as that they gave to Terry's in York: commit to keeping it open and then close it after a few years and a further review.[1]

    2. A threat to the UK's science base and leading-edge research in GM and other food-related science areas

    Food security is coming to the forefront of the UK government's list of sustainability concerns and the UK's agricultural and food industries will have far more demanded of them over the next 10-20 years. This is already exercising many policy organisations and we are seeing calls from bodies such as The Royal Society for increased support for Agriculture and food research and teaching.

    The Global Science Centre for Cadbury plc is currently on the campus of the University of Reading where they employ over 200 people of whom about 130 are highly skilled graduate staff in a range of research disciplines. This centre interacts with the University's world-renowned Food Science and Agriculture departments and through joint research and other activities has contributed to the creation of a centre of excellence for the UK which attracts research investment and international students from around the world.

    R&D consolidation is identified in Kraft's formal documentation as an area for cost reduction in any merger and this could see all such activity transferred to the US into Kraft's own laboratories reducing the availability of funding for leading-edge food science research in the UK and reducing the availability of "knowledge economy" jobs in the UK in a core STEM subject of critical importance to national security.

    The wider policy issue is could or should government intervene in a commercial transaction such as this where the national interest in terms of maintaining and building knowledge economy jobs or critical skills such as engineering, biological sciences, genetic engineering etc could be undermined through actions taken by a new owner, regardless of where they are from? There may well be an argument where a company, listed on the London Stock Exchange (and in good commercial health) is acquired by a competitor to require any purchaser to protect assets of that company which are of strategic importance to the UK including a centre of skills which are critical to our long term national security. I would define security here to embrace the concept of security based on economic stability which would require certain key skills to be developed and retained.

    3. A potential risk to the UK's international reputation as a centre of responsible and ethical business

    Cadbury plays a prominent role in building of the UK's reputation for ethical and responsible business in some areas of the world where the UK has a significant interest in maintaining and sustaining its economic and political influence. This has been maintained through its distinctive values and how these have been employed in day-to-day business practice in Sub-Saharan and Southern Africa, in Australasia, Asia and North America. In particular their commitment to ethical and sustainable practices in cocoa production and their endorsement of the Fair-trade movement are major symbols locally in Africa and world wide with consumers of a UK brand that stands for the business values the government has long espoused.

    Cadbury has a long and creditable trading reputation with Ghana having set up the Cadbury Cocoa Partnership which invests for social good in that country.

    The prospect of Cadbury, known all over the world as the UK's chocolate, being run to the model of Kraft's approach to its consumer brands (for example its chocolate is not fair-trade, and they have rejected fair trade as a model for their coffee)[2] carries with it the risk that from supply to retailer the face of the UK is seen as less positively and this will impact more widely especially in areas of strategic importance to the UK such as India and Africa.

    The wider issue here is that of the pressures for continually upbeat result outcomes of a quarterly reporting system imposed on companies with a US stock exchange listing as opposed to that of a bi-annual reporting structure in the UK putting pressure on responsible business behaviours that may take longer to pay-off than a very short-term focus on costs and profitability.

    4. Another global head office leaves the UK and another global business delists from the London Stock Exchange (LSE)

    Whilst this is a relatively minor issues in terms of jobs (yet we should remember these are highly skilled "knowledge economy" jobs) there is an issue for the UK I believe in losing another global business from its shores and in losing another branded goods business from the FTSE 100. Without UK organisations being able to access debt funding to the level Kraft has been able to fund it to acquire similar assets in other markets there is an increasing imbalance and possible further incentives for global financial operations to drift back across the Atlantic or to find alternatives in Europe, the Middle East and Asia.

    5. One of the funders of the takeover is the UK taxpayer

    Combined with a mix of the issues above, or indeed even potentially as the single biggest stand-out issue is any role for a major government-owned bank in providing debt funding for a formal hostile bid.[3]

    The role of RBS as a major provider of funds for Kraft has already been highlighted as an issue by MPs in a meeting with the Secretary of State late last year. It goes without saying that in any formal bid battle the irony of a UK bank, 84% owned by the UK taxpayer funding the acquisition of an iconic UK company by a US conglomerate, and not a very successful one at that, will be fully and continuously debated in the media.

    Given the shortage of funds being made available to UK business highlighted by the CBI's Director General in his new year message[4] the big questions for policy makers has to be this : why aren't RBS funding UK businesses to develop and grow when the money they are putting up has come from UK taxpayers? What is it about this deal that makes it more attractive to RBS's managers than the legions of UK businesses looking for more working capital?

  This last point raises the major policy issue on the role and motivation of fund managers and bankers in driving any potential deal through.

  Whilst there would be no opposition in my mind to a deal, even given the combination of the top four issues above, were the price to reach a level where any rational seller believes it impossible to refuse an offer, there is every chance that the price agreed by those who will act on behalf of the ultimate owners of the company (ie, the individual investors, insurance policy owners and pensioners/prospective pensioners) will not represent by a long way that which would be agreed in a perfectly informed market.

  This possible mis-alignment between the interests of the ultimate stakeholders in whose long-term interests the firm should be run, and those of the "intermediating stakeholders", who may hold shares on their behalf for shorter term motives may result in a less than ideal outcome.

  The obvious example of intermediating stakeholders would be fund managers (whether principal traders, pension fund managers or mutual funds). These intermediate stakeholders buy, hold, and sell stocks not only for reasons of changes in their underlying value, but also for shorter term motives—either bonus arrangements or, more professionally, because they have need for liquidity to finance other investments (or to cover other needs for cash). These shorter term motives would be sufficient to encourage the sale (or purchase) of stocks even in circumstances where the stock was trading at below some assessed fair value—essentially a "fire-sale". Long term stakeholders would of course prefer to continue to hold the stock until its value rose again, but they would be overruled by the short term interests of the intermediating stakeholders.

  This would cause a fundamental conflict between the interests of the firm itself and those of the middle men—and one that could well result in the destruction of asset value, to the detriment of the stakeholders and the economy. The current liquidity and cash positions of such stakeholders, and the drivers of their own bonus plans may well come together to create such a negative outcome in this case.

  Both this government and the previous one have committed themselves to the concept of a "share-owning democracy" where they encourage all citizens to invest as a form of accelerated saving for their future (particularly their old age) through individual or collective portfolios. Indeed this government has increased this involvement by insisting owners hold the managers of those businesses to closer account (for example through the voting on the remuneration report).

  The irony of the deregulation of financial markets coupled with the explosion in collective investment vehicles for long term saving (including ISAs) is that we are even further from a real share-owning democracy than ever. Indeed with the power and influence of a small number of fund managers what reform has created is a share managing autocracy where the few make all the key decisions on behalf of the many, with no recourse to the views or interests of the many.

One final thought ...

  The ultimate irony for any government would be the sight of the corporate banking team at RBS or any other government-owned institution being paid multi-million pound bonuses for funding the acquisition of a UK company by a US conglomerate at a price that failed to reflect real market value with an outcome that damaged the long term interests of the UK economy.


  Professor Bones worked for Cadbury Schweppes from October 1999 to December 2004 as Group Organisation Effectiveness and Development Director. He was responsible for change management, communications (including corporate communications for a period of time), leadership development, capabilities and skill development and knowledge management. He reported to the Board and was involved in its major business activities during that period, in particular the acquisition of Adams Inc. and the subsequent restructuring of the group organisation.

  Professor Bones still holds c5,000 shares in Cadbury plc and is a deferred pensioner.

  Professor Bones is Dean of Henley Business School at the University of Reading. As Dean he is a member of the Senior Management Board of the University, its Senate and its Council.

5 January 2010

1   The York chocolate maker was bought by Kraft in 1993. Twelve years later the American food giant decided to close the factory with production being moved overseas to Poland where interestingly Cadbury has already indicated production is moving from Keynsham. The 27-acre plant still stands empty to this day. (ref BBC News Back

2   Kraft Web Site: "The standards for coffees to be certified sustainable by Rainforest Alliance or obtain the `Fair Trade' mark are similar. However `Fair Trade' provides a fixed minimum price for farmers, and as such, operates outside the normal trading system. By supporting Rainforest Alliance certified sustainable coffees, we help farmers reduce costs, gain efficiencies, improve quality and become more independent, self-sufficient and competitive within the existing market system as well as having access to a premium market."

3   RBS is one of nine banks that Kraft says are ready to lend a total of 5.5 billion pounds to finance a deal. Barclays and HSBC, which have not received direct capital injections from the government, are also on the list. Back

4   "Conditions at UK banks have improved significantly since the summer, with a sharp rise in their key capital ratios. But there could be more aftershocks to come from the global credit crunch; the process of regulatory reform has hardly begun; and the transition to more robust funding structures is likely to be both slow and expensive. In the meantime, net lending to companies is still shrinking, and business investment remains very weak." Back

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