Memorandum submitted by Professor Christopher
Bones (Dean, Henley Business School)
CADBURY PLC:
A PERSONAL VIEWPOINT
ON THE
ISSUES SURROUNDING
THE FORMAL
KRAFT OFFER
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.
DECLARATION OF
INTEREST
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
http://news.bbc.co.uk/local/birmingham/hi/front_page/newsid_8426000/8426447.stm) 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."
(http://www.kraftfoods.co.uk/kraft/page?siteid=kraft-prd&locale=uken1&PagecRef=2311&Mid=2311). Back
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. http://www.foxbusiness.com/story/markets/industries/finance/mps-try-stop-rbs-financing-kraft-deal-report/ 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."
http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/9a73f81d376a8bb680257696003abaff?OpenDocument Back
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