Kraft Foods’ takeover of Cadbury was only a quarter the size of last year’s biggest bids — BHP Billiton’s for Rio Tinto, for example — but the offer for the confectioner has assumed disproportionate importance and could permanently tilt the playing field for future British acquisitions, by protecting companies at the expense of investors’ profits.
Kraft Foods’ takeover of Cadbury was only a quarter the size of last year’s biggest bids — BHP Billiton’s for Rio Tinto, for example — but the offer for the confectioner has assumed disproportionate importance and could permanently tilt the playing field for future British acquisitions, by protecting companies at the expense of investors’ profits. The Takeover Panel is considering new ‘Cadbury Rules’ that would allow companies to keep their independence even when most shareholders want to accept a bid, and that could leave directors in control who are opposed by a majority of investors.
Cadbury was part of all our childhoods. But there have been previous bids that triggered emotional responses — BTR’s offer for Pilkington provoked protests on the streets of St Helens, Granada was branded an upstart caterer for buying LWT — without leading to changes in the Takeover Code. Yet a myth developed around Cadbury that made it a cause célèbre which could result in the most radical rewrite of the takeover rule book since the City panel started refereeing bids in 1968.
The fantasy that Cadbury was a quint-essentially British, family-run chocolate maker with Quaker values was promoted by its unions, repeated by the media and left uncorrected by its directors. The campaign to save it from American raiders thus grew under its own momentum. In fact, the family largely sold out when the company floated in 1962 and the last Cadbury retired a decade ago: the business makes more profit from chewing gum than chocolate and employs more people (and generates more sales) in America than in Britain. The chief executive was American. And institutional shareholders thought so little of Cadbury that they were inclined to sell out — mainly to Americans, who far outnumbered UK institutions on the shareholder roll. Yet once Kraft bid, Cadbury was declared part of Britain’s heritage. Never mind that the bidder was a fellow food company rather than an asset stripper or private-equity fund. And although unions and management had agreed in 2007 to move production from a Somerset factory to Poland, the jobs became an issue and Kraft got the blame, and censure by the Panel, for foolishly saying it would try to save the plant.
Without an imminent general election the Cadbury takeover might be just another lost bid battle, now forgotten. But its importance was pumped up when Labour ministers Lords Mandelson and Myners called for new rules to move the bidders’ winning line. Cadbury’s defeated chairman, Roger Carr, inflated it further by setting out new proposals for hindering hostile bids — even though it was he who built up the Williams conglomerate through acquisitions and only last year, as chairman of Centrica, launched a £1.3 billion hostile bid of his own for the oil company Venture Production. Vince Cable backed Mandelson before succeeding him: now the coalition’s programme includes a review of ways to control takeovers.
The Cadbury myth has set in motion a mighty machine. Squeezed from all sides, the Takeover Panel this month launched its consultation, asking whether future bidders should, as Carr and Mandelson proposed, win only if holders of two thirds of the target’s shares accept instead of the traditional majority of one share above 50 per cent. Should shares bought during bids lose their votes? Should hedge funds be disenfranchised? Ought bidders to state their long-term intentions? Should timetables be shorter? The consultation closes next month but early indications suggest most chairmen — perhaps more worried about receiving bids than making them — support such proposals. But despite sympathy for Cadbury, adopting these measures would damage investors’ interests. Shareholders should be free to sell during a bid to bank profits in case the offer fails, but if these shares become voteless they will sell cheaply, eroding the gain. And if the winning line is set at two thirds, owners of 65 per cent could accept but still be defeated by a 35 per cent minority — or indeed blocked by a single holder of 20 per cent because other shares bought during the bid were disenfranchised. Indeed, if just 36 per cent of shares change hands after the initial bid, an offer could never succeed.
Takeovers add to shareholders’ returns: not only actual offers like Kraft’s but bid rumours and prospects that buoy share prices. Protecting companies also protects bad managements. Making success harder will mean fewer successful offers. But how tenable is it for directors to continue in control when most shareholders have opposed their advice to reject an offer?
If MPs grumble at a 55 per cent threshold for dissolving parliament, investors should rebel against an even higher hurdle for bids. Companies already have a Cadbury code on corporate governance; adding Cadbury takeover rules based on a corporate fairy tale would be an overindulgence. A myth about a historic chocolate maker must not beget an all too real hindrance to bids that deprive shareholders of profits.