Here Today Goo Tomorrow? Cadbury in the melting pot. We need to make takeovers more difficult.
Reports today suggested that the US chocolate firm Hershey is now contemplating going-it-alone in an effort to get its hands on the icon of British chocolate, Cadbury.
Analysts are suggesting that Hershey is looking at an offer of at least ÃÂ£10.2bn (or $17bn) to outflank Kraft's hostile bid of ÃÂ£9.8bn.
Hershey appears to have lined up financing from JP Morgan and Bank of America for such a bid. As noted last week, Hershey (which makes and sells Cadbury brands in the US, albeit sweetened for American tastes), has discussed a possible joint bid with the Italian chocolate firm Ferrero, but is now looking at going alone.
Hershey has eyed Cadbury before (notably back in 2008) and the appeal for Hershey is obvious. The latter is very much limited in its market appeal to North and South America, and is around just half the size of Cadbury. Cadbury would open up new markets in Europe and - critically - emerging markets such as India.
But two obvious questions arise: 1. Would it be biting off more than it can chew (excuse the pun) and 2. How would this impact on British jobs and production?
As a potential suitor, Hershey is probably a better bet than Kraft, as the strategic synergies between Cadbury and Hershey are more obvious. Kraft is - as Cadbury management rightly point out - a low growth conglomerate. But that doesn't mean that a Hershey takeover would actually work, or - moreover - that it would work in the interests of UK PLC.
There would of course be no real guarantees that production would stay in the UK. Indeed, in the US, Hershey has recently been shifting thousands of jobs to Monterrey in Mexico to cut costs.
Meanwhile, concern is growing over the behaviour of RBS, the British based-but-global bank which failed disastrously last year and has had to be bailed out at huge cost by taxpayers, and which is now helping to bankroll Kraft's hostile bid for Cadbury. Unlike other banks, RBS apparently left it until the last possible moment to tell Cadbury what it was doing.
As Ruth Sutherland notes in today's Observer, "RBS's defence is that it is a global operator and it has also had previous dealings with Kraft. Big deal. As a state-controlled entity, it should have been guided by the best long-term interests of UK taxpayers and stood behind Cadbury, not opted for Kraft and its insultingly low bid, in return for a quick fee.... this everyday tale of life in the banking sector illustrates much of what has gone wrong: lack of loyalty, lack of ethics and lack of long-term vision.
This chimes with a long-running concern of blogs here in The Birmingham Post that the financial system - especially now that it is in large part state owned - needs to be run in a way that benefits a wider section of society (notably households and businesses) than the current set-up delivers.
Oh, and let's not forget that most takeovers fail. They fail for shareholders let alone workers and society. They fail because of the disruption and organisational costs that they impose. They fail because shareholders, especially the hedge funds which have recently gobbled up Cadbury shares like a box of Cadbury Roses on Christmas Day - all too often lack long-term commitment and are too often willing to sell out for a quick buck without thinking about the long-term downside for them or for society
I've detailed in earlier blogs (see here) why takeovers usually fail. The upshot is that takeovers -especially hostile ones - need to be made more difficult so that efficient businesses can plan and invest long-term and grow their businesses organically.
Labour promised to do this before being elected in 1997. Blair backed off in the face of big business opposition. So, in response to blog comments, how could takeovers be made more difficult?
One way is through a tougher competition policy which scrutinises takeovers more carefully. The ÃÅber-Blairite Stephen Byers effectively dropped the public interest element of takeovers. That needs to be undone and the narrow focus on competition needs to be broadened to look as well at - for example - jobs, technology, the balance of payments, regional impact, and so on. Yes, that would mean more state intervention. That's necessary as the takeover system simply doesn't work.
Secondly, shareholders need to be encouraged to behave in a more long-term way. The sliding scale capital gains tax could be yet more tapered to foster longer-term shareholdings. A tax on share trades would dampen speculation and discourage hedge funds Arbs piling in. Cross-shareholding between firms could make takeovers more difficult (these were encouraged in Japan in the 1970s for exactly this reason). If need be, the concept of 'Golden Shares' (introduced by the Tories when they privatised assets in the 1980) could be used to protect key firms.
Corporate governance reform could give other stakeholders - like workers - a say so that decisions are not just left to shareholders. Germany's co-determination laws for example make hostile takeovers more difficult as the acquiring firm needs more than 50% to gain control. That is backed up by limited voting rights which mean that hostile bidders may be limited to gaining 5% of voting rights, thereby making them have to build a coalition of bidders to acquire enough rights.
The takeover code could be changed so that bidders have to signal at an earlier trigger point that they are looking to make a takeover and seek strategic control of the firm rather than simply a portfolio investment. At the moment, a shareholder must make an offer when its shareholding, including that of parties acting in concert (a so-called 'concert party') reaches 30% of the target. If this figure was brought down, the bidder would have to signal its intention earlier, giving management more time to defend the target firm.
And returning to the banking system, long-term equity stakes could be taken in firms by an industrial bank (which Brown promised us last year) so as to both give firms a long-term perspective and to offer the prospect of stable shareholders.
All of this amounts to 'throwing some sand in the wheels of financial markets' much in the same way that Tobin proposed for currency exchanges. Now that the idea of a 'Tobin Tax' is again being discussed, why not discuss how to limit the damage caused by takeovers? With a resurgent stock-market, takeover activity is likely to take-off again. Dust off your copies of The State We're In by Will Hutton. It's time to throw some sand in the wheels of the market for corporate control.
PS I'd like to stress again that I am not against foreign investment in the UK - indeed I welcomed the Tata takeover of JLR, which brought in a long-term, committed and principled owner to JLR. What concerns me here is the risk to yet another well run British firm now exposed because of the workings of turbo-charged capital markets.
Professor David Bailey works at Coventry University Business School.