The Hedge Fund Merger-Men move in on Cadbury: Is this really socially useful activity?

By David Bailey on Nov 12, 09 10:56 PM in Manufacturing

News that hedge funds have piled into Cadbury shares risks undermining the board's defence of the firm. Hedge fund manager John Paulson has increased his stake in Cadbury shares over the last few days and now owns a 2.54% stake. Overall, hedge funds are believed to now control something between 14% and 25% of the firm's equity, depending on which city source you believe.

Of course, the hedge funds have no interest in long term sustainable growth for the firm. They are at the sharp end of short-termism. They have bought in the hope of selling at a higher price in a takeover. That means a bigger group of shareholders now exist who will be willing to (a) abandon ship for the right price, and (b) put pressure on the board to accept any improved offer.

Of course, if management somehow manage to tough it out and see off the US corporate raiders then the hedge fund 'merger arbitragers' (or 'Arbs' for short) would dump the stock, leading to a share price slump. That in turn increases the risks for committed long-term investors, thereby worsening their risk-reward calculations, making it in turn more likely that they sell out if an improved offer comes in.

As the FT - a supporter of the free market - noted this week "it would be tragic if a cogent defence of Cadbury on fundamental grounds was undermined by traditional fund managers selling out in order to pad their end-of-year returns". Quite.

Whilst Cadbury this week described the Kraft offer as "derisory", the ominous presence of the Arbs could make it much harder for Cadbury to control its own future. The Arbs' sole aim here is to profit from the spread between the target's (i.e. Cadbury) share price after a takeover announcement and the closing price at deal completion.

Apparently this is all seen as illustrating the growing confidence the hedge fund industry is experiencing, with funds appear to be regaining their appetite for risk. Great, eh? Er no. Takeovers usually fail and can bring with them not only corporate damage but also social damage.

This is socially wasteful activity in my view, and its resurgence reinforces calls for a tax on financial transactions - the latter would throw some sand in the wheels of the short-termist financial markets and allow some breathing space for efficient managers (like those at Cadbury) to run the company in the long term interests of shareholders and other stakeholders.

And it isn't just hedge funds piling in either in the hope of a quick buck. Credit Suisse, the investment bank, increased its stake from 5.99% to 6.3%. Such investors are basically betting on a higher bid from Kraft or another firm.

One final twist comes in the form of the British state owned bank RBS providing financial support for the Kraft bid. The thought of us as taxpayers bailing out a hopelessly run bank so that it can then support a US multinationals' attack on a well run British based firm would have beggared belief 18 months ago. Not now, given the weird and wonderful world we live in.

Of course the government repeats the mantra 'we don't want to be bankers'. No - it is just bank-rolling their socially destructive activities. This isn't really what I hoped for when I paid my taxes, and reflects the naivity of labour's great banking bail-out. The latter is something John Clancy and I have blogged on repeatedly (see here for example).

Professor David Bailey works at Coventry University Business School.

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4 Comments

Swampy said:

"The thought of us as taxpayers bailing out a hopelessly run bank so that it can then support a US multinationals' attack on a well run British based firm would have beggared belief 18 months ago. Not now, given the weird and wonderful world we live in."

- you said it prof. I wander why i get out of bed sometimes when i think my hard-earned money is just being sloshed up against the wall by this gov. What about the tories, would they do anythin different?

November 13, 2009 10:53 AM

David Bailey said:

cheers swampy. I can't see the Tories tackling the crazy takeover culture we have and regulating the City, can you?
Of course, we used to have a 'public interest' element in our competition policy that could be used in such case but Labour - was it Stephen Byers? - took this away. Big mistake, me thinks.

November 14, 2009 10:43 AM

Amoree said:

Please take a look at the website www.savecadburys.co.uk to see how much the 'British' Cadbury Board think of us Brits and the company - American millionare Stitzer is the Cheif Exec and is closing Cadburys Somerdale (281 year old proitable and productive choc manufacturing) to send to Poland, just to bring it ALL back HERE as the British public are the only ones to eat it.

November 16, 2009 8:18 PM

David Bailey said:

Hi Amoree,I'm not saying that Cadbury management are perfect, but I simply don't believe Kraft's so-called assurances on the Somerdale plant when they are looking for at least 625 million pounds of cost savings and (and maybe up to 1 billion pounds in reality). where will the savings come form? Plus long-term they will have no commitment to the UK.

November 17, 2009 10:33 AM