Kraft and Cadbury, Victors and Spoils

Barring any last-minute surprises, Kraft, the world’s second-largest food company, will swallow UK-based Cadbury. Barely a month after deriding Kraft as an “unfocused” conglomerate and declaring “There is no strategic, managerial operational or financial merit in combining with Kraft”, Cadbury Chairman Roger Carr announced that the price was right. He praised Kraft for its commitment to “our heritage, values and people throughout the world”…and acknowledged the inevitability of job cuts.

In finance, it is not always the swiftest who reap the spoils. Under growing pressure to meet investor “expectations”, Kraft eliminated over 19,000 jobs in 2004-2008 and took on huge amounts of debt to fund share buybacks. Until last year, when momentum slowed due to the financial hangover from the acquisition of Danone’s European biscuit business, the dividend was raised annually, even quarterly, while the company scrambled to meet earnings targets through progressive rounds of cost-cutting.

Cadbury moved more slowly to accommodate pressure for “shareholder value”, only shifting into high gear with the 2008 “Vision into Action” program which coupled increased dividends with plans to eliminate 15% of the global workforce. Because it financialized later, Cadbury’s balance sheets were in better shape when Kraft and the dealmakers began to circle the company. So in December 2009, as the jockeying over the takeover price continued to heat up, Cadbury announced that it would deliver even more to shareholders by slashing investment and ramping up margins.

The UK’s Unite, which fought to keep Cadbury independent and warned that a heavily leveraged takeover would inevitably encourage asset-stripping and job losses, now has to confront the weight of even more debt: over 7 billion borrowed UK pounds out of the purchase price of GBP 11.9 billion (USD 19.4 billion). That burden will weigh not only on Cadbury, but also on workers throughout Kraft’s global operations, who will have to build a global defense.

Cadbury top management can enjoy their windfall, financial advisors on both ends of the deal will pocket millions and the hedge funds who loaded up on Cadbury shares (and who now own some 30% of Cadbury stock) as the takeover war raged can cash in their chips and turn to short selling Kraft.

It is easy, but ultimately pointless, to accuse people like Roger Carr of treachery. He has a long history of presiding over company breakups. Business is business, and company bosses have a “fiduciary obligation” to do the deals on behalf of shareholders. But it is hugely relevant to question the meaning of “investment” in a world where “investment banks” have no stake in the companies on the receiving end of the deals, when “investors” buy and sell shares with a perspective which has been compressed from years to days and even minutes, and when pension funds ostensibly acting on behalf of employees’ long term interests are increasingly indistinguishable from traders motivated solely to increase their assets under management. The only group with a long-term investment in the future of their workplaces, it would appear, is the workers who build the businesses. The Cadbury deal shows just how few cards they hold – and what has to change.