The Kraft-Cadbury deal has an air of ABN Amro about it….and makes about as much sense
The old Not Born Yesterday site wrote of RBS’s acquisition of ABNAmro at the time, ‘If this is all about the size of Freddie Goodwin’s dick, then he must have a small one – and it must be where he keeps his brain’. It was one of our better bits of unpleasantness – and not entirely gratuitous.
Three years ago, John Birger wrote in Fortune magazine, ‘Experts who study mergers and acquisitions know deals have a dark secret: most of them do nothing for shareholder value.’ He’s right: the Economist surveyed the M&A sector six years ago and discovered almost exactly the same thing – two thirds of deals destroyed shareholder value.
Having for my sins been through two acquisitions as a victim and three as the predator, I can tell you it’s not hard to work out why: management gets hopelessly distracted, the CEO gets tumescent and pays too much, and the victim good-guys leave within a year.
There are many reasons why M&A deals are done. One is that merchant banks need them to happen: I am on the record in 2006 (in Market Leader) as pointing out that, Lehman was over-dependent on M&A assignments and expertise. But the biggest driver by far is the ‘pissing contest’ factor. Business week, again in 2007:
‘When grand thinking is applied to the mergers-and-acquisitions arena, disaster often ensues. Multibillion-dollar deals are based on personal relationships and egos, grandiose plans for so-called transformational changes to an industry, and a sense that the new sum will be far greater than all the previous parts…’
Or in other words, it’s really a pissing contest. Kraft CEO’s Irene Rosenfeld has a powerful reputation as a marketer, but it’s hard to see why she wants Cadbury…..beyond the fact that arch rival Nestle grabbed Rowntrees a few years back.
Warren Buffet owns 9.4% of Kraft, and he opposes the deal – on the bases of too much share dilution, plus an unwillingness to give Rosenfeld a blank cheque to raise her offer. Given that since she announced her plans Rosenfeld has already upped it by 70%, you can sort of see where the old Buffer is coming from. Ferrero Rocher too has pulled out of the bidding. They see it as too distracting, too expensive and too unfriendly. Respected US business professor Robert Salomon on those issues:
‘M&A tends to go awry when well-run orderly deal machines are thrown off kilter by volatility or emotion…’
It does indeed. And as the price goes up, greed gets a grip of victim shareholders. It’s one of the strongest anti-M&A arguments: remote shareholders after a fast buck rather than the good of the company. Last year – if we’re being fair to corporates about this – McKinsey was able to claim:
‘…the percentage of deals that fail to increase shareholder value has declined in recent years, from 65 percent to 50 percent. Companies are learning from their mistakes…’
Hmm. Pardon the pun, but ‘Big Deal’ is my reaction to that. And I’m unconvinced by the ‘learning from mistakes’ line: I’ve combed the columns of the business press over the last month, and to my mind we’re still a rationale short of rationality as far as the Cadbury acquisition goes. This is the best the FT has managed to date:
‘Cadbury, which derives about 40 per cent of its revenues from emerging markets, is partly a way of boosting (Kraft)’s international presence’.
Is that it? Seventeen billion dollars to get into countries likely to default at any moment makes no sense at all. And just how big does Kraft need to be to get ‘presence’?
We must surely – especially in the light of the last eighteen months – start to ask ourselves just how much the world needs bigger and bigger, and one less competitor in the confectionery sector. Who is this good for: Kraft shareholders? I doubt it – as does Buffet. Consumers? Decidedly not: less competition is nearly always A Bad Thing.
This deal is all about Irene Rosenfeld wanting to be Numero Uno. But being Number One (as she should know as a marketing person) is about being the best in a way that delivers loyal brand franchises and higher margins. This is often nothing to do with being the biggest.
Go to Kraft’s notice-board site at the minute, and you’ll get a ‘not found’ message. In war, they say, the first casualty is truth. In big-bang acquisitions, the first casualty is sanity, followed swiftly by debate. This deal is a disaster waiting to happen.