Do we need a 'Cadbury Law' to protect British companies?
James Moore examines the pros and cons of changing takeover rules in the UK
Thursday 10 June 2010
Proponents have taken to calling it the "Cadbury Law" – the creation of a new takeover framework that would make it more difficult for an opportunistic predator like Kraft to gobble up a perfectly viable and profitable business such as Cadbury's by exploiting Britain's takeover rules. The first major survey of corporate Britain on whether the rules should be changed, however, reveals that businesses are sharply divided. DC Advisory Partners, a boutique investment bank, quizzed senior executives at 100 UK companies with a combined annual turnover of more than £290bn. Half of them wanted a Cadbury Law, and half did not want any change.
The timing of the survey is particularly apposite – for a start, the Takeover Panel is conducting a consultation on the current rules, with another review promised by the coalition Government (Business Secretary Vince Cable has spoken in favour of a Cadbury Law).
There's another equally pressing reason, though: the weak pound. Emerson Electric might have been rebuffed in its attempts to take over Britain's Chloride Group after the latter found a white knight in the form of Swiss electrical engineering company ABB (although this one's not over yet). But analysts are predicting another string of takeover bids as corporate America takes advantage of sterling's weakness to sweep up a bevy of British companies on the cheap. Some 72 per cent of the executives surveyed by DC expect there to be an increase in the number of UK firms acquired by foreign-owned companies unless the takeover rules are changed.
The fall of Cadbury is still hugely controversial and has led to accusations that Britain's takeover code is weighted too heavily in favour of the bidder. Critics argue that Kraft, a hostile bidder, was able to string the process out long enough so that Cadbury's shareholder register became filled with short-term investors, such as hedge funds, who would be willing to accept any bid to make a quick buck with no regard to the business's long-term prospects or value.
But DC argues that the long-termers didn't have to sell to them, and it said: "Any changes that reduce Britain's international competitiveness and damage Britain's standing as a place to do business to international investors and companies has got to be a bad thing, and will be harmful to both the UK economy and the exchequer in the long run."
DC also points out that while Cadbury's the brand was British, the company was actually a multinational that was headquartered in Britain with, pre-bid, 53 per cent of the shares held by US institutions, against 37 per cent held by Britons. The chief executive was American and revenues were split 25 per cent UK against 28 per cent US.
Of course, investment banks like deals because they generate fees. TUC general secretary Brendan Barber says: "Any review of current regulations must lead to a change where bids can only go ahead subject to an assessment of the long-term impact of any takeover on the company. At the moment, shareholders make the decision based on the share price alone, with scant concern as to the effect the acquisition of the company will have on jobs or the surrounding community."
As for the investor groups, they are more wary of some of the radical changes that have been suggested. Michael McKersie, the assistant director of investment affairs at the Association of British Insurers (ABI), says: "It's absolutely right that the Takeover Panel should consult on whether we have the right system and whether the rules are balanced. But we are quite clear that 50 per cent is the right threshold for securing control of a company. If you've achieved 50 per cent plus one, then you have won. We are also concerned about the dangers of creating two classes of shareholder, one of which can vote and the other that can't."
Business groups are keener on reform. John Cridland, the deputy director-general of the CBI, said: "The Cadbury takeover highlighted that the shareholder base of many British companies has shifted markedly in the last decade to one of international share ownership. The most important priority is to strengthen the incentive for long-term equity ownership in the London market. In the area of takeover rules, where lots of ideas have been floated, the CBI would be very cautious about radical changes because of the unintended consequences they could have. But one idea worthy of scrutiny is that to vote, shareholders should have acquired their shares before the onset of a bid situation."
Mr Cridland's plea for measures to encourage more long-term UK shareholders – the power of British institutions has been falling markedly – is where he would find common cause with the ABI. Without them, a Cadbury law might prove fruitless.
The most controversial takeovers
For critics, this deal is the poster child for everything wrong with the way mergers and acquisitions are conducted in the UK. Kraft, whose shares had been flatlining in the US, laid siege to Cadbury for months before launching a hostile bid that resulted in an £11.5bn takeover. They outraged almost everyone (even censured by the Takeover Panel) after they went back on their promise to keep open the Somerdale plant, near Bristol.
The Spanish company's debt-fuelled £10.3bn takeover would not have been allowed had the nationalities been reversed. The performance of the airports in the months following it hardly helped the public's mistrust of Britain's "open-doors" policy.
The French and Germans came in and took over much of Britain's energy infrastructure. Price rises swiftly followed.
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