David Prosser: Jam today or chocolate tomorrow?
Wednesday 13 January 2010
Outlook The battle for Cadbury is turning into a case study of short-termism in the City. Kraft's bid may or may not undervalue Cadbury, as the British company insists, but it undeniably offers a premium of more than 30 per cent to the value of the shares before this saga began. Cadbury, meanwhile, insists there will be of plenty of jam tomorrow for shareholders prepared to ignore that juicy premium.
Judging from yesterday's update, Cadbury's promise is not an idle one. It genuinely is a well-managed business, one that seems to be outperforming Kraft on pretty much any metric you care to mention.
Still, how long would it have taken the confectioner's share price to hit the current levels without Kraft's bid? And more to the point, as investors weigh up their decision, how long will it be before the price tests these levels again if Kraft is ultimately unsuccessful, particularly if the US company raises its bids further?
Some of Kraft's offer, of course, consists of its own shares. But that doesn't mean Cadbury shareholders are being asked to change horses - to back Kraft's managers as better stewards of their money than those of the British company. Anyone who wants to cash in straight away can do so by selling Kraft in the market.
To put the dilemma a different way, it looks as if investors will make more money, in the long term, from maintaining Cadbury's independence. But could they make even more cash by taking Kraft's money straight away and then finding another investment opportunity? Very possibly.
It's easy to work yourself up into a lather about the short-termism of the City. But Cadbury shareholders, from pension funds to life insurance companies, are mostly investing other people's money and owe their ultimate loyalties to them. Or to put it more baldly, is your sentimentality about Cadbury sufficiently strong to pass up a quick buck for your pension fund, especially if that quick buck can then be put to good use somewhere else?
These debates are nuanced, and the answers to the questions posed may well be different if Kraft does raise its offer in the end (assuming Warren Buffett allows it do so). But Cadbury's shareholders will be aware that in addition to the positive effect of Kraft's offer on the value of the company, they have also benefited from the recovery of the market as a whole, which many analysts believe may be running out of steam.
Cadbury is a strong company that is getting stronger. In a straight race against Kraft, there would not be many takers for the American. But the lure of jam today, assuming one can find equally sweet alternatives to a holding in Cadbury, may just be enough to get Kraft over the line.
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