James Moore: Shareholders can't allow Kraft to win

Outlook: If you let a predator take over a company in your portfolio at beneath the market price, others will try the same tactic
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The Independent Online

If ever an explanation was needed for why the City makes so much money, just take a look at the takeover battle between Kraft and Cadbury.

If the latter had been under any real pressure from its shareholders to surrender to its US suitor's advances, chief executive Todd Stitzer and his team would have been forced to the table weeks ago and it would now be all over bar the shouting. That this hasn't happened speaks volumes.

And yet, goaded on by a veritable army of advisers, Kraft has nonetheless launched a hostile takeover bid, at almost exactly the same price that Cadbury emphatically turned down at the beginning of September. That was when talks between the two firms were terminated and Kraft went public with its interest in a vain attempt to keep its target at the table.

In fact the offer is worth about £400m less than the original proposals because of the way Kraft's shares have performed during the phoney war that has existing between the two companies for the past two months (never a good sign).

Crucially it is also pitched at significantly below the price Cadbury's shares are currently trading at.

Kraft's argument is that Cadbury would be worth much less if it hadn't been on the scene and that, in the absence of any real interest from potential counter-bidders, shareholders should just accept its terms and have done with it.

No doubt its advisers have come up with all sorts of clever reasons why this should be the case, which will be aired ad nauseam at roadshows up and down the country during the coming weeks.

Clever they might appear to be when illustrated graphically by the company's whizzo Powerpoint gurus. But they ignore simple common sense.

If you are a short-termer who wants to get out of Cadbury, you can do it now at a price higher than the offer. So why stick with it?

Longer-term holders also have little to gain from accepting Kraft's terms. They know that if Mr Stitzer can't deliver on his promises, Kraft will still probably be around, and if not, so what?

Cadbury has an enviable portfolio of brands, the sort of properties that don't come on to the market very often. If it needs a new owner to rescue it, there will be plenty of suitors waiting in the wings, whatever Kraft would like to believe.

But there's a more profound reason than that for long-term holders to say no. Tabling takeover bids at below the market price of a company's shares has been tried before. Just look at the exchange on which Cadbury's shares are traded. Macquarrie, the Australian bank, and Nasdaq used the same arguments Kraft is using when they tried the same tactic on another company with an iconic brand: the London Stock Exchange. The LSE's shares duly responded by climbing higher and higher.

Shareholders were doubtless aware that the shares were primed to fall when the dust had settled and the bidders had been seen off (they did just that). But it was contrary to their long-term interests to surrender the LSE. They knew then what they know now. If you let a predator take over a company in your portfolio at beneath the market price, others will try the same tactic. That is not something you want to see.

And yet none of this appears to have registered with Kraft's management, who appear willing to pay tens, and perhaps ultimately hundreds of millions of dollars of their investors' money in fees to legions of bankers, lawyers, accountants and PR advisers who will be employed to keep this whole sorry show in the road. A show that will seem more like a farce by the time it has finished and the dust has finally settled.

Long term, Mr Stitzer still has to prove that Cadbury has a viable future as an independent business. Like it or lump it, his company is in play. But Kraft is adding nothing to this debate with its derisory offer. All it is doing is wasting everyone's time, together with an awful lot of its own money.

If Kraft is really serious about Cadbury's it has one option open to it. Pay up.

Bankers hold the whip hand and know it

It's really no wonder that the financial services industry is laughing all the way to the bank. Just months after the worst financial crisis for a generation (or two), it's back to business as usual for the men in pinstripes while politicians fumble and fight over what to do about the mess, goaded by a furious electorate.

It was with an eye on just that electorate that Gordon Brown was out and about at the weekend with a plan for a levy on every transaction (the "Tobin Tax") to pay for future bailouts. It's a notion that's gained some currency in Europe but goes down like the falling pound in the US. Which means that it stands about as much chance of a banker saying "I'm really sorry" and meaning it of being adopted. And therein lies the problem. As the British Bankers' Association is so fond of pointing out, if you want to reform the banking system, it needs to be done internationally. Our politicians can stomp their feet up and down and come up with as many bright ideas for change as they like, but they are fully aware that most of them will never leave the starting blocks. They know that if they go too far, the banks will hot-foot it out of the UK along with half the City of London in favour of a more sensible (read softer) regulatory regime, taking a hefty slug of tax revenues with them.

In a speech yesterday the chief executive of the Financial Services Authority, Hector Sants, said there were limits to what the watchdog could do, and meaningful change would only happen if regulated firms show a commitment to it. A commitment he doubts. And he's right.

One way or another, we may well all find ourselves back here again, and quite soon. Because the bankers have us all over a barrel. And oh how they know it.

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