Leading article: A sweet deal for the economy?

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The Independent Online

Cadbury's strong performance in recent months shows that Britons have maintained their appetite for chocolate throughout the downturn. But does the takeover bid for Cadbury by the American food giant Kraft suggest that investors and corporations are recovering their appetite for large deals? The answer is ambiguous.

The food industry is something of a special case. It has traditionally been better able to withstand the headwinds of recession than other sectors of the economy. People tend to cut back on big ticket purchases and expensive holidays when times get hard, but they still have to eat. They also tend to find comfort in small treats such as chocolate.

The costs of the industry have also come down as global food commodity prices have generally fallen back. So before getting overexcited, we should remember that firms in the sector have always enjoyed relatively more freedom of movement during downturns. Also, many of the large takeover deals at the height of the boom were financed by the abnormally cheap credit that the banks were churning out. Those conditions are not going to return any time soon.

That said, the first unsolicited takeover bid from a blue-chip firm since the downturn hit could well be an indication that something approaching normality is beginning to return. Kraft's bid follows other signs of life in the corporate sector, such as Proctor & Gamble's sale of its pharmaceutical business for $3.1bn and Disney's acquisition of Marvel Entertainment for $4bn. When one considers that UK mergers and acquisitions activity hit a 40-year low this year, such signs of life are significant.

The size of the proposed deal (£10bn, which Kraft has indicated it will partly raise by selling bonds) highlights something else too. The availability of credit for larger companies has improved. Private money is coming in off the sidelines and investors are willing to lend again. The caveat is that it is still hard for viable smaller companies to get finance from banks. A strong recovery will remain elusive until that particular pipe is unblocked.

This takeover bid is a potential treat for Cadbury's shareholders, who stand to make a fat profit if it proceeds. But we shall have to wait longer to see whether it heralds significantly sweeter days ahead for the global economy.