Leading article: A takeover that could still turn sour

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The Independent Online

Cadbury's capitulation to the advances of the American food conglomerate Kraft has dislodged a healthy dollop of chocolate-coated sentimentalism here in Britain. One member of the Cadbury family reacted with horror yesterday to the acquisition of this 186-year old confectioner by "a plastic cheese company".

Such snobbishness need not be taken very seriously. It is true that Cadbury, with its Quaker roots, has a distinguished history of philanthropy. But the reality is that the days in which the company revered ethics as much as profit ended long ago. Cadbury is now a hard-nosed multinational conglomerate in its own right, albeit a significantly smaller one than Kraft.

The concerns over the future of 4,400 Cadbury UK jobs, the bulk in Bournville and Somerdale, do deserve to be taken seriously. But despite the admission yesterday of inevitable job cuts at Cadbury's Uxbridge head office, it seems alarmist to argue that Kraft is set to impose savage cuts on British operations. Kraft's true target has always been Cadbury's foothold in developing countries such as India and Mexico, rather than its British operations. And that is where the focus of Kraft's management is likely to be.

In any case, the fact is that businesses in Britain floated on the stock market (as Cadbury has been) are for sale to anyone with the money to buy them, regardless of nationality. Successive governments have ensured that Britain's economy is fully open to all investors, with no restrictions on ownership. Whether one agrees with that policy or not (and this newspaper believes the benefits far outweigh the costs) it would be ridiculous for the Government, having sanctioned the sale of airports and power stations to foreign companies, to block the sale of a a confectioner on the grounds of national interest.

A better reason for concern over this acquisition is not history, sovereignty or jobs, but the questionable commercial logic behind it. Kraft has paid a considerable price to acquire Cadbury and will need to borrow $11.5bn to finance the takeover. Kraft's management will have to increase revenues significantly if they are to justify that outlay and make good on the bold promises made to their own shareholders. That is a considerable challenge.

And it might work out. The world's most successful investor, Warren Buffet, for one, believes that Kraft has plenty of scope for growth. He intervened to ensure that Kraft did not mint too many new shares to make this purchase because he believes the US firm is undervalued.

But nothing is guaranteed. And concerns linger that Kraft's management, cheered on by bankers and lawyers and fired by a hubristic ambition to become the world's largest confectioner, have bitten off more than they can chew. Never mind emotive issues about national ownership, when managements start to consider size more important than a clear-eyed assessment of the possibilities for profit that is the time for alarm bells to start ringing.