Leading article: The case for regulating takeovers grows stronger

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The Independent Online

Chocolate nationalism has died down. More than year after Kraft's takeover of Cadbury in a £11.5bn deal, no one notices anything different about their Dairy Milk bars. British chocolate seems to be safe from Americanisation.

But a bad taste lingers nevertheless. Yesterday's report by the Commons Business Select Committee into the takeover criticised the Kraft chief executive, Irene Rosenfeld, for repeatedly refusing to appear before it. Kraft's closure of Cadbury's Somerdale factory, near Bristol, last year has also created bitterness.

Kraft has certainly behaved less than impressively. Before the takeover, the US food giant had pledged to keep Somerdale open and protect 400 jobs there in order to assuage those concerned about the consequences of the deal. Kraft's failure to honour that commitment was a clear breach of faith.

Yet demands from some quarters that such takeovers should be banned in the name of safeguarding British jobs is dangerous. For a start, we cannot be sure that those jobs at Somerdale would have been saved if the takeover had not happened. The factory might well have been closed anyway by Cadbury's previous management, which had long since ceased to be run by philanthropic Quakers.

Nor can it be assumed that a British-based company would have shown the committee any more courtesy than Kraft. The most compelling objection to the original takeover was not related to jobs, but business. Big-money corporate takeovers usually end up destroying shareholder value, rather than enhancing it. Promised synergies fail to materialise.

Those at the helm of vast, unwieldy corporate giants tend to struggle. From the disastrous merger of AOL and Time Warner to the empire-building of Fred Goodwin at Royal Bank of Scotland, we have had ample evidence of how these supposedly brilliant deals often turn out to be anything but.

In the wake of the Kraft deal, the Takeover Panel (backed by the Business Secretary, Vince Cable) announced that it would look into modifying the rules governing mergers. Measures such as raising the minimum acceptable voting threshold and restriction of fees to bankers are being considered. A report is due to be released later this year.

This investigation is justified. At present, rumours of a takeover tend to result in heavy buying of shares in the target company by hedge funds and other hot money investors. These investors then have a stark interest in voting through the deal, since this enables them to realise a quick profit. Longer-term shareholders, who might have objections, often find themselves outvoted. The fact that influential investment banks have a vested interest in seeing takeovers consummated (thanks to the fees they generate) also makes it more likely that the concerns of long-term shareholders will be drowned out.

Of course, those who subscribe to the theory that financial markets are always efficient will have a problem with any official interference in this area. But having witnessed the largest market failure in a century, which came to a head spectacularly in the 2008 financial meltdown, these objections should not prove overwhelming. We should have learned by now that rampant speculation is not always in the public, or even private, interest.

It remains to be seen whether Kraft's takeover of Cadbury will create or destroy value. As the Commons business committee points out, despite the reversal over Somerdale, there has been investment by Kraft at Cadbury's Bourneville site. We will, in due course, see what Kraft's pledges to keep investing in the UK are worth. But Mr Cable would be justified, regardless, in throwing some sand into the wheels of corporate takeovers and privileging long-term investors over those out to turn a fast buck.