Why Britain needs to let Cadbury's go

By MoneyWeek Editor John Stepek Jan 19, 2010

John Stepek

Share with
friends:

Comments (10) Print this article

After a long draw-out bid battle, it looks as though everyone's new favourite company, Cadbury's, will end up in American hands.

The company has recommended a bid from US conglomerate Kraft (for the details, see the market update below).

We were sceptical that the deal would go through. But it looks as though Kraft boss Irene Rosenfeld had a bit more firepower than anyone gave her credit for. And fair play to her for avoiding the "mine's bigger than yours" macho posturing that you often get with these high-profile bid battles.

The news will upset a lot of people who don't want to see the company taken over by a foreign 'predator'. But should chocolate really be classed as a strategic industry?

What the Cadbury's deal means for the UK

You can see why the Cadbury's deal is stirring such strong emotions. The country feels repulsed by the not-very-convincing contrition and sheer greed of bankers, and the supine complicity of their shareholders. Robert Jenkins of the London Business School put it very well in a letter to the Financial Times.

"In the UK, banks have opted to pay a tax surcharge to the government rather than hold the line on remuneration to the benefit of shareholders." In other words, bank boards have decided that they're willing to pay the government "some £4bn-plus" rather than tell employees to take a hit to their bonuses. That's money which rightfully belongs to shareholders. But few of them seem willing to stand up and remind managers of that fact.

The Cadbury's deal also puts all the scaremongering about hedge funds vanishing overseas into perspective. As Anthony Hilton put it in the London Evening Standard last night, it seems stupid to be worried about the tax revenues lost from a few financiers running off to Switzerland, when at the same time a 150-year-old company is being taken over by a foreign firm. "The record shows that UK firms which pass into foreign ownership… very soon pay much lower corporation tax to the UK government. This is because their new foreign parent organises affairs so that what was a UK profit is subsequently generated in a country or a tax haven where the rates are lower."

So no wonder people feel sentimental about Cadbury's. A perfectly good British company, which actually makes something, is set to fall to a US rival. It's another triumph for devious financiers over honest hard-working manufacturers.

Who's to blame for the loss of Cadbury's?

So who's to blame? Many people pin it on the short-termist attitude of institutional shareholders. They generally aren't very patient. They want big returns now. Their long-term horizon starts at three years at the latest. Medium term is anything over 12 months.

Special FREE report from MoneyWeek magazine: When will house prices bottom out - and how will you know?

  • Why UK property prices are going to fall 50%
  • When it will be time to get back in and buy up half price property

Of course, it's easy to criticise the boys and girls in the City and they deserve a lot of it. But if we're honest, while individual investors might say they're happy to buy and hold a stock for 10 to 20 years, they aren't that patient either. Say you bought Cadbury's at 500p or 600p a share a couple of years ago. Are you really going to turn down 850p now? It's unlikely. Particularly if the chances are that the share price will dive if you do.

So like it or not, it's unrealistic to expect shareholders to do anything else other than to go for the bid. So then you're left with the option of deciding that certain businesses cannot be sold, or that certain buyers cannot buy them.

But then you're into the realms of protectionism, and centralised control. That's not a very efficient way to allocate capital and resources. So you need a very good excuse to be protecting them from foreign takeovers. And regardless of how warm a glow the name Cadbury's gives you, there's no real reason to stop someone else from buying it.

Why entrepreneurship is the answer to Britain's economic woes

Entrepreneurs create companies. They create them for various reasons – to build up and sell, or to generate wealth for their families. Eventually, if these companies survive, they'll change hands. They'll either end up with the next generation, or they'll be sold into private hands, or they'll go public. At no point is the government directly involved (nor should it be involved) in that decision-making process. And once a company's gone public, you have to accept that you lose control of it. If Cadbury's had wanted to stay British, it should never have been listed.

But life goes on. A successful economy creates companies, builds them up, then lets them go. And the important thing is that this entrepreneurial process is given an environment in which it can thrive. That's why it's important to have a nice stable taxation system, and as little red tape standing in the way of business creation as possible.

That's why a warning from the British Chambers of Commerce (BCC) that new taxes and regulation will cost British firms £25.6bn over the next four years is such a worry. The group wants a three-year moratorium on new employment laws in the UK, and a campaign for an EU-wide moratorium. Of course the BCC is always going to talk up the interests of its members, but given the government's constant fiddling with the country's tax laws it's not hard to see their point.

And it's an important one. If there's one thing that can help Western economies get out of their debt-burdened holes and grow again, it's entrepreneurship. Our resident share tipster Paul Hill pointed out in a recent MoneyWeek magazine cover story that the best way for the West to fight back against the rise of emerging markets, was by exploiting its vast reserves of intellectual property and design expertise. If you missed it, you can read the piece below, and find out which stocks Paul thinks will benefit most. If you're not already a subscriber, claim your first three issues free here.

Our recommended article for today

Innovation – our best chance against the rise of the East

The West must use its superior intellectual property reserves to fight the growing global economic dominance of China, says Paul Hill. Here, he explains how to cash in.

Comments (10)

Published in Economics | More articles by John Stepek

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. Warwick

    (19 January 2010, 12:11PM)  Complain about this comment

    From a free market economic aspect John is right about Cadbury. However the world is not as free as the UK and the last time Kraft purchased a British company, HP sauce they closed the factory and moved to Netherlands. So no UK Corporation Tax and no jobs left. Fact is the sauce doesnt taste the same either so my bacon and eggs dont either. I cannot see anything positive about this takeover for the buyer of the product, the shareholders of Cadbury, or the UK.

  • 2. Clericus

    (19 January 2010, 12:29PM)  Complain about this comment

    Maybe a goodly proportion of the institutional investors John mentions are pension funds trying to close gaps caused in large part by the government. Given the shaky state of the economy, nailing down a few profits is quite understandable.

  • 3. Peter Kellow

    (19 January 2010, 12:43PM)  Complain about this comment

    “A successful economy creates companies, builds them up, then lets them go.”

    Tell that to the Germans, the French or the Japanese. When does John expect that these “successful economies” will be letting go of VW, Renault or Sony?

    Shareholders will always behave as John says – unless they are Warren Buffet. The problem is with the British banks. British banks are only interested in the short term and see the companies they loan to purely as cash cows. They never take shareholding in companies to show long term commitment to them.

    John, you keep reminding us of your libertarian agenda. But the problem all libertarians ignore is that there is no such thing as a pure market. We don’t have one anymore than the Germans do. The difference is that ours is completely dominated by the Multinational Corporate Finance. Theirs isn't.

  • 4. Disappointed, of Chancery Lane

    (19 January 2010, 01:26PM)  Complain about this comment

    What John says is only true if everyone else plays by the same rules as the Brits, which they don't. We denationalised our energy markets, only for them to be bought by nationalised companies from other countries - why should we have allowed that? Although I don't think buyers of Cadbury's should have been blocked per se, the way the buy-out is structured should be subject to tighter regulation.
    Precarious leveraged buy-outs, which is effectively what the Kraft bid has become, should not be permitted where the debt is loaded onto the target company. This will inevitably happen, destabilising a previously very stable company. I understand that other countries have much tighter restrictions on such deals, meaning that hot money inevitably floods into Britain. I just hope the competition authorities block the bid.

  • 5. Arlene

    (19 January 2010, 01:43PM)  Complain about this comment

    ~I think everything you are saying is what's wrong with the attitude to business in the UK ~ you are deluded!~we think we are on a level playing field and that we know best and god help us we are now suffering from that attitude within the banking industry!
    Everyone else just sees the UK as an apple ripe for picking whilst they make sure their orchard is safely locked at home.
    I foresee a time in the future when our kids will regret the selling off our utilities,airports and infrastructure when the scramble for water power and food becomes acute.
    We should stop selling any more our companies to foreigners now!
    ~yes it is good old protectionism that every other country employs to protect their national interests to certain degree except the UK~they all do what they can get away with~even in the EU~so who is stupid?

  • 6. Wickesy

    (19 January 2010, 02:17PM)  Complain about this comment

    Warwick and Peter are right. Kraft will make the usual promises to continue production in the UK and then move the bulk of the Cadbury enterprise to another country. Yet again, Britain will lose jobs, revenue and taxes.

    If that is considered good by John Stepek, are he and his publisher actively looking for a foreign buy for MoneyWeek ? After all, there are plenty of financial writers in other countries, many of whom would accept lower salaries that Mr Stepek.

  • 7. Simon Brady

    (19 January 2010, 02:20PM)  Complain about this comment

    A very interesting article about Entrepreneurs, unfortunately this country does not encourage the enterpreneurial spirit very well especially with the current tax system costing small business a fortune each year. The Govt like to say say they help small business, however from experience there was very little assistance available that was of use to our business when we set it up. We can fully understand why businesses consider managing their affairs overseas if they are paying less tax which allows an increase in profitability.

  • 8. keeldar

    (19 January 2010, 03:11PM)  Complain about this comment

    Cadbury's is (was ) synonymous with paternalism and loyalty , an icon and model . As near to an industrial mutual as you can get . It was not losing money ; had a rosy future . Now the sellout for the quick buck , recommended by the Board of Directors .
    Hopefully Bournville Village will endure , if only as a living museum .
    The cricket ground and the tennis courts ? Not so sure .

  • 9. Mark Staton

    (19 January 2010, 05:07PM)  Complain about this comment

    Rubbish, I am afraid John. Yes, in an normal "functioning" economy companies are formed, grow and then are bought up by bigger fish, leaving space for more small business. This is not happening at the moment, everything is stagnant and the big boys are just going after the things that they wanted for years. We will lose hundreds more jobs which is just about the worst thing that can happen, you speak as if all is normal in the world and what we are seeing is normal economics, this is just more greed.

  • 10. Jan

    (20 January 2010, 10:51AM)  Complain about this comment

    In my point of view American's are going to eat us alive.They print they money as they wish and don't care about hard labour.Those elewen billins is not much to print for them and buy whatever they like.

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>