Today’s breaking news is the improved offer by Kraft Foods for Cadbury and the likelihood that the proposed merger of the two companies will now go ahead. I wonder how it strikes you. Personally, I cannot help having some feelings of trepidation about the whole proposal.
No, it is not just a tinge of sadness at watching a two-hundred year old ‘institution’ being subsumed, or watching another major company fall into overseas hands. Rather it is a deeper curiosity as to the thinking behind the bid and a concern about the longer term outcomes. I cannot help wondering what the human cost will turn out to be.
Of course the sweetened bid is attractive for Cadbury shareholders. (Sorry, but the pun is absolutely unavoidable!) The offer is around 20-25% more than the share-price at the time the merger was first mooted, and they receive a substantial cash payment, as well as shares in Kraft. There may be some future risk associated with the latter, but it is not much more than they would have probably faced anyway. So it is extremely unlikely that they will not approve the deal.
On the other hand the deal is perhaps not so good for Kraft shareholders. Apart from a diluted stake in an admittedly larger organisation, they also face the risk of the enormous additional debt the company is incurring to pay the price. The debt level substantially increases the future risk.
Kraft directors are justifying their bid by promising future efficiency savings of $600 million p.a. within 3 years. As everyone knows only too well, efficiency savings are a management euphemism for plant closures and job losses. So such promises add to the uncertainty and erode employee engagement before the deal is even finalised. This makes the targets more difficult to achieve. Yet they cannot be revoked as management has to deliver them. This compounds the action required to do so, and exacerbates the problem. It is therefore hardly any wonder that statistics show very few mergers have delivered the benefits promised.
Consequently it is moot whether they really add value in the grand scheme of things, or simply transfer costs to the economies in which the closed operations and laid off people reside. I mean which is more preferable, for a company to make bigger profits for its shareholders by operating within this model of greater efficiency inspired by corporate self-interest, or for the company to operate less efficiently and provide livelihoods for a greater number of people. I guess no-one really knows the answer to that, and it in any case depends on where in the political spectrum your beliefs fall.
It is certainly not a debate I wish to get involved in here. I would, however, suggest that the question might be easier to answer if:
- The value tied up in people was also included in the balance sheet; and
- Management had a clearer idea of the value of the human assets they are dispensing with when they propose these “cost savings”.
This blog is one of several that I write, but is not regular and I only post to it when current events prompt me to make a comment and invite yours. I do hope you will contribute to the discussion and thus help to initiate and bring about the change that is so badly needed. Please click on the link on the top right of your screen to subscribe to a feed. My primary blog is my business one at Zealise but you can also connect to me at Facebook or Twitter