Who gains from takeovers?

Sorry for the lack of posts over the last week or so. I have been out and about again. Still, a few long train journeys gave me the chance to catch up on some reading. The hullabaloo over Kraft’s takeover of Cadbury’s has kept me entertained over the past couple of days.

Perhaps there is so much fuss because, like Woolworths, Cadbury’s is a brand that a lot of us remember from when we were children. Seeing it go into foreign ownership is bound to cause a twinge of sadness. But there is no rational case for getting any more upset about Cadbury’s than any other business that has been taken over by foreign organisations. Over the past twenty years or so Britain’s airports, energy suppliers, steel makers, water companies and motor manufacturers have fallen into foreign hands. These industries are all more strategically important than the manufacture of confectionary. If the government did not step in to prevent their acquisition by foreign companies, there is no logic in it stopping the sale of a firm that makes chocolate bars. The people planning to demonstrate against the takeover will probably have a nice day out in London but that’s about all they will get.

Almost as futile are the protests of the shareholders. Both Cadbury’s and Kraft shareholders reckon they are being sold short by the merger. While this might sound a little counterintuitive, it is indeed possible for both sets of shareholders to get shafted during a merger. There are a few individual examples of successful mergers but most of the evidence over the last decade or so, both academic and anecdotal, shows that most fail to add value to the new company and many actually destroy value. The biggest mergers are the most value-destroying of all. All too often, the whole ends up being much less than the sum of the parts.

The mistake we often make when discussing takeovers is to assume that there is some kind of commercial logic too them. Sometimes there is but quite often there isn’t. No, as I have said before, the key driving forces behind takeovers are the egos of senior executives. Mergers are a power trip for the people who plan and execute them. The adrenalin highs during the chase are better than you could get from most drugs. Suddenly everyone wants to interview you. You go from single columns tucked away in the business section to big feature articles in the mainstream sections. You are there on the front pages, bestriding the world, with the fate of thousands of people and millions of dollars in your hands.

Of course, as well as the ego trip, takeovers can be financially beneficial for senior executives too, especially if they can convince their boards and remuneration committees that borrowing a shedload of money to buy another company somehow counts as growth. The bosses of the acquired companies often don’t do too badly either. But the people who are always guaranteed to make a killing are the investment bankers and advisors. They usually keep a low profile during the battle but they get fat fees for…erm…arranging things. Back in the olden days, before 2008, investment banks had lots of people who would search for companies ripe for takeover then approach potential acquirers among their clients and suggest that they make a bid. As the economy picks up, no doubt they will soon be up to their old tricks again.  

So you see, even though employees, politicians, journalists and shareholders might complain, for some people mergers and takeovers really are a very good thing.

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One Response to Who gains from takeovers?

  1. roym says:

    dont forget the contribution of raiding private equity and the like. once the whisper of Krafts bid was out, 25% of cadburys was snapped up by hedge funds. the game was over before it even started.

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