Chocolate Wars

by Deborah Cadbury

  The press was waiting for a statement. “The board of Cadbury unanimously recommends Cadbury shareholders to accept the terms of the final offer,” said a weary-looking Stitzer. “The deal represents good value for Cadbury shareholders,” assured Carr. The press was quick to point out that among those shareholders poised to benefit from the takeover was Stitzer himself, who reputedly walked away with an estimated £17 million ($25.5 million) in shares and options. “The strange paradox of this is that investing in the company I believe in, in the end actually was of benefit to me,” he said later. “I wasn’t in any way seeking an early end to my employment.”

  According to Carr, most shareholders “were very pleased with the price achieved.” Bankers and advisors in London and New York also benefited to the tune of £400 million ($600 million). Yet some shareholders had a muted response. Legal and General Investment Management, which held 5 percent of Cadbury’s shares, was “disappointed” that the price did not reflect the true value.

  Others were shell-shocked by the news. Felicity Loudon saw the outcome as “a horror story” and urged people to voice their opposition to their MP and the shareholders. On fan websites, British consumers were equally angry and outraged. “There should be a national boycott of Kraft-Cadbury,” urged one. Sites were launched to save the Curly Wurly and other beloved brands. There were financial analysts who thought the firm had been sold down the river. “Cadbury’s exit valuation,” said one industry analyst, “will rank as the lowest in the confectionery space by some margin.” The two grandsons of George Cadbury, Sir Adrian and Sir Dominic, described the news quite simply “a tragedy.”

  Irene Rosenfeld was all smiles. The glamorous winner in a red suit with a gold brooch, she told reporters that she felt “great.” Cadbury-Kraft combined was “a global powerhouse” with worldwide sales of £37 billion (over $50 billion). “Acquiring Cadbury is a significant milestone in the history of Kraft foods,” she said. “The combination of a more extensive snacking portfolio, together with an expanded global footprint and greater penetration of grocery and instant consumption outlets, creates opportunities that will truly set this company apart from its peers.”

  Mars and Wrigley had been knocked into second place. Rosenfeld stood at the helm of the world’s number one confectionery supergiant.

  CHAPTER 21

  Gone. And It Was So Easy.

  The hotly contested takeover of Cadbury was one of the largest completed acquisitions in British history. For many economists this is just part of an ongoing process that has brought immense benefits worldwide. Globalization helps lift millions out of poverty and distributes a wider range of products around the world at cheaper prices than ever before. In the chocolate industry, if the rationale that Kraft used to persuade Cadbury shareholders is correct and the projected synergies between the two companies are realized, then Cadbury becomes a leaner and more efficient organization and Kraft will sell more of its products overseas, creating opportunities for all Kraft employees. Investors enjoy higher profits, and chocolate goodies are produced ever more cheaply—at least that is the theory.

  Sir Adrian and Sir Dominic Cadbury warned in a letter on January 20, 2010, to the Daily Telegraph that a high percentage of takeovers do not live up to the bidder’s claims. Kraft’s record to date, they wrote, “is of underperformance and, in the case of Terry, of failing in their stewardship of the company they had acquired.” The two former Cadbury chairmen pointed out that the value of a company reflects its reputation built up over a lifetime and the consumer’s trust that the company and its brands are one. “Cut the tie and submerge the brands in a larger entity,” they wrote, “and both present and future value will be lost.”

  The difficulty of maintaining the culture of a company that is taken over is linked to the acquiring company’s debt load. In this case,

  Kraft assumed an estimated £7 billion ($10.5 billion) of debt to fund the takeover, raising its total debt to a reported £18.3 billion ($27 billion). This staggering amount of debt generates fears that Cadbury will be asset-stripped and put to work to service this debt. Despite assurances from Kraft that this will not happen, the premise of the takeover acknowledged annual efficiencies of £412 million ($618 million). “Nobody knows whether or not they can achieve it,” Sir Dominic says. “They were not obliged to show where all those savings are going to come from. They also claim the synergy with Cadbury is going to produce £650 million [$975 million], but the evidence for that is not on the table. Now if you borrow all this money and say you are going to be able to pay it off by making savings, it surely is more responsible to have a much clearer view of where those savings are coming from.” Hardly surprising then that the very stakeholders whose lives George Cadbury and the pioneers were at such pains to enrich are likely to lose out sooner or later—starting with the workers.

  Roger Carr himself warned that job losses were inevitable. Sir Adrian and Sir Dominic appealed to Kraft on January 20, pointing out that it had “accepted a duty to those working for the company.” And they urged Kraft “to live up to that responsibility.” Unite, the trade union that represents Cadbury workers, is concerned that up to 10,000 jobs in Cadbury worldwide could be at long-term risk. Under pressure to meet debt repayments, they fear Kraft will be more likely to cut jobs in Britain rather than on home turf in America. Unite claims that over the last ten years, Kraft has sacked some 60,000 workers to help pay for similar deals—a figure Kraft denies.

  But just a week after sealing the deal, Kraft confirmed the closure of the famous Cadbury factory at Somerdale that makes Crunchie and Curly Wurlys. During the takeover, Kraft had said it believed it would be able to keep this site open, unlike Cadbury. But in an apparent U-turn, four hundred jobs now had to go. “This sends the worst possible message to the 6,000 other Cadbury workers in Britain,” said Unite. “It tells them Kraft cares little for their workers.” Union leaders and MPs were outspoken about what they saw as cynical manipulation. “Kraft has tossed away promises on jobs like a torn-up sweet wrapper,” argued Liberal MP Matthew Oakeshott. “It has treated British parliament with contempt.”

  A House of Commons Business, Innovation, and Skills Committee was set up to investigate the U-turn, but Irene Rosenfeld failed to appear, sending Kraft’s vice president for corporate and legal affairs, Marc Firestone, in her place. “I am terribly sorry,” he said. He told a skeptical committee of MPs that Cadbury’s plan to close Somerdale was more advanced than Kraft had initially thought. He also pledged there would be no further cuts in Kraft’s UK manufacturing for two years but could provide no guarantees beyond that. The MPs’ report concluded that Kraft had acted “irresponsibly and unwisely.”

  The effect of the merger on the workforce is not simply worry over job security. Control of the firm will now pass from London and Bournville to Chicago. In today’s global village, the Bournville employees may rarely see their American management. Does this create an inspiring environment? “The danger is that people no longer see the reason for giving of their best,” argues Adrian. “A business which in economic terms is doing very well can lose the drive of the very people who are in it—you lose an economic benefit let alone the social implications.” It is easy to see how those whose lives are overturned by global forces beyond their control feel alienated and have low expectations. It is the opposite of what George Cadbury tried to achieve when he set out to improve a man’s lot by raising his hopes and ideals.

  The wider community, during George Cadbury’s tenure, benefited from the generous use of chocolate wealth to funds schools, hospitals, convalescent homes, churches, housing, swimming pools, games fields, the cricket pavilion, and even such meaningful touches as the Bournville bells. These enhancements contributed to the local community’s sense of unity and belonging. But in today’s global village, Birmingham is fast losing its proud manufacturing heritage, and there are growing ghettos within the city that no longer convey “that eager spirit of application” so admired by the Chambers Edinbur
gh Journal in 1852. The writer and columnist A. N. Wilson, whose father helped to create village houses for the Wedgwood workforce in Staffordshire, points out that the thriving communities created by enlightened nineteenth-century business leaders “lie in sad contrast to the antisocial attitudes of modern business magnates who think only of profit and the shareholder.” Writing in the Daily Mail on January 23, 2010, he argues, “The depression, the human redundancy in all senses of the word which has resulted from the globalisation of the market place has made us all come socially adrift,” adding, “We are all victims of the ‘hostile takeover’ of one kind or another.” Needless to say community leaders and Birmingham MPs campaigned against the sale of Cadbury in Westminster.

  There was anger too at the lack of action from politicians. Prime Minister Gordon Brown stated, “We are determined that the levels of investment that take place in Cadbury in the UK are maintained, and we are determined at a time when people are worried about their jobs, that jobs in Cadbury can be secure.” But he had no power to enforce his statement. The role played by the Royal Bank of Scotland was seen as a bitter betrayal. This British bank, which was 84 percent owned by the taxpayers after the government bailout during the credit crunch, joined the syndicate that funded Kraft offering a £630 million loan facility. “When British taxpayers bailed out the bank, they would never have believed that their money would be used to put British people out of work. Isn’t that plain wrong?” argued the Liberal Democrat leader, Nick Clegg, in a stormy House of Commons debate on January 20.

  Betrayal or not, the British government believes in an open-door policy with regard to foreign takeovers. Some economists argue this is to Britain’s benefit with takeover rules focused on value and a clear financial code that leaves decisions on deals to shareholders who all have equal voting rights whether they are short-term or long-term investors. For others, like former Treasury Minister Geoffrey Robinson, this is “a one-way street,” and too many British companies, especially in manufacturing, have passed into foreign hands: glass, steel, chemicals, and confectionery, to name but a few. How much closer to the truth is city columnist Anthony Hilton, who argues, “We have an economy dangerously skewed towards financial services,” and “the whole nation pays the price.” He points out that “investment bankers actively tout our companies around the world because one big bonanza can set them up for life.” Business Secretary Peter Mandelson too questions who benefits from such deals: “The open secret of the last two decades is that mergers often fail to create any long-term value, except perhaps for the advisors and those who arbitrage the share price.” The Guardian summed up the anger: “This is an old-fashioned Square Mile stitch-up, driven through by City short termists.”

  So how has this happened? For Sir Dominic Cadbury, at the heart of the issue is the changing concept of ownership inherent in our modern form of shareholder capitalism. In fact, he argues, “There’s no ownership concept,” at least not in the traditional sense of stewardship and long-term planning for a company that his Quaker capitalist forebears understood. The current system is far removed from the Quaker philosophy of business and “aligns too many people to be incentivised over the short-term.”

  “It comes back to the role of the shareholder—the shareholder is the owner of the business. But the difficulty with all this is that they are not acting as owners of the business,” he says. “There are thousands of shareholders in Cadbury who would probably have said they didn’t want to sell their shares and would have voted against. But they didn’t have a vote, because if you are the average shareholder, you don’t hold your shares personally; you hold your shares through your pension scheme or your bank. In the case of Cadbury, sixty fund managers made the decision.” But fund managers are under pressure to focus on immediate gain and short-term performance targets rather than long-term wealth creation.

  Hedge funds demonstrate the extremes of short-termism. “The hedge funds are ‘owners’ whose motivation is to see that the company disappears,” says Dominic. “By definition, they have no sense of obligation and no sense of responsibility for the company whatsoever.” Yet in this case, by the end of the bidding process, they “owned” more than 30 percent of Cadbury and were happy to sell for a 20p profit—a stark contrast to the dedicated Quaker capitalist founders who nurtured the company from its humble beginnings. This has to be the ultimate in the throwaway society. “One day you had the Cadbury company, the next day you didn’t,” says Dominic. “Gone. One hundred and eighty years of history down the tube, and I would argue 180 years of being a beacon of good practice. Something very precious got lost that day. Gone. And it was so easy.”

  Sir Dominic is not opposed to takeovers but questions how they are achieved. “Even the Chinese, in their Communist way, actually feel very seriously about ownership. They are not going to let ownership drift away,” he says. Traditionally takeovers have been a way of removing bad management, but in this case, many argue that Cadbury’s management team was more dynamic and effective than Kraft’s. Todd Stitzer concedes the outcome was not consistent with his view of principled capitalism. “I felt immense frustration because this company stands for everything that is right in business,” he said. “It stands for performance on the one hand in terms of reward for shareholders but also social and sustainable responsibility on the other hand.” The key, he points out, is to find the right balance between short-term shareholder returns and the long-term needs of the company.

  For some the takeover raised questions about the role of the company board. “Roger Carr was wrong when he said the Kraft takeover was all about price,” argues Mark Goyder, the founder and director of Tomorrow’s Company, a research organization. He believes the fiduciary duty of company leaders is to their company, not directly to the shareowners. “Neither the takeover code nor the general law imposes a duty on directors to recommend a bid on price grounds alone where they feel it isn’t in the best interests of the company,” Goyder told Director magazine. In a keynote speech to the city of London on March 1, 2010, Peter Mandelson, Secretary of State for Business, said that board directors should consider the interests of all stakeholders in a business: employees, suppliers, and a company’s brands and capabilities. He urged directors to act more like “stewards” rather than “auctioneers” selling to the highest bidder, adding, “If this requires restating the 2006 Companies Act, then so be it.”

  Roger Carr, who fought for the best price for shareholders all the way through the takeover, now questions whether the current takeover rules are fair. Speaking at the Said Business School on February 9, 2010, he acknowledged that “something has happened to the system that appears to tip the playing field to short-termism. . . . Whilst capitalism is efficient, it may be unreasonable that a few individuals with weeks of share ownership can determine the lifetime destiny of many.” Rather than the government “speaking from the sidelines on national interest,” they could use their power “to deliver their view or at least tax measures to encourage long-term share ownership.” Why not raise the acceptance for takeovers from 50.1 percent of the share register to 60 percent, he asked, “reducing the odds of deal-driven investors unduly influencing the outcome.” Perhaps, he adds, shares acquired during the bid period should carry no voting rights to “ensure that short-term money does not determine long-term futures.” Richard Lambert, director of the Confederation of British Industry, and many other business leaders are questioning whether short-term investors’ voting rights should be curtailed. Some MPs are calling for a “Cadbury Law” to ensure that for certain “strategic” companies, two-thirds of shareholders will have to vote yes in a hostile takeover.

  So why has the balance tipped to short-termism? “Greed,” in the view of Todd Stitzer. “People want money fast and they don’t really care. They just don’t care what it takes to get it. That’s what it’s all about. It’s disconnected. The connection between the humans who make the raw materials with the humans who make the stuff in factories, the humans who make
the machines that go into the factories. It’s disconnected so no one feels responsible for how it works.” This disconnect, he says, leads to “people who are in it to see if they can get 20p out of you” as opposed to genuine wealth creation by innovation and increased capability.

  He believes the current system can distort the notion of value and is open to abuse. “There’s a game that public companies play with shareholders—with financial statements. They do things to enhance earnings, so that people who are quantitatively orientated and think that all you need to do is look at numbers and numbers relationships, say this is getting more valuable and that’s going to keep going forever, but that’s not true. Just not true. Brands must have brand marketing investment. They have to have science and technology investment. You have to have machinery and equipment that’s replaced on a regular cycle that’s not milked and so on.” He believes that process has also led to a culture of wanting higher compensation. “In the rubric of ‘we want everyone to have options and identify with the shareholders,’ smart people, who aren’t quite as principled, figure out how to advantage themselves by manipulating the financials,” he explains. “The world has borne witness to legions of company leaders doing this.” The manipulation is all too easily disguised: “It’s purposeful,” he says. “They figure out how to fiddle with the accounting by doing certain things in the business to increase the value of their shares so they can cash in their stock options.”

  For Timothy Phillips, chairman of The Quakers and Business Group, which aims to promote Quaker principles in the workplace, there are wider concerns related to our modern form of shareholder capitalism. Firstly, “Shares tend to be owned by institutions rather than individuals, and they collectively become almost more powerful than governments, which are overly influenced by the growing power of the shareholder lobby.” Is this truly democratic, he asks? He also questions the transparency of the process. “For example, the money that Kraft shareholders have borrowed to buy Cadbury will be repaid to the banks who funded the purchase; they in turn repay the funds they borrowed from in the first place. So what one is doing by supporting the argument that bigger is better all the time is creating essentially a global network of asset ownership on a vast scale.” This has led to “a number of international well-paid jobs in powerful institutions and corporations, but it also means wealth and power is concentrated into fewer and less accountable hands.”