Reviews for "City of Thieves"

"An insider's view to insider trading ... written with vigour and authority."

LITERARY REVIEW



"...a brilliantly constructed, intelligent, thrilling read."

IRISH EXAMINER



"A thriller that puts the boot into bullies in the City's financial world."

INSEAD BUSINESS SCHOOL

Wednesday 20 January 2010

The Cadbury Sellout

Rarely does a big corporate takeover create value for those who should be entitled to it. Instead, company executives and bankers tend to hoard the profits from the deal for themselves, whilst shareholders, customers, taxpayers and workers get sold out by the very people they looked upon to protect their interests. Something is wrong with capitalism when a badly run American plastic cheese company can take over a well-run British jewel in the crown for a ridiculously cheap price and get away with it.

THE WINNERS
Today a whole line of Cadbury’s stakeholders were betrayed by their own board, who allowed Kraft to acquire Cadbury for a paltry £11.6bn. The bankers to both parties in this acquisition will probably walk away with close to £300m in advisory and financing fees whilst the boards of both companies will probably award themselves lucrative bonuses – Cadbury’s CEO alone is in line for a £20m payout from this one transaction. The only other winners in this deal are the short term hedge fund managers who bet on the fact that Cadbury’s was a takeover target – these are the same group of people that Lord Turner, Chairman of the Financial Services Authority, recently described as socially useless.

THE LOSERS
Meanwhile there a string of losers:

Kraft shareholders are likely to lose because the true cost of this deal is far higher than their CEO Irene Rosenfeld is letting on. Leave aside the fact that this deal only makes sense if Rosenfeld can achieve significant cost savings and synergies – something most mergers singularly fail to do, according to many management gurus. Then there are the borrowing costs, which are misleadingly low – Kraft will have to borrow $12.7bn dollars more to finance this acquisition. That’s easy when interest rates are 0.5% - the lowest they’ve ever been in peacetime history. But when the economy picks up and interest rates start rising, Kraft shareholders will have to pay higher rates to rollover their debt. That will make them big losers, but by that time Rosenfeld might have jumped ship with a nice pay off

Cadbury’s shareholders are likely to lose because their board allowed the company to be sold during a recession, when the company was valued on the cheap. The Cadbury board were happy with Kraft’s offer of 850p per Cadbury share. Yet there is a case for arguing that Cadbury’s shares are worth 1200p or more, if one takes account of its longer term growth prospects.

Cadbury’s customers will almost certainly lose out. In this world of globalisation, profits are everything and quality doesn't even get a seat on the board. A company that makes cheese for McDonalds hamburgers will be tempted to cut the expensive ingredients that give Cadbury’s customers the wholesome taste they crave, with something that is cheaper and less healthy.

Cadbury’s 45,000 strong global workforce is likely to be decimated as Kraft seeks cost savings and its UK workforce is likely to take the biggest hit as head office jobs move to the USA. If Kraft faces difficulties in future, you can bet that overseas territories like the UK will see job losses before the US workforce feels any pain.

The UK taxpayer is likely to lose substantial tax revenues now that Cadbury’s global profits will flow through the USA taxman rather than the UK’s. Given that Cadbury’s allegiance to the UK economy is now all but historic, there will be an adverse knock on effect on future manufacturing jobs and investment in the UK too.

AND THE PETRIFIED POLITICIANS
All too often British politicians seem to be petrified of engaging in any kind of industrial policy, even if it appears to be in our national interests. The British version of capitalism seems to be rewarding the wrong sets of people (short term profiteers) and penalising the good guys (long term investors, British consumers and British taxpayers).

Yet the UK government seems to be the only major government that stands by and allows this to happen. After all, in 2006 the Americans prevented Dubai World from becoming the owner of their ports when it purchased P&O, the British company that owned them. In 2005, the French passed a law that protected ‘strategic industries’ from foreign takeover. Ironically, the law was dubbed the ‘Danone Law’ because it was hastily drafted to protect Danone, a niche French food producer, from a possible takeover bid by Kraft or Nestle. Imagine what would happen if a foreign predator – possibly state-controlled by a hostile or undemocratic state – wanted to buy BT? Would we want our telecoms network – one of the most strategic assets any nation has – to be owned by an outsider? Military commanders are persistently warning politicians that cyber warfare is a major threat to our defence. Yet under current legislation, the British government no longer has its golden share in our main telecoms network company BT, so it could conceivably be sold to any number of sovereign funds or overseas players.


THE SOLUTIONS
So what can be done to stop the national treasures of UK plc being sold to foreign predators on the cheap, thereby protecting our national interests in the long term? Here are some suggestions:

Formulate an industrial policy that protects our strategic industries. Designate certain industries as ‘strategic’. Pass legislation that allows the UK government to veto any takeover of a company in such a strategic industry on grounds national interest. Such industries should include defence, telecoms, energy and manufacturing. As the French did with their ‘Danone Law’, so we should use Cadbury’s as the trigger to launch a national industrial policy.

Change the balance of power in big corporations to favour long term investors. Companies are notionally owned by shareholders, yet too often boards go against the interests of long term shareholders, as they did in Cadbury’s case today. Change the law so that shareholders who have held a company’s shares for 10 years (i.e. your pension fund) have a far greater say in takeover decisions than shareholders who want to make a quick buck over 10 days (your average hedge fund).

Change the composition of the board to include worker representation. In Germany, unions sit on the board, giving the workforce a say in decisions that impact their livelihoods.

Bar board executives from profiting from takeovers. Make it illegal for company CEOs to get a pay off when their company is sold off. How can a CEO properly protect his shareholders if he gets a payoff the minute he surrenders. More importantly, how can it be right for Cadbury’s CEO to walk away with £20m for doing a deal that so badly damages the Cadbury workforce, Cadbury customers, the UK economy, and UK taxpayers?

Change the tax system to favour long term investment. Allow investors who have held shares in a UK company for over 5 years to take profits tax free, but charge the full capital gains tax rate (currently 18%) for any profits made by short term investors (i.e. those who bought and sold within 5 years). If you want to be kind to hedge funds, you can have a sliding scale that is most punitive for those short term investors who jump in and out of shares on a daily or weekly basis.

Change the tax system to neutralise the advantage of debt versus equity. Currently there are tax advantages for companies who wish to raise money from the debt markets over those who raise it from the equity markets, because interest on debt is tax deductible whilst shareholder dividends are taxable. By giving debt and equity equal tax status, CEOs like Rosenfeld would think twice before piling up debts for Kraft shareholders.

Put an end to the era of cheap money. With interest rates at 0.5%, credit is too cheap. Companies can borrow at virtually no cost, making it very easy for badly run large corporations to take over well-run smaller corporations. Logically, you will end up with a catastrophically run mega corporation. Who benefits from such takeovers except a clique of insiders – bankers, boardroom bosses and hedge fund managers?

Whilst some of these suggestions are common sense, parts of the financial services sector will lobby hard against them. Don’t let them hold us to ransom. When I realised what was wrong with the global investment banking sector, I left the world of corporate banking and wrote a book about it. Whilst “City of Thieves” is fiction, the issues it raises – issues such as greed, integrity and ethics – are very real. And the Cadbury’s debacle today has borne many of them out.

We don’t have to see UK plc be sold on the cheap. But it will take a tremendous amount of political guts to stop it, because we have to stand up to one of the most powerful industries in the world. And our politicians need to wake up to the challenge before it’s too late.

2 comments:

  1. Common sense, but no one in Government seems to have it. When we are being held over a barrel by overseas owners of our utilities in the future, then it will be too late. Good analysis Cyrus. Athar

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  2. It's not rocket science, is it? Don't spend more than you can repay. Even I could do a better job of running the economy than the government - and as for the banks...! However did they get in the mess in the first place? Do these people have brains?
    On a cheerier (but no less conceited) note - check out my latest reveiw
    http://noirjournal.typepad.com/noir-journal/

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