Was Cadbury Chairman Roger Carr Right To Regret When Cadburys Was Taken Over By Kraft?

"Shareholder value" is the sum of the decisions in a firm which affect the operation of the firm and its ability to raise the amount of free cash flow over a period of time and generate a good return on invested capital (Froud, et al, 2000). Cadburys, as UK top-listed chocolate maker had been taken over through a hostile bid for £11.9 billion by American food company Kraft Foods in 2009 (Moeller, 2012; Financial Times, 2010). In the late August 2009, Kraft desired to purchase Cadburys with an offer around £10.2 billion or 745 p per share in cash and stock. However, Cadburys thought it undervalued the company and refused the offer. Thus, in the late January 2010, Kraft raised its offer to 850 p per share and major shareholders of Cadburys did an about-turn and accepted it (Financial Times, 2010). The result made Cadburys' chairman Roger Cadbury regretted that the chocolate firm will be absorbed into Kraft's agglomeration business model. Thus, it will lose the main ethics of Cadburys as being a pure chocolate confectionery manufacturer. Therefore, he said: "the loss of a business that was sound.. the independence of something that was good."(Financial Times, 2010) On the other hand, from the perspective of Kraft Foods, taking over Cadburys was beneficial for them as it allowed them to follow the economic tendency of financialization in order to expand their company and boost the share prices in the stock market. It is important to mention that financialization represents today's capitalism of the shareholders' values. With respect to financialization, Arrighi (1994) defined that it is a sum of profits for shareholders through financial channels rather than through productive commodity trading. Also, as Krippner (2005) stated, 'financial' refers to the activities about the transfer of liquid capital which is future dividends, capitals or interest earnings. Simply speaking, finacialization is a process to re-allocate the capital through investment in order to ensure the investment funds are used efficiently and maximise the profits of shareholders. Thus, from the point of view of Kraft Foods, the Cadburys moral values are the main factor contributing to its demise and the ethics should be replaced by financialization. This essay will argue that today's capitalism is not purely based on financialization which represents shareholders' values, but some other more important values to an ethical company. It will echo Roger Cadbury's argument in favour of retaining the business ethics and support that he should regret the loss of the independence of Cadburys. Regarding to the "Financialization" market, it is tough to escape the impression that we live in a financial world. A series of large corporations which are based on financialization have replaced productive enterprise in the USA on account of the tendency of financial economy (Krippner, 2005). It is important to demonstrate that, for most of the businessmen in the USA, the financial market is the major performance in which a variety of management teams compete for their own benefits in order to supervise the corporate resources (Jensen, 1988). As a result of this, takeovers in general, happened due to the fact that changing market environments and upgrading technologies demanded a main restructuring of corporate assets. Meanwhile, in the 1980s, various economic and political conditions had caused a climate that economic efficiency needed a main restructuring of corporate assets (Jensen, 1988). These elements had brought about an upward trend in total takeovers. Therefore, it is vital to emphasise that the fact that Kraft Foods took over Cadburys followed the tendency of financialization in the late 1900s in America and it is a performance of today's capitalism based on shareholders' values. Nevertheless, it is clear in Jensen's article (1988) that the takeover market can only focus on certain special industries, not spread in the whole corporate firms. A variety of sectors in the USA have experienced the slowed-down growth in the economy because the large parts of the economy cannot meet the investment returns demanded by financial markets. In other words, shareholders could not get a good return on invested capital which is a massive loss for shareholders. This goes against the ideas of financialization which tends to maximise the shareholders' profits. In the case of Kraft Foods, it is important to mention that it results a dramatic decrease in the sale of Kraft Foods (MacArthur, 2011). It shows that Kraft Foods would not get free cash flow and it is significant to affirm that it violates shareholders' values. Therefore, today's tendency of financialization did not really satisfy shareholders' needs, and shareholders' values cannot be safeguarded, especially in a recession. The market for takeover is producing massive interests for shareholders. Premiums through hostile bids can rise 30 per cent based on average capital (Jensen, 1988). In Cadburys' case, Kraft Foods' shareholders realised that taking over Cadburys was a significant opportunity for them to gain more profits from reorganising the two companies. Also, the CEO of Kraft Foods declared that buying Cadburys with £11.9 billion was the best way to boost the share price and get extra income by opening new markets in Latin America and Asia. The fact showed that their thoughts were right because the share price of Kraft Foods, indeed, increased in the global market for candy and chewing gum. Also, the financial result of Kraft Foods dedicated that the total revenue had grown up 11%, to $12.6 billion, due to the fact that the sales climbed 40% in India and 20% in China (MacArthur, 2011). As a result, taking over Cadburys had helped Kraft Foods to develop in the US corporate markets and the most important is that shareholders' benefits had been maximised. This precisely follows today's capitalism based on shareholders' values. Although takeover boosted the profits of shareholders, it can also be argued that taking over Cadbury was a short-sighted decision as it sacrificed long-term interests to build up the short-term benefits (Jensen, 1988; Stein, 2013). The mere truth of price-earnings owing to the increased share prices shows that the market is evaluating something else rather than pure present values. Indeed, the nature of the growth in the stock is one which has a large amount of investment submitting to a great number of short-term cash flows but not the future cash flows and income (Jensen, 1988; Stein, 2013). Take Kraft Foods as an example, the fact showed that the growth of Kraft Foods had been slowed down and even faced hefty debts with $26 billion (MacArthur, 2011).Therefore, it is important to highlight that the shareholders for purchasing Cadburys' shares will not be the long-term orthodox owners of the target firm. On the other hand, the main characters for them are rational hedge funds or arbitrageurs who just wish to maximise their own profits through takeover. Moeller (2012) also supported this point of view. As a consequence, there would be a question that should this managerial myopia be advocated to be spread in the market purely for maximising the shareholders' profits in the short term and ignoring the long-term objectives for the firms? Cadburys, as a well-known chocolate confectionery business with a long history in the UK, adhered consistently to a more ethical version of capitalism. In terms of business ethics, they follow the rules and principles that determine how a business should behave. Cadburys always insisted on caring about their workers which is based on Quaker values but not purely focusing on treating them as a means to production and profits (Dellheim, 1987). What should be mentioned is that, according to Dellheim (1987), the employees in Cadburys would be treated as social equals, meanwhile, Cadbury brothers would provide housing and better welfare services to them. Although it is arguable that it is possible to increase the costs of the firms, in Cadbury brothers' opinions, being more ethical is the way against managerial myopia standing on the attitude of long term version for the firm. As a consequence, Todd Stizer, CEO of Cadburys 2003-2010, emphasised that the whole idea of Cadburys is "doing good is good for business." Also, Sir Dominic Cadbury conceded that something very precious has been lost on account of the fact that Cadburys had been taken over by Kraft. Indeed, Roger Cadbury regretted the loss of the major business ethics when Kraft took over Cadburys. Therefore, capitalism which is based on shareholder values should not spread the myopia in managing firms; on the contrary, long term version is the truth. In other words, spreading the moral business in the market should be the symbols of today's capitalism. In conclusion, this article has underlined two different opinions toward takeover based on the shareholders' values. From the perspective of Kraft Foods, it is necessary to take over Cadburys on account of the economy tendency on the basis of financialization. Meanwhile, it is obvious to know that taking over Cadburys brought huge benefits to Kraft Foods, for instance, increased share price. However, from the point of view of Cadburys, it is important to assert that the action of taking over Cadburys was a short-sighted decision which uses the short-term benefits to sacrifice long-term interests. Also, being taken over by Kraft Foods leads to a loss of the main ethics of Cadburys and it is not the representation of present day shareholders' value. Therefore, in my opinion, although taking over Cadburys gave a lot of short-term financial benefits to Kraft Foods, it will lose the essence of an ethical company which accompanies the firm in a long term. Cadburys, as a century-old manufacturer, would be successful in surpassing a large number of other chocolate manufacturers due to the fact that they stick to Quaker values. It can be highlighted that it is Quaker values which raised the degree of harmony in labour relations, which in turn, increased the loyalty of the workers (Dellheim, 1981). Thus, Quaker values had helped Cadburys to go through different difficulties since 1861 which can be better viewed as a long term strategy to manage a firm. It is obvious to realise that the finance is a vital element to a firm; however, it only has influence on external part of a firm. A successful company should have their own spiritual values and ethics as their internal spiritual pillar. As a result, Roger Cadbury should regret the loss of the independence of Cadburys.