Why Britain needs to let Cadbury's go

published 19 January 2010

After a long draw-out bid battle, it looks as though everyone's new favourite company, Cadbury's, will end up in American hands.

The company has recommended a bid from US conglomerate Kraft (for the details, see the market update below).

We were sceptical that the deal would go through. But it looks as though Kraft boss Irene Rosenfeld had a bit more firepower than anyone gave her credit for. And fair play to her for avoiding the "mine's bigger than yours" macho posturing that you often get with these high-profile bid battles.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

The news will upset a lot of people who don't want to see the company taken over by a foreign 'predator'. But should chocolate really be classed as a strategic industry?

What the Cadbury's deal means for the UK

You can see why the Cadbury's deal is stirring such strong emotions. The country feels repulsed by the not-very-convincing contrition and sheer greed of bankers, and the supine complicity of their shareholders. Robert Jenkins of the London Business School put it very well in a letter to the Financial Times.

"In the UK, banks have opted to pay a tax surcharge to the government rather than hold the line on remuneration to the benefit of shareholders." In other words, bank boards have decided that they're willing to pay the government "some £4bn-plus" rather than tell employees to take a hit to their bonuses. That's money which rightfully belongs to shareholders. But few of them seem willing to stand up and remind managers of that fact.

The Cadbury's deal also puts all the scaremongering about hedge funds vanishing overseas into perspective. As Anthony Hilton put it in the London Evening Standard last night, it seems stupid to be worried about the tax revenues lost from a few financiers running off to Switzerland, when at the same time a 150-year-old company is being taken over by a foreign firm. "The record shows that UK firms which pass into foreign ownership very soon pay much lower corporation tax to the UK government. This is because their new foreign parent organises affairs so that what was a UK profit is subsequently generated in a country or a tax haven where the rates are lower."

So no wonder people feel sentimental about Cadbury's. A perfectly good British company, which actually makes something, is set to fall to a US rival. It's another triumph for devious financiers over honest hard-working manufacturers.

Who's to blame for the loss of Cadbury's?

So who's to blame? Many people pin it on the short-termist attitude of institutional shareholders. They generally aren't very patient. They want big returns now. Their long-term horizon starts at three years at the latest. Medium term is anything over 12 months.

Special FREE report from MoneyWeek magazine: When will house prices bottom out - and how will you know?

Why UK property prices are going to fall 50%
When it will be time to get back in and buy up half price property

Of course, it's easy to criticise the boys and girls in the City and they deserve a lot of it. But if we're honest, while individual investors might say they're happy to buy and hold a stock for 10 to 20 years, they aren't that patient either. Say you bought Cadbury's at 500p or 600p a share a couple of years ago. Are you really going to turn down 850p now? It's unlikely. Particularly if the chances are that the share price will dive if you do.

So like it or not, it's unrealistic to expect shareholders to do anything else other than to go for the bid. So then you're left with the option of deciding that certain businesses cannot be sold, or that certain buyers cannot buy them.

But then you're into the realms of protectionism, and centralised control. That's not a very efficient way to allocate capital and resources. So you need a very good excuse to be protecting them from foreign takeovers. And regardless of how warm a glow the name Cadbury's gives you, there's no real reason to stop someone else from buying it.

Why entrepreneurship is the answer to Britain's economic woes

Entrepreneurs create companies. They create them for various reasons to build up and sell, or to generate wealth for their families. Eventually, if these companies survive, they'll change hands. They'll either end up with the next generation, or they'll be sold into private hands, or they'll go public. At no point is the government directly involved (nor should it be involved) in that decision-making process. And once a company's gone public, you have to accept that you lose control of it. If Cadbury's had wanted to stay British, it should never have been listed.

But life goes on. A successful economy creates companies, builds them up, then lets them go. And the important thing is that this entrepreneurial process is given an environment in which it can thrive. That's why it's important to have a nice stable taxation system, and as little red tape standing in the way of business creation as possible.

That's why a warning from the British Chambers of Commerce (BCC) that new taxes and regulation will cost British firms £25.6bn over the next four years is such a worry. The group wants a three-year moratorium on new employment laws in the UK, and a campaign for an EU-wide moratorium. Of course the BCC is always going to talk up the interests of its members, but given the government's constant fiddling with the country's tax laws it's not hard to see their point.

And it's an important one. If there's one thing that can help Western economies get out of their debt-burdened holes and grow again, it's entrepreneurship. Our resident share tipster Paul Hill pointed out in a recent MoneyWeek magazine cover story that the best way for the West to fight back against the rise of emerging markets, was by exploiting its vast reserves of intellectual property and design expertise. If you missed it, you can read the piece below, and find out which stocks Paul thinks will benefit most. If you're not already a subscriber, subscribe to MoneyWeek magazine.

Our recommended article for today

Innovation our best chance against the rise of the East

The West must use its superior intellectual property reserves to fight the growing global economic dominance of China, says Paul Hill. Here, he explains how to cash in.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.