Kraft Food’s takeover of Cadbury has renewed the ‘is big necessarily bad?’ debate

 

Kraft Food’s takeover of Cadbury has renewed the ‘is big necessarily bad?’ debate

When the world’s second largest food company, Kraft Foods, mounted a hostile takeover bid for the 200-year-old British confectioner Cadbury, it triggered a passionate opposition campaign.

The campaign was led by the chief executive of Cadbury, Todd Stitzer, and has joined by politicians, unions, and a sympathetic media. It was aimed at saving the “independence” of an iconic British brand from becoming part of a US conglomerate. Some saw the Kraft bid as another example of a large ruthless company snapping up a smaller, good company.

Cadbury’s management argued that the price offered by Kraft undervalued the chocolate maker’s real worth. The company also highlighted its sustainability performance, attributing its past, present and future success to “Cadbury’s unique culture and values”

Stitzer said: “Cadbury is special, with a way of doing business that is not only part of our identity but integral to our success. We call it being performance-driven and values-led, and it’s rooted in the belief that doing the right thing is a competitive advantage.”

Using sustainability as one of the defence tactics may have surprised many, because Kraft is known as a sustainability leader.

And finally Cadbury’s defence melted, when Kraft offered to pay a higher price, substantially increasing from $15.9bn to $18.9bn, and the deal was sealed in late January ending a high-profile five-month corporate battle.

But while the bittersweet war between Kraft and Cadbury has ended, the debate lingers on.

Kraft’s bid for Cadbury is not the first instance of a giant multinational pursuing a niche company with a strong sustainability reputation. Ben & Jerry’s and Body Shop, both with reputations for their ethical business models, were acquired by Unilever and L’Oréal respectively in recent years. These buyouts, and now Kraft’s acquisition of Cadbury, have stirred a debate on whether an acquisition by a large conglomerate of a smaller business with ethical credentials destroys the long-term value by diluting the unique culture and values of the acquired company.

“There are issues around the takeover of niche and highly ethical firms by large companies. But they can’t be reduced to just the issue of size,” says Mark Goyder, founder-director of London-based thinktank Tomorrow’s Company. He says there are many examples of large companies being a force for good and making a positive contribution.

Valuing the values

Goyder says an ethical takeover bid is one in which the bidder sees the current and potential value, and the sustainability, societal and ethical impact of the acquired company.

Reputation of the suitor is a key factor. Prakash Sethi, president of New York-based Sethi International Center for Corporate Accountability and professor at Baruch College, says: “If, for example, Exxon wants to buy Chevron, nobody cares because both have equally bad sustainability reputations. But if one of them tries to buy a company which has a very strong reputation on environmental and social issues, there will be opposition.”

Sethi adds that the reputation of the country also plays a role. “If a Chinese company tries to acquire an American company, sustainability will become an important issue to evaluate the acquisition and a reason for resistance.”

Goyder says it is perfectly acceptable for the target company that has high ethical standards to challenge the suitor on sustainability. “It must ask what your manifesto is. What’s your perspective for the social and ethical performance of the company? It should ask who is going to be the better steward at upholding the commitment to sustainability.”

The suitor’s ability to convince the stakeholders is crucial if the target company has good ethical credentials.

“The important point is whether the bidding company is guaranteeing the management of the company it wants to acquire that the distinctive values of the company will be maintained,” says David Vogel, professor at Haas school of business, University of California Berkeley, and editor of California Management Review. He says the bidding company should explain what concessions it is willing to make in allowing the acquired company to maintain its current sustainability practices.

Goyder says the bidder should not only demonstrate what it is going to do on profitability in the short term, but it should also demonstrate what it is going to do on community engagement, sustainability, supply chain and citizenship.

Price is often at the centre of a takeover tussle. The question is: what is the right price for an ethically strong company? Is it today’s share price or a value based on a longer-term performance driven by values?

Goyder says valuing an ethical company only on its current share price will create a disincentive for responsible investors to invest in longer-term reputational and ethical issues. “In a takeover situation, it’s logical for investors to look not only at the price offered, but also the track record of the bidder and whether the new owners will take the company in the right direction,” he says. Neglecting sustainability in the longer term will be disastrous.

Protecting the rights of minority shareholders is another important aspect. “A key governance issue is whether the acquirer is treating all shareholders equally in terms of price offered,” says Andrew Crane, George R Gardiner professor of business ethics at Schulich school of business, Yale University.

Observers say long-term value should be of particular concern to responsible investors such as pension funds, which have a long time horizon for returns to serve their members effectively.

Is big bad?

Being acquired by a large group is not always a losing proposition. Friendly takeovers can actually benefit the smaller ethical companies if they are convinced that the acquiring company will live up to the values they are committed to. “Such takeovers are in the interest of smaller companies that are looking to expand internationally. They can look forward to the financial resources of the acquiring company,” Crane says.

For the acquiring partner, it makes business sense to preserve the acquired company’s ethical principles and practices. Vogel says the acquiring company has an interest in maintaining the distinctive social values of the acquired company. “Why should they change that? That [ethical image] is part of the reason they are buying the company.”

But the mother of all questions is whether it is practically possible for a large company to maintain the high level of sustainability performance that a smaller company can.

Crane says it is not fair to compare sustainability performance of a small company with that of a large company. “Small-mission-oriented companies can live up to their values because they are small, usually focused on one set of social issues and because they can control their operations in a very tangible way.” He adds that the values of the founder often play an extremely important role in setting the direction for a small company.

On the other hand, large multinational companies operate in a more complex environment, face different kinds of ethical issues and are under greater scrutiny. “Often it is very hard for a large company to convey a clear, consistent and coherent ethical image to all stakeholders,” Crane says.

Sethi says consistently pursuing sustainability may be a challenge for conglomerates that are made up of several independent companies, operate in different industries and do not have a unified corporate culture.

So what then are the criteria larger companies should meet before bidding for niche and ethical brands?

“At the very least their sustainability practices should reflect the best in their industry. They will have to demonstrate their conduct in a manner which is consistent, transparent, believable and verifiable. They have to have a reputation on the ground,” Sethi says.

Coming back to the marriage of Cadbury and Kraft, all eyes will be on whether Kraft will be able to use sustainability synergies and unique strengths of both companies to build a super-ethical company.

Sceptics in the UK, where there is sentimental attachment to Cadbury, will watch each move that Kraft makes, particularly in terms of protecting British jobs. This came into sharper focus with Kraft’s announcement it was to close a Cadbury factory near Bristol. Cadbury had previously announced its intention to cease operations at the plant, but during the takeover process Kraft had indicated a willingness to reverse this decision.

Speaking to Ethical Corporation, Steve Yucknut, vice-president for sustainability at Kraft Foods, admits that UK and European consumers are not as familiar with Kraft as companies such as Cadbury. But, he says: “We really admire Cadbury’s sustainability efforts, as well as other industry peers.”

He says Kraft is eager to educate the public on “all the great things we’ve been doing around the world”. One of the company’s principles, according to Yucknut, is to “lead with results”. He argues that “the more people learn about all we’re doing, they’ll better understand how we’re helping to create a better world”. Certainly Kraft will now be under great scrutiny in the UK to see if it holds to this claim.

Kraft Foods: fast facts

• The world’s second largest food company, behind Nestlé.
• $42bn in full-year sales.
• 98,000 employees and 168 plants worldwide.

Key sustainability initiatives/performance:

• In Dow Jones Sustainability Index North America for past five years
• In Dow Jones Sustainability Index World for past four years
• Member of the Ethibel Sustainability Index
• Participant in the Carbon Disclosure Project

2011 sustainability goals launched in 2005. Performance as of 2009:

• Reduced plant energy use 12% (goal of 25% by 2011)
• Reduced plant energy-related CO2 emissions 14% (goal of 25% by 2011)
• Reduced plant water consumption 21% (exceeding 15% goal two years early)
• Reduced plant waste 14% (goal of 15% by 2011)
• Eliminated 53m kilograms of packaging material (goal of 68m kg by 2011)

• The world’s largest buyer of coffee and cocoa from Rainforest Alliance certified farms.
• Ultimate goal is to source 100% coffee for the Kenco coffee brand sold in the UK from Rainforest Alliance certified farms by 2010, as supply becomes available
• Kenco instant coffee sold in the UK is 75% from Rainforest Alliance certified farms
• In 2008, bought 30,000 tonnes of coffee and 3,000 tonnes cocoa from Rainforest Alliance certified farms
• Committed to using 30,000 tonnes of cocoa beans from Rainforest Alliance certified farms by 2012

Source: Kraft Foods

Quick facts on Cadbury

• $8.6bn in annual sales.
• 45,000 employees in 60 countries.

Key sustainability initiatives/performance:

• Reduced global water consumption by 20% in 2009 from base year 2006.
• Committed $70m through the Cadbury Cocoa Partnership in 2008 to help cocoa farmers.
• Fairtrade certification for Dairy Milk chocolate sold in Britain and Ireland in 2008 extended to Canada, Australia and New Zealand in 2009.
• Purple goes green programme to cut water, energy and packaging use (2007).
• 10% carbon reduction target by 2011 from base year 2006.

Source: Cadbury