According to some academic research takeovers more than often destroy value or don’t achieve the claims made at the time of the tie-up.
The above research paper identifies a dozen studies that have examined mergers and takeovers, some of which were positive, but quite a few found that between half and two thirds destroyed value and just didn’t work.
Some studies seem to suggest that the bigger the deal, the more problems the merged company will have in generating the claimed higher returns.
So is that why Warren Buffett, the billionaire investor who is the largest shareholder in Kraft, on Wednesday criticised the US food group’s $US20 billion ($A21.6 billion) agreement to buy Cadbury’s as “a bad deal”?
Probably not. He seems to have been speaking from self-interest as his stake in Kraft will be watered down and he will find it hard to get more dividend income after Kraft boosted its debt by a third to a reported $US30 billion by buying Cadbury.
That on its own is a sign that all those fears about the health of markets and debt a year ago have vanished.
Buffett told CNBC, the US business television network, that he had doubts over the purchase of Cadbury and would have voted against it had Kraft sought shareholder approval for the deal.
“I have a lot of doubts,” Buffett said. But Kraft investors will not have the chance to vote on the deal, which involves the US group issuing 265 million new shares, or about 18% of its existing share capital, because that is below the 20% at which shareholder approval is required.
The issue will dilute Buffett’s holding by more than 1%, taking his stake to about 8%, from the current 9.4% where he is the company’s biggest holder.
Buffett said the company was worth more than its current stock price — down 2% at $US28.72 in Wall Street trading overnight, but added that the use of its shares in the takeover was “very expensive currency”.
But he said he supported Irene Rosenfeld, Kraft’s CEO, and denied that he would sell down his stake in the group. “I like Irene,” Buffett told CNBC. “She has been straightforward with me. We just disagree.”
Kraft finally secured Cadbury’s backing for its hostile approach on Tuesday after raising its offer to 850 pence a share by adding more cash to the offer (because Buffett had earlier indicated he would vote against any move to issue more shares than originally planned).
The deal will prove more expensive for Kraft as its huge debt pile will become more expensive after the Fitch credit ratings agency downgraded Kraft by one notch to BBB minus, the lowest investment grade, saying “the anticipated increase in financial leverage of the combined Kraft/Cadbury”.
Rival agency Standard & Poor’s has Kraft’s rating at A-minus but was keeping it on a negative cedit watch. Moody’s said it was likely to keep Kraft at investment grade, but the rating was under review for possible downgrade.
The Cadbury deal will push Kraft’s debts from $US20 billion to more than $US30 billion once it has taken on $US9.5 billion of debt to fund the cash portion of the offer and assumed more than $US3 billion in Cadbury debt.
Rosenfeld called the takeover “transformational”, but has to say something like that. After all, if the deal sours, she’s out on her neck (no doubt with a golden pile of compensation) and Warren Buffett will be poorer, but proven right.