Mergers, acquisitions and takeovers: the takeover of Cadbury

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House of Commons Business, Innovation and Skills Committee
Mergers, acquisitions and takeovers: the takeover of Cadbury by Kraft
Ninth Report of Session 2009–10
Report, together with formal minutes, oral and written evidence
Ordered by the House of Commons to be printed 30 March 2010
HC 234 Published on 6 April 2010 by authority of the House of Commons London: The Stationery Office Limited

The Business, Innovation and Skills Committee
The Business, Innovation and Skills Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Business, Innovation and Skills. On 5 June 2009, the Department for Business, Enterprise and Regulatory Reform and the Department for Innovation, Universities and Skills become the Department for Business, Innovation and Skills. On 1 October 2009 the Business and Enterprise Committee was renamed the Business, Innovation and Skills Committee to reflect that change. The Committee retained the same membership as the Business and Enterprise Committee.
Current membership
Peter Luff MP (Conservative, Mid Worcestershire) (Chair) Roger Berry MP (Labour, Kingswood) Mr Brian Binley MP (Conservative, Northampton South) Mr Michael Clapham MP (Labour, Barnsley West and Penistone) Mr Lindsay Hoyle MP (Labour, Chorley) Miss Julie Kirkbride MP (Conservative, Bromsgrove) Anne Moffat MP (Labour, East Lothian) Mr Mark Oaten MP (Liberal Democrat, Winchester) Lembit Öpik MP (Liberal Democrat, Montgomeryshire) Ian Stewart MP (Labour, Eccles) Mr Anthony Wright MP (Labour, Great Yarmouth)
The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via
The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at
Committee staff
The current staff of the Committee are: James Davies (Clerk), Ben Williams (Second Clerk), Aruni Muthumala (Economist), Louise Whitley (Inquiry Manager), Anita Fuki (Senior Committee Assistant), Eleanor Scarnell (Committee Assistant), Jim Hudson (Committee Support Assistant) and Laura Humble (Media Officer).
All correspondence should be addressed to the Clerks of the Business, Innovation and Skills Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5777; the Committee’s email address is [email protected]







1 Introduction


2 The closure of Cadbury’s Somerdale factory




Kraft’s explanation to the Committee


3 Kraft’s undertakings in respect of Cadbury


Brand Management


Undertakings for jobs


Somerdale workforce


Cadbury workforce




Research and development


Cadbury’s philanthropy and corporate social responsibility




The Cadbury Foundation and Community Investment


The Fry Club


The Environment




4 Government intervention


Short-termism in the market: the Kraft experience


Possible areas for reform


Public interest test and additional conditions




Conclusions and recommendations




Formal Minutes




List of written evidence


List of Reports from the Committee during the current Parliament


The Kraft takeover of Cadbury has proved to be an event which is likely to shape future public policy towards takeovers and corporate governance. It was marred particularly by the controversy over Kraft’s statements regarding the future of Cadbury’s Somerdale factory which was earmarked for closure. Kraft’s initial indications that it would keep the factory open, which it reversed after gaining control of Cadbury, heightened the public’s feelings of mistrust towards Kraft. Our Report scrutinises its handling of the closure of the Somerdale factory, sets out Kraft’s future plans for Cadbury and considers the wider implications of takeover policy in light of Kraft’s actions.
We are disappointed that Irene Rosenfeld, the Chairman and CEO of Kraft Foods Inc. did not give evidence in person. Her attendance at our evidence session would have given an appropriate signal of Kraft’s commitment to Cadbury in the UK and provided the necessary authority to the specific assurances Kraft have now given to the future of Cadbury.
We conclude that Kraft acted both irresponsibly and unwisely in making its original statement that it believed that it could keep the Somerdale factory open. By doing so, Kraft has left itself open to the charge that either it was incompetent in its approach to the Somerdale factory or that it used a “cynical ploy” to improve its public image during its takeover of Cadbury. Its actions have undoubtedly damaged its UK reputation and has soured its relationship with Cadbury employees.
Kraft will now have to invest significant time and effort into restoring its reputation and regaining the trust of the public, its UK workforce, Government and ourselves. Kraft gave us a number of undertakings in respect of the future of Cadbury, which we set out in this Report. These commitments are now in the public domain, and therefore will be subject to close scrutiny over the next few years. We recommend that the Department for Business, Innovation and Skills monitors Kraft’s compliance with its undertakings, and particularly those relating to Cadbury’s world class Research and Development facilities.
In the wider public policy context, we express our concern that the takeover of Cadbury by Kraft was ultimately decided by institutional investors motivated by short-term profits rather than those investors who had the company’s long-term interests at heart.
We welcome the Government’s focus on the issue of ‘short-termism’ in decision-making on the future ownership of UK companies, and its efforts to engage with institutional fund managers as part of the process. We also welcome the fact that the Government and the Takeover Panel are considering a review of the rules and legislation governing takeovers in the UK. However, any review should not be a disguise for protectionism against foreign takeovers. It needs to address all takeover activity, whether entirely domestic or by foreign companies, to ensure that such activity is conducted in the best interests of the UK economy.
We encourage our successor Committee to take up where we have left off and conduct a detailed inquiry into these important issues and into the role of shareholders and managers of companies more generally. It is time to reconsider many aspects of corporate governance.

1 Introduction
1. Normally, our programme of work is focused on scrutinising Government policy. Occasionally we need to widen that focus in order to respond to unforeseen events. The takeover of Cadbury by Kraft, and the manner in which it was conducted, provoked a strong public reaction and has proved to be an event which is likely to shape public policy in the future. We therefore believed that it was important for us to consider the matter. The purpose of this Report is to present the evidence that Kraft gave to us on its plans for Cadbury and comment briefly on a number of proposals which have been put forward to reform the regulation of takeovers as a result of Kraft’s acquisition of Cadbury.
2. On 12 January, before the takeover was completed, we took oral evidence from Professor Christopher Bones, Henley Business School; Jack Dromey, Deputy General Secretary and Jennie Formby National Officer, Food and Drinks Sector from Unite the Union; and Ian Lucas MP, Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills. At the time both Cadbury and Kraft were prevented by the City Code on Takeovers and Mergers from discussing the details of their respective positions in public and therefore did not give evidence.
3. Despite strong resistance to the bid, Cadbury’s board capitulated a few days after we held our January evidence session. On 19 January Cadbury recommended Kraft’s offer to its shareholders. Kraft received formal acceptance of its offer on 2 February and concluded the takeover.
4. At the start of its bid for Cadbury, Kraft announced its intention to keep open Cadbury’s factory at Somerdale, which Cadbury had previously earmarked for closure.1 On 9 February, after the takeover had been completed, Kraft announced that it was no longer able to deliver on that intention.2 This reversal provoked a public outcry. We therefore decided to hold a second evidence session with senior representatives from Kraft to put its future plans for Cadbury under the spotlight.
5. On 16 March we took further evidence from Unite the Union and from Marc Firestone, Executive Vice President, Kraft; Trevor Bond, President, Cadbury, Britain & Ireland and Richard Doyle, HR Director, Cadbury, Britain & Ireland. We had extended the invitation to give evidence to Irene Rosenfeld, Chairman and Chief Executive Officer of Kraft, an invitation she declined to accept. Marc Firestone explained that Irene Rosenfeld was unable to attend because our evidence session clashed with a Kraft Board meeting in the United States.3 However, it was pointed out to Marc Firestone that the date of the session was arranged at Kraft’s convenience,4 and had originally been planned for the beginning of March. We have subsequently received a letter from Irene Rosenfeld confirming that she endorses the content of the evidence given by Marc Firestone.
1 Kraft’s Takeover Proposal document, 7 September 2009 2 BBC News, Cadbury’s Bristol plant to close, 9 February 2010 3 Q 166 4 Q 167

6. Notwithstanding the seniority of Marc Firestone’s position within Kraft, we strongly believe that Irene Rosenfeld herself should have given evidence before us, not least because the statements regarding Somerdale’s future—its re-opening and then its closure—were made and announced by her. Irene Rosenfeld’s attendance would have given an appropriate signal of Kraft’s commitment to Cadbury in the United Kingdom and provided the necessary authority in respect of the specific assurances offered to us during our evidence session.

2 The closure of Cadbury’s Somerdale factory
7. The Somerdale Factory is seventy-five years old and began production when JS Fry & Sons merged with Cadbury and subsequently moved its business from Bristol to the Somerdale factory in Keynsham, near Bristol.5 On 3 October 2007, Cadbury announced its plans to close the factory with the loss of 500 jobs.6 Production at the factory would be transferred both to the company’s Bournville plant in Birmingham and, by 2010, to a new plant in Poland. The latter would produce some, if not most of, the brands made at Somerdale including Curly Wurly, Fudge, Turkish Delight, Fry’s Chocolate Cream and Cadbury’s Mini-Egg.7
8. On 7 September 2009, Kraft announced that it believed it could reverse Cadbury’s decision to close the factory. Irene Rosenfeld, Chairman and Chief Executive Officer of Kraft, stated that:
Our current plans contemplate that the UK would be a net beneficiary in terms of jobs. For example, we believe we would be in a position to continue to operate the Somerdale facility, which is currently planned to be closed and to invest in Bournville, thereby preserving UK manufacturing jobs.8
9. Even before the takeover, Unite the Union which represents a large proportion of the Cadbury workforce, expressed doubt about the authenticity of this pledge. Jennie Formby, National Officer, Food and Drinks Sector of Unite, explained:
I have been very disappointed by the fact that Kraft has persisted in repeating what appear to be assurances to the people in Keynsham which, as far as I can see, are very hollow. It has said it wants to keep a manufacturing facility in Keynsham. I have asked what that means […] There is no meat on the bones at all. It has said continually that it does not know enough about it; it does not know how it is configured inside. We have said that surely a company of its experience has an idea of what it looks like inside because there are lots of things in the public domain. The reality is that there is no intention to come and save the jobs.9
In January, Professor Bones highlighted the fact that Kraft had reneged on similar promises in the past—most notably a promise to keep open Terry’s factory in York when it acquired Terry’s in 1993:
5 BBC archives, Fry's chocolate factory is not about to be bombed, A letter from 1940 6 Cadbury Press Release, Cadbury Trebor Bassett Proposes Restructuring of UK Chocolate Manufacturing, 3 October
2007 7 The Independent, Strike threat over Cadbury’s plans to move to Poland, 13 November 2007 8 Kraft’s Takeover Proposal document, 7 September 2009 9 Q 63

whilst all good intentions are spoken about in the process of an acquisition the track record intriguingly for Kraft was to shut the Terry’s of York factory and move production—surprise, surprise—to Poland. Therefore, I do not look at the acquisition commitments perhaps with a great deal of credibility in terms of the comments made for the long term, but I appreciate that this time the circumstances may be different.10
10. On 9 February 2010, one week after the takeover was finalised, Kraft announced that it would not be able to keep open the Somerdale factory. Irene Rosenfeld declared that:
In our recent talks with Cadbury senior management, it became clear that it is unrealistic to reverse the closure programme, despite our original intent to do so. While this is a difficult decision, we have moved quickly to end any further uncertainty.11
11. Following the announcement, Kraft faced a barrage of criticism. Unite accused Kraft of “a cruel manipulation”, describing the earlier commitment as a “cynical ploy” to gain favour for the bid.12 Lord Mandelson, who had met Irene Rosenfeld, was also unimpressed with the way in which the announcement was managed:
A week ago [Irene Rosenfeld] would have known what announcement would be made, barely six days later. It would have been more honest if it had been more straightforward and straight dealing with the company and the workforce and also with the Government if she had told me what their intentions were.13
Kraft’s explanation to the Committee
12. We questioned Marc Firestone, Executive Vice President, Kraft Foods Inc., on the rationale and the evidence which underpinned both the initial announcement that Kraft believed it could keep open the Somerdale factory and Kraft’s subsequent reversal of that announcement.
13. He explained that in September 2009 Kraft believed that it could keep open both the Somerdale factory and the factory in Poland to service Cadbury’s existing production requirements and Kraft’s expanding production needs in Europe:
When we envisioned the combined manufacturing network of Kraft and Cadbury, we believed that we would be in a position to maintain production in Somerdale in the UK while also taking advantage of the new facilities that we did know Cadbury was building in Skarbimierz in Poland […] Our capacity requirements were growing tremendously. 14
He argued that:
10 Q 2 11 The Independent, Kraft to close Cadbury factory near Bristol, 10 February 2010 12 BBC News, Dismay at Cadbury’s closure plans, 10 February 2010 13 BBC News, Dismay at Cadbury’s closure plans, 10 February 2010 14 Q 232

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Mergers, acquisitions and takeovers: the takeover of Cadbury