Mergers, Acquisitions and Takeovers: the Takeover of Cadbury by Kraft

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 £0.00 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) Powers 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 http://www.parliament.uk/parliamentary_committees/parliamentary_committees Publications 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 http://www.parliament.uk/parliamentary_committees/bis.cfm 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). Contacts 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 Contents Report Page Summary 3 1 Introduction 5 2 The closure of Cadbury’s Somerdale factory 7 Background 7 Kraft’s explanation to the Committee 8 3 Kraft’s undertakings in respect of Cadbury 12 Brand Management 12 Undertakings for jobs 13 Somerdale workforce 13 Cadbury workforce 13 Pensions 15 Research and development 16 Cadbury’s philanthropy and corporate social responsibility 17 Fairtrade 17 The Cadbury Foundation and Community Investment 19 The Fry Club 20 The Environment 20 Conclusion 20 4 Government intervention 22 Short-termism in the market: the Kraft experience 22 Possible areas for reform 24 Public interest test and additional conditions 25 Conclusion 27 Conclusions and recommendations 28 Appendix 32 Formal Minutes 33 Witnesses 34 List of written evidence 34 List of Reports from the Committee during the current Parliament 35 3 Summary 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. 5 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 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.

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