There is so much mumbo-jumbo surrounding most high-profile corporate decisions – especially mergers and acquisitions – that it gets hard to follow along without feeling a deep sadness for the injuries done to the English language. Of course, corporate types talk this way not because they’re aesthetically challenged, but because they’re usually trying to hide something.
That’s what makes today’s press release from Berkshire Hathaway, Warren Buffett’s conglomerate, so delightful to read. The statement levels a devastating critique of Kraft’s attempt to issue shares to pay for its proposed acquisition of Cadbury, the UK-based confectioner. And it does so in plain English.
According to the Berkshire release, Kraft’s management wants “to authorize the issuance of up to 370 million shares to facilitate the acquisition of Cadbury,” something that Berkshire, which owns over 9% of Kraft, is loath to do. Berkshire’s reasoning is hard to argue with – why repurchase your own shares at $33 (as Kraft did in 2007) if you’re going to issue more shares at $27 in order to use as acquisition currency?
Warren Buffett is known for picking not just great companies, but great companies with great management teams. Kraft management’s latest proposal must have left the Sage scratching his head and perhaps doubting their judgment…certainly enough to issue a public retort to the offending proposal. While the release didn’t unambiguously close the door on a future change of heart, Berkshire clearly sees the proposed deal as one that destroys value, commenting, “If we conclude [in future] that the offer does not destroy value for Kraft shareholders, we will change our vote to ‘yes.’”
It seems clear to everyone that Kraft is aiming to take a path that would lead to its overpaying for Cadbury, clear, that is, to everyone but the company’s own management. Why do executives so often destroy corporate value in M&As?
Steven M. Davidoff, who maintains The Deal Professor, a “blog within a blog” at The New York Times Dealbook site, offers some interesting reasons why corporate executives often pursue value-destroying deals. In his new book, Gods at War: Shotgun Takeovers, Government by Deal, and the Private Equity Implosion, Davidoff blames the current deal culture on two things: executive hubris and a deal industry that only profits when deals are consummated. He writes:
“This CEO hubris has been reinforced by the institutionalization of deal-making. The deal-making industry is now vast. It involves the investment banks who provide financial advice and debt financing, the law firms who structure and document these deals, the consultants who work on strategic issues, and the media who cover it all. The deal machine provides its own force toward deal-making and completion. In many circumstances, the vast proportion of the fees of these ancillary actors are based on the success of the transaction. If a deal is not completed, they are paid little. But if a deal does succeed, the deal machine reaps tens of millions, too often with little accountability for the future of the combined company. The result is that the voice heard by corporate executives is too often one that pushes their own biases toward completing and winning takeovers.”
While it is not clear that Kraft’s management is suffering from this kind of impotency, clearly, Berkshire is not impressed with its open-ended proposal to pursue Cadbury at any cost. Nor should it be. If only more shareholders (not to mention boards of directors) would throw cold water on deal-making more often, particularly when it is so patently obvious that a company is overpaying.
We often laud CEOs who pull the trigger and make the big deal. Perhaps we should devote more attention to CEOs who have wisely left the deal table when the goods have been bid up too high. But as Davidoff explains, pride goeth before destruction, and an haughty spirit before a fall.
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