On November 19 I observed that Kraft’s proposed acquisition of the English company Cadbury had all the right ingredients for a war of attrition. These are never pretty; the company that captures the target often pays far too much and winds up with a bad case of buyer’s remorse. And it looked as though Kraft might be heading in that direction, having gone from the $16 billion they were proposing in November to about $17 billion in this New Year.
In response to my article, several readers said that I had underestimated the savvy of one of Kraft’s major shareholders, Warren Buffett’s Berkshire Hathaway. Buffett, they argued, would never allow Kraft to overpay for an acquisition target — even one it wanted, even one that competitors might also lust after.
Well, it looks as though our readers know a thing or two, as Wednesday’s headline in the Wall Street Journal proclaims: “Buffett hits Kraft on Cadbury“. Buffett made a highly unusual public statement opposing Kraft’s proposed issuance of shares to help fund the deal, stating that “the share issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury.”
And now the speculation begins. Did Buffett really intend to issue such a public slap in the face to a management team that is highly respected and which he supports? Or is he perhaps allowing that same management team to play a version of “My mommy won’t let me” with respect to Cadbury’s eager shareholders? Will his intervention signal that Cadbury is just not worth what its management seems to think it is? Or should it be interpreted as a preventive measure intended to keep a competitive bidding war from heating up? Should this be interpreted as smart re-setting of the value of the target firm, or as deflating the possible hubris of an acquisitive management team?
In my own teaching on M&A, I often observe that there are at least three prices for any proposed acquisition target. There is the “fair” price for the assets of the firm that an intelligent analysis might support. Then there is the “synergy” price — the price a princess will pay to kiss a frog, an analogy that Buffett himself has used in illustrating why mergers so often don’t deliver on their promise. The third price — typically the highest and least rational — is what an acquirer will pay to prevent the target from falling under the influence of another firm.
So what do you think will happen next?