Banking Charlies are in the chocolate factory

Anthony Hilton
9 Sep 2009

One of the advantages of a long summer break was that it gave me time to reread Barbarians at the Gate, the seminal tale from 20 years ago of the takeover battle for RJR Nabisco, which came to define the grotesque excess of 1980s Wall Street.

It was a happy choice because the takeover bid from Kraft for Cadbury that erupted on Monday has so many of the same ingredients it has the potential to go the same way. The central message of the Barbarians book was that none of the legion of Wall Street advisers spent a moment thinking about what was good for the company they were advising, or what was in the best interests of its employees, its customers or even its shareholders.

Whether it survived or not was a matter of supreme indifference. Instead, the battle was an excuse for the exercise of the unbounded ego and unfettered greed of the investment bankers involved — some of whom seemed the most arrogant, socially maladjusted bunch you were likely to meet.

The bankers were driven only by the size of fee they would earn from the transaction and the follow-up revenues they would get from selling mountains of debt and other financial instruments in the follow-through. Indeed, advice was structured to maximize the potential revenues from this aftermarket. Any spare time they had when not musing on such schemes was spent trying to shaft their colleagues and rivals.

Interestingly, one of the leading advisers to Kraft, Lazards' Bruce Wasserstein, was also involved in RJR Nabisco. He was a marginal player — an apprentice Barbarian if you like — because one of the big beasts in the deal, Salomon's John Gutfreund, did not trust Wasserstein not to leak to the Press. It is wonderfully ironic therefore that in this week's deal Lazard is already complaining about the Press coverage and having meetings to discuss it. One has to admit though that this behaviour is not so much Barbarians at the Gate as Charlies in the Chocolate Factory. But give it time. The egos are circling.

It is obvious too that the fees are going to be grotesque even without Lazard's silly meetings. Both sides have far too many advisers for it to be otherwise — not because the client values a range of opinions but because if they have all the investment banks signed up, they can't then be making mischief on the outside looking for a way to gatecrash the deal by persuading another hapless company to counterbid and spoil the party. From Kraft's perspective, it may be expensive, but it does have the advantage of keeping the advisers honest — they all watch each other.

The downside is that the advice suffers because they don't work as a team and will sabotage any strategy which might result in any one of their number getting a disproportionate share of the fees and prestige.

None of this has anything to do with whether combining Cadbury and Kraft makes serious commercial sense though no doubt in due course we will be subject to the usual unprovable rubbish about cost savings and extra marketing clout. Meanwhile, the benefit is not obvious. Kraft lost any chance of being on the side of the angels when it felt the need to invent processed cheese in the first place.

While its other contributions to global gastronomy continue to set the pulses racing as the heart works ever harder to get the blood through those clogging arteries, it is hard to see what problems Cadbury has that are so bad Kraft could be a solution. Most observers think Cadbury is big and skilled enough to do what it needs to do on its own.

Unfortunately, that is not the answer the City wants, and is unlikely even to be the answer Cadbury's advisers want. Normally in battles like this, the defending investment bank defines success not by defeating the bid but by getting someone else to pay even more. The fees, if the bid is seen off, will no doubt be generous but they will be very much higher if they can turn this into an auction. If that means the end of Cadbury, then so be it.

This is beginning to unfold only days after Sir David Walker wrote in the Financial Times about the need for the City to turn away from short-termism and rediscover the merits of giving long-term support to companies. Sir David is author of the Government-commissioned review of governance in the wake of the banking crisis, and was for many years chairman of Morgan Stanley Europe — one of the banks defending Cadbury.

This bid is an interesting test too, given what is happening in the wider economy. We cannot hope to reduce our dependence on financial services and rebalance the economy towards mainstream businesses if we keep selling our best examples to overseas buyers, who will then proceed quite rightly to run them with their own interests in mind.

But the reality is that all those fund managers will look at how the bid has inflated their performance in the relevant quarter either to the end of September or, looking ahead, to December, and they will then think of the bonuses they will personally collect if they lock in that extra performance. And that will seal Cadbury's fate.