There’s more to business than money

Anthony Hilton
02.11.09

The boss of BP, Tony Hayward, said this weekend in public what many in business believe but precious few are prepared to live by.

He told the Sunday Times that there was “no industrial logic at all” in the mergers of large oil companies which were such a feature of the last decade — and indeed the defining feature of the stewardship of his predecessor Lord Browne. The oil industry needs access to new resources and access to new customers he says. Putting two existing businesses together achieves neither goal, and indeed size brings with it a whole range of new problems borne of complexity and remoteness. It is hard to believe that a smaller oil company would have been caught out, as BP was, by its problems of leaking pipelines in Alaska or the faulty procedures which led to the Texas refinery explosion, two events which have hugely undermined the progressive image of the company.

It is interesting too that the other big news of the weekend should be the Government's decision to try to bring more competition back into banking with the revival of Northern Rock, the spinning off of Scottish TSB business from Lloyds, and probably at some point the separation of the RBS-branded banks from NatWest. It is easy to suggest that these measures have been forced on the parties by the EU competition authorities in Brussels, but we should be pleased, wherever the measures come from. Those who run big banks will often say in private — echoing Hayward — that there is no evidence at all for the idea that size brings greater efficiency. These measures are not much in the great scheme of things but at least they are a start, or will be some years from now when they actually happen.

But just as one is beginning to think people might at last be waking up to the often inherent wastefulness of corporate size, the same page of the same paper carries a report that the US processed food company Kraft is putting the final touches to a hostile bid for Cadbury the UK chocolate maker. The offer is expected to be launched once Kraft's latest profits figures are digested by the market later this week. Yet this looks to be a deal entirely without merit, a merger of just the type which Haywood describes as pointless — pointless that is to everyone except the investment bankers and other advisers for whom it is the means to a fee-earning end. It is significant for example that in all the months of courtship which have led to this moment, no one has been able to come up with any sensible business reason for this deal, and neither has Kraft given any hint of an idea as to how it might improve Cadbury. It would be fair to assume that the reason for that is it cannot. This is about financial engineering — using the higher share ratings of the American market and taking advantage of sterling's weakness to buy the company when it is cheap, with the naked opportunism barely concealed by a fig leaf of notional cost savings which will no doubt turn out to be a fiction, though not until thousands of jobs have been needlessly lost trying to deliver them.

Yet in spite of the “complete absence of industrial logic” the fund managers who hold Cadbury shares — those who have not already sold out to hedge funds — can scarcely conceal their eagerness to receive a bid. Because price is all that seems to matter to most of them they are more than likely to accept, not immediately but once it has been sweetened a bit to secure a recommendation of the board. Such is the usual course of the ritual dance which is about to follow.

Were the Cadbury shareholder base largely made up of private shareholders the company would be much more likely to maintain its independence because private shareholders identify much more closely with a company, its management, its products, its employees and its ethos. Institutional shareholders find such things to difficult and costly so ignore them.

People have tried off and on for years to see if there is some way such institutional shareholders could take into account a wider national interest but without success. Yet such a wider interest does exist. There was value to a city such as York, Norwich or Bristol — where large local businesses have been sold to foreign owners — in having a headquarters in their town. The top employees supported the local infrastructure — schools, theatres, restaurants, transport and the like — and their loss after being taken over diminished these places.

Often they also diminish the tax revenue. One of the little discussed consequences of our willingness to sell all our businesses to foreign buyers is that the new owners usually arrange things — quite legally — to reduce to a minimum the tax they pay here. Over the years the likes of Rowntree (now Nestlé) , Asda (now Wal-Mart) and the others have paid far less tax after takeover than they did when they were British-owned.

The financial meltdown has reminded us that there is a national interest in banks lending to small businesses even if it is not what they want to do. Perhaps we will one day similarly come to realise that allowing the future ownership of businesses to be decided exclusively by the self interest of fund managers does not always deliver the best results either.