Tuesday, 19 January 2010

No love lost for hedge funds

Its difficult to reconcile to the way the Kraft Cadbury deal finally ended (the deal got done today). Not the outcome – M&A transactions like this happen all the time. But the way it happened makes me reflect if unbridled capitalism is really a good thing.

My ire is on the hedge funds – they are no different to a herd of vultures which circle over an animal that’s about to die. When there’s a whiff of a M&A transaction, the hedge funds pile in to buy the shares of the target, hoping to make a killing . This is what happened in the Alcon transaction about which I posted here. Somebody tell me how what happened in the Cadbury case is reasonable by any yardstick.

Here’s what happened. When the first whiff of a possible takeover of Cadbury was in the air, the hedge funds bought heavily into Cadbury shares. They then drummed up noise that Kraft’s bid was inadequate and it had to raise the price. They kept making this noise and were prepared to play brinksmanship. Till virtually yesterday, they kept repeating the mantra – Kraft had to bid more.

Kraft caved in. They raised their offer to an effective 850p per share, from the original 745p where they started. Once this happened, the herd turned on Cadbury’s board to accept the offer. Never mind that one of Cadbury’s largest shareholders Standard Life said that they wouldn’t support a bid lower than 900p. Never mind that many independent valuations supported a price above this figure. Never mind that Cadbury released excellent results even with this protracted takeover process was on. The noise making ability of the hedge funds is pretty large . The Board was right to be worried about lawsuits – the scoundrel’s last refuge. Cadbury’s investment bankers advised the Board to accept – they would; wouldn’t they – they don’t make any fees if the deal doesn’t happen. So ultimately the Board of Cadbury caved in.

So the hedge funds win. They are only concerned about a windfall now. Who wants to wait for the long term for value creation. Who cares about the 180 year history of a company. Who cares for the management which has created all this value. So 850 is a great price because they bought it at 750. Forget about long term potential.

I simply cannot accept that a short term raider has the same equal shareholder rights as a long term investor. As managers, we are supposed to be working for our shareholders. But I certainly don’t want to work for vultures. Governments have to intervene – if you haven’t held the shares for more than a year, you have no right to influence a M&A transaction – you have no voting rights, you have no right to sue. The fate of companies built over 180 years cannot be decided by the shark who wants to make a killing now. Its just not on.

The financial services industry has learnt nothing from the past year. Their behaviour is exactly the same. Forget about bonuses and pay which have hogged the headlines. Hedge funds have got back to behaving exactly as before. No wonder the public mood is so much against this lot. They stand next only to Osama bin Laden in public contempt. They deserve this contempt, and more.


Ravi Rajagopalan said...

I agree with you and am appalled. The problem is that legislators are too stupid and do not understand the financial services industry other than in soundbites. They have to legislate intelligently based upon a good understanding of short-term and long-term interests. Your suggestion of limiting voting rights on M&A to shareholders of a certain longevity is very sensible and can be done immediately.

J said...

//if you haven’t held the shares for more than a year, you have no right to influence a M&A transaction – you have no voting rights, you have no right to sue.//

I can see all kinds of problems with this but love the spirit of the idea - definitely worth a try. It is clear that these short term investors do not care about long term value but the challenge is to show clearly that there is a wealth transfer from the truly long term investor to these guys. Otherwise they are mere irritants to managers.

Deepa said...

It is such a pity that speculation has become more important than business. What a contrast from your blog on Nestle. Business consortiums should work together, and lobby for regulations to safeguard themselves from the sharks. If they stand by like mere on-lookers, this would go on happening.

Ramesh said...

@dada - Its not so much only the government. These funds who punted, did so with a large sum of money. If the deal did not happen, they would have a lost a packet. We are back to the same old wild ways that brough the financial crisis in the first place - wild unrestrained gambling. A society that encourages and rewards such wild risk taking deserves a financial crisis every 5 years.

@J - Very right. The idea is riddled with problems. But in the name of allowing liquidity in capital markets ( a worthy goal for sure), we have allowed complete anarchy. If we want that, we should also then accept periodic financial crises and taxpayers should not save such cowboys from ruin.

@Deepa - In the non Anglo Saxon world in Europe, such safeguards exist. For long we have criticised them as protectionist and thereby breeding inefficiency. But I am not so sure now. The French suystem which has a lot of safeguards for management seems to be as effective in spawning global companies as the British one.

Sandhya Sriram said...

The point to observe in situations like this is that every one knows what has happened is wrong, the current britain government, the media, public at large, the share holders (excluding the hedge funds who are not share holders but mere share bearers), every one feels what has gone wrong.

So maybe kraft will set the requisite example for the british legislature to take suitable modifications to the provisions to give credit to long term share holders.

But strictly no more bail out for these gamblers !!

Durga said...

Completely agree with your viewpoint. Another one of the business insights from the online professor!

Srivats said...

whoaa I am wonderstuck at the expertise you show and the thing about voting rights of share holders. You should be writing for business coloumns in magazines, or be a top advisor in a firm. God u rock!

Ravi Rajagopalan said...

It is notable that in today's FT, Peter Cadbury - a descendant of the original George Cadbury - has this to say " “The City Code should be changed so that shareholders that appear on the register after a bid is announced should not be able to vote.” The FT's Headline is that the deal is good for globalisation. This may be true, but one cannot sacrifice interest for a principle. It is bad politics and ultimately the outcomes are not necessarily beneficial.

You should be writing for a major column my friend.

VA said...

This is another excellent dimension added to one of your earlier post on Nestle. Your suggestions are like magical wands. Very incisive remedy! I have no words, Sir!

Ramesh said...

@Sandhya - Maybe, Maybe, but I doubt. We have accepted the complete sanctitiy of stock markets and ligslation is unlikely to come, I think.

@Durga - Oh, you are too kind.

@Sri - Hey thanks so much for am kind compliment. I am happy to be writing this blog rather than do anything else !

@Dada - Wow - sheer luck of timing !

@VA - Oh thanks so much.

gils said...

!!! thalaivaray ungala pathi post mathi post pugazhthuturken solitu soap podrennu nenachukathenga..ithana naala enaku hedge fundna ennanay purila..aana intha post padichaparum..understood it..chaanceleenga..semma simpla neata crispa..enna prachanai..athuku possibla enna solution tharalaamnu..romba nalla solirukeenga. If u can take up teaching as a profession (if not already) many wud benefit. Apdi ilaati again i go back to my previous request of "eco for dummies" sort of a ready recokener book. This subject is something which i find not many have a grasp of and even if they do..they dont have the knack of explaining it in simple terms. You've both :) chanceleenga..feels gud to have got into this blog :)

gils said...

but antha mathiri fundoda arthamay intha mathiri go-for-the-kill situationsku thaan ilaya?? apo totala hedge fundsay koodathu solreengala?

Ramesh said...

@gils - wow, that's the best compliments I've got. If I can attract you to a boring business blog and you feel gud, well ....
Hedge funds certianly have a role tom play in markets. What I object to is their use of shareholder rights to make a fast buck to the detriment of other stakeholders who are involved with a company. Law provides a primacy to shareholders as owners of a company. That was not meant to grant primacy to short term fast buck guys like hedge funds.

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