Cadbury: It's Not Really Up to the Board

If the Cadbury directors had no hesitation in rejecting Kraft's bid, they should. Boards can be too ready to

board did other than put considerable thought into its rebuff, consulting with its investors. Kraft's two-month gap between announcing its takeover intention and formally bidding certainly gave Cadbury time. But directors should neither ignore investors' wishes nor assume they understand them.

For most boards, most of the time, the interests of the company and its owners coincide. Occasionally, there are major disagreements over management competency or corporate strategy -- Sir Philip Hampton, chairman of Royal Bank of Scotland, is under fire for accepting a non-exec post at Anglo American. Butthese are still usually resolved by working with the company.

But on a bid, a board can be in direct conflict with the majority of its shareholders-- and the directors can be wrong.
Those boards that receive an offer and instantly fire off a statement about its inadequacy and derisory terms that undervalue the company start with a mistaken assumption that the firm should remain independent or that the incumbent directors should remain in charge.

It is an understandable, if irrational, stance but it is one encouraged by investment bankers that stand to make higher fees from defending -- and losing -- the company's autonomy that from accepting a fair offer.

Shareholders are not always acting in short-term interests in accepting a bid. Even long-term investors may think the premium sufficiently high to take quick profits, but if the offer is paper rather than cash they would be accepting shares in a company that has overpaid and will pay in future for that mistake. Investors may, however, think the bidder offers the prospect of better management than the current crop ( whose instinct, after all, is to resist a change of ownership).

It might seem good planning to have a bid defence ready just in case -- but if it is ready, why has it not already been implemented?

Under the pressure of an unsolicited takeover, companies can suddenly put in motion a series of changes, from ditching the directors to demerging divisions and leveraging the balance sheet to increase dividends.

Such plans to turn the company inside out and upside down often smack of desperation, but if they had any merit, they would have been proposed prior to the offer, not hastily promised after the bid arrives.

A hostile bid is simply a bid that the board has rejected. If, as Kraft has done, it is put to shareholders, then the investors will decide the outcome irrespective of the board's rejection.

Wise boards should be able to put shareholder value ahead of their own preservation. Holding out for a better offer is admirable but holding out at all costs is not.