Lessons learnt from the Kraft-Heinz attempted takeover
The pursuit of profit may be pushing some to seek ‘innovative’ models of finance, finds Angus McCrone
Financial engineers are coiled, ready to strike – that’s the lesson from the recent Glencore and Kraft sagas.
People say that they are “so hungry they could eat a horse”, but you do not expect them to carry out the threat. Apart from anything else, horses are generally much larger than humans.
In the corporate world, however, a smaller animal can occasionally swallow a larger one. It is one of the boldest types of deal, potentially propelling the predator into a far bigger league but also carrying the same kind of risks that consuming a crocodile does for a python. Royal Bank of Scotland succeeded with its purchase of NatWest in 2000, but Blue Arrow’s takeover of Manpower in 1987 ended up rebounding disastrously on the acquirer.
Deals involving smaller players buying into larger ones seem to be symptomatic of mature bull markets, and the fact that recent months have produced two such moves may be a signal that the long stock market upswing since 2009 is well into its pipe-and-slippers phase.
What Kraft-Heinz taught us
The Kraft-Heinz approach for Unilever ended in failure in February when a strongly worded rejection from the Anglo-Dutch giant (combined in all probability with unfriendly noises from the British and Netherlands governments) forced the American group to drop the idea.
The two companies ended up putting out a bizarre joint statement, saying that Kraft had amicably agreed to withdraw its proposal and how they held “each other in high regard”.
How did Kraft-Heinz appear to have crafted its bid strategy to get around the snake swallowing the crocodile issue? It raised Unilever’s average operating margin of about 15% towards the US company’s 22% by a controversial combination of heavy job cuts and using market power to raise prices in the combined food business.
These big-bites-bigger moves show us two things.
First, that currency shifts have created apparent relative value in international businesses (in these cases the weakness against the dollar of the Russian rouble and the UK pound); and second, that financial engineers are out searching for audacious ways to generate returns at a time in the cycle when many of the more straightforward growth and consolidation opportunities have been taken.
Read the full article in the April 2017 edition of CA magazine