{"id":141137,"date":"2010-01-05T13:15:00","date_gmt":"2010-01-05T18:15:00","guid":{"rendered":"tag:blogger.com,1999:blog-3087194156628161158.post-6109972674053741086"},"modified":"2010-01-05T13:18:08","modified_gmt":"2010-01-05T18:18:08","slug":"marketwatch-buffett-goes-activist-on-krafts-cadbury-bid","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/141137","title":{"rendered":"MARKETWATCH: Buffett goes activist on Kraft’s Cadbury bid"},"content":{"rendered":"

Jan. 5, 2010, 12:50 p.m. EST \u00b7<\/span><\/p>\n

By Alistair Barr, MarketWatch<\/p>\n

Investor usually backs management, but issues strong worded statement<\/span><\/h2>\n

SAN FRANCISCO (MarketWatch) — Berkshire Hathaway Inc. Chairman Warren Buffett likes to invest in good businesses with great managers, and then lets them get on with it. But the famed investor broke with that approach Tuesday by publicly criticizing Kraft Foods Inc. <\/p>\n

In particular, the investor singled out Kraft’s \/quotes\/comstock\/13*!kft<\/span>\/quotes\/nls\/kft<\/span> (KFT<\/a><\/span> 28.37<\/span><\/b>, +0.94<\/span>, +3.41%<\/span>) <\/span> plan to sell new shares to help pay for its attempted acquisition of industry rival Cadbury PLC \/quotes\/comstock\/23s!a:cbry<\/span> (UK:CBRY<\/a><\/span> 779.00<\/span><\/b>, -26.00<\/span>, -3.23%<\/span>) <\/span> \/quotes\/comstock\/13*!cby<\/span>\/quotes\/nls\/cby<\/span> (CBY<\/a><\/span> 49.80<\/span><\/b>, -1.85<\/span>, -3.58%<\/span>) <\/span>. Read more about Buffett’s refusal to support Kraft plan. <\/a> <\/p>\n

<\/object> <\/p>\n

News Hub: Kraft and Cadbury’s Soap Opera<\/h3>\n

Kraft announced that it would be selling off its pizza business to Nestle, and using proceeds to entice the still skeptical Cadbury into a deal, Dana Cimilluca reports. <\/p>\n<\/p><\/div>\n

Berkshire \/quotes\/comstock\/13*!brk.a<\/span>\/quotes\/nls\/brk.a<\/span> (BRK.A<\/a><\/span> 99,691<\/span><\/b>, +91.00<\/span>, +0.09%<\/span>) <\/span> \/quotes\/comstock\/13*!brk.b<\/span>\/quotes\/nls\/brk.b<\/span> (BRK.B<\/a><\/span> 3,318<\/span><\/b>, +6.99<\/span>, +0.21%<\/span>) <\/span> issued a statement noting that it is Kraft’s largest shareholder, and argued that the plan to issue new stock would “give Kraft a blank check” to change its Cadbury offer. <\/p>\n

Berkshire also criticized Kraft’s board of directors, which authorized a $3.6 billion stock buyback in 2007 at $33 each, and is now allowing the company to issue new shares at the current price of $27. <\/p>\n

“Does the board now believe those purchases were a mistake and that Kraft’s true value is only the current price of $27 per share — and that it is therefore fine to structure a major acquisition based upon that price?” Berkshire wrote in its statement. <\/p>\n

“It’s very unusual for Buffett to do this,” said Whitney Tilson, head of hedge-fund firm T2 Partners LLC and a Berkshire investor. “It’s unusual both in that Berkshire did this at all and in the very strong wording of the statement.” <\/p>\n<\/p>\n

\n

‘I’m not sure whether this represents a shift to a more activist Warren Buffett. I hope so.’<\/p>\n<\/p>\n

Whitney Tilson, T2 Partners<\/p>\n<\/blockquote>\n

Stepping up? <\/h3>\n

Berkshire’s main strategy has been to buy or invest in businesses run by talented and trustworthy managers and then remain mostly on the sidelines. <\/p>\n

Even when Buffett was on the board of companies in which Berkshire invested, he often stood by when those companies were working in ways that he may not have agreed with, Tilson noted, citing Gillette’s $7 billion acquisition of battery maker Duracell in 1996. <\/p>\n

“I’m not sure whether this represents a shift to a more activist Warren Buffett. I hope so,” added Tilson, who’s investment firm owns Kraft shares as well as Berkshire stock. <\/p>\n

Another shareholder of Berkshire and Kraft said he was “elated” when he heard the news about Buffett on Tuesday. <\/p>\n

“We were frustrated and were wondering how to stop this bidding war getting out of control,” said Jeff Auxier, manager of the Auxier Focus Fund. “Finally [Buffett is] stepping up and saying that these prices make no sense.” <\/p>\n

Shareholders often have no constituency to protect their common interest. But in this instance, Buffett is using Berkshire’s large stake in Kraft and a public statement to rally other investors to a common cause, according to Auxier. “CEOs overpay, over-borrow and destroy shareholder value and a lot of big shareholders do nothing. People wonder why you’ve had negative returns on the S&P 500 Index \/quotes\/comstock\/21z!i1:in\\x<\/span> (SPX<\/a><\/span> 1,133<\/span><\/b>, -0.09<\/span>, -0.01%<\/span>) <\/span> over the past decade. Just look at the valuation of deals like AOL Time Warner.” <\/p>\n

If Kraft ends up buying Cadbury at a high price, the company’s shares will underperform the market for five years, Auxier warned. “We’ve seen this time and time again. It gets to be a problem of CEO ego vs. shareholder value.” <\/p>\n

Behind the scenes <\/h3>\n

Another longtime Berkshire investor said it’s not unusual for Buffett to actively protect its investments from value-destroying actions such as issuing lots of new stock to overpay for acquisitions. <\/p>\n

“Berkshire’s ideal is a world in which there are lots of great businesses and it goes along passively as an investor,” said Thomas Russo, a partner at Gardner Russo & Gardner. “But the world often doesn’t provide that, so you have to do more to get what you want sometimes.” <\/p>\n

When the Coca-Cola Co. \/quotes\/comstock\/13*!ko<\/span>\/quotes\/nls\/ko<\/span> (KO<\/a><\/span> 56.29<\/span><\/b>, -0.75<\/span>, -1.31%<\/span>) <\/span> was considering buying Gatorade, media reports at the time suggested that Buffett was behind the scenes trying to persuade the company not to overpay for the sports-drink maker, Russo noted. Rival PepsiCo \/quotes\/comstock\/13*!pep<\/span>\/quotes\/nls\/pep<\/span> (PEP<\/a><\/span> 61.88<\/span><\/b>, +0.64<\/span>, +1.04%<\/span>) <\/span> ended up winning Gatorade through its $13 billion acquisition of Quaker Oats in late 2000. “Berkshire has been increasingly outspoken on the need for shareholders to speak up about corporate action and corporate governance,” he added. <\/p>\n

Berkshire’s statement on Tuesday suggests Buffett thinks that Kraft is more undervalued than the benefit of the discount they will get by buying Cadbury, according to Russo. “Berkshire is choosing not to give up the attractive discount on Kraft shares simply to get an acquisition of Cadbury, where the shares may or may not be trading at a discount according to Berkshire’s calculations. It’s not unusual for Berkshire to have a discussion about what they’re getting and giving up.” <\/p>\n

‘Good cop, bad cop’ <\/h3>\n

Buffett’s statement also may be interpreted as an attack on Kraft executives, but the company’s management could use it to their advantage, Tilson said. “Kraft management can use this to play ‘good cop, bad cop.’ They can say, ‘Look, this is our final offer because if we pay any more our shareholders will vote against it.’ <\/p>\n

“‘Enough is enough, take it or leave it.’ That’s what Buffett is saying,” he added. <\/span> <\/p>\n

Alistair Barr is a reporter for MarketWatch in San Francisco.<\/span><\/p>\n

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