Warren Buffett has made it clear that he opposes<\/a> Kraft Foods issuing new shares at the current price to finance an acquisition of U.K. confectioner Cadbury. <\/p>\n Buffett, whose Berkshire Hathaway owns 9.4% of the U.S. food and beverage conglomerate, said he thinks Kraft\u2019s shares are undervalued, making them an \u201cexpensive\u201d currency to use for a bid. <\/p>\n In fact, Buffett has long been wary of using stock to acquire companies. Deal Journal dug up this passage from Roger Lowenstein\u2019s 1996 biography, \u201c <\/span>Buffett: The Making of an American Capitalist<\/a><\/span>,\u201d in which the Oracle of Omaha sounds off on companies that used stock for acquisitions during a wave of M&A during the early 1980s. <\/p>\n Citing a 1982 letter to Berkshire\u2019s shareholders<\/a>, Lowenstein explains that Buffett thought CEOs ought to think of stock deals as their selling part of the company in order to acquire another. Here\u2019s the relevant passage: <\/p>\n \u201cWith the issuance of new shares, each outgoing stockholder would up owning proportionally less of the company than before . The CEOs disguised this fact by using the language of a buyer: \u2018Company A to Acquire Company B.\u2019 However, \u2018clearer thinking about the matter would result if a more awkward but more accurate description were used: \u2018Part of A sold to Acquire B. <\/p>\n \u201cWhy was this disguise employed? Most stocks, including most acquirers stocks, were cheap. In such a case, an acquiring CEO was shopping with an unattractive currency, like an American in Paris when the dollar was undervalued. \u2026. <\/p>\n \u201cBuffett suggested that such managers and directors could \u2019sharpen their thinking\u2019 by asking if they would be willing to sell all of their company on the same basis as they were selling part of it. And if not, why were they selling part of it.\u201d<\/p>\n<\/blockquote>\n Fast forward to Buffett\u2019s statement today on Kraft\u2019s Cadbury bid. He thinks Kraft is undervalued considering where its shares were trading when the company did a big share buyback in 2007 :<\/p>\n \u201cKraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more,\u2019\u2019 according to Berkshire Hathaway. \u201cDoes the board now believe those purchases were a mistake and that Kraft\u2019s true value is only the current price of $27 per share \u2014 and that it is therefore fine to structure a major acquisition based upon that price?\u201d<\/p>\n<\/blockquote>\n Indeed, Kraft\u2019s price to earnings ratio of 17.51 lags behind that of rivals PepsiCo (P\/E of 18.60) and even that of the much smaller Hershey (P\/E of 21.77), though Kraft has a higher P\/E than consumer product conglomerate Proctor & Gamble\u2019s 14.27.<\/p>\n Thus, if Kraft management had to answer Buffett\u2019s 1981 question about whether it was a good time to sell the whole company, the answer would probably be no. Buffett says he isn\u2019t opposed to a deal for Cadbury. Raising $3.7 billion in cash from the sale of its pizza business and lifting the cash component of its Cadbury offer may have helped alleviate some of Buffett\u2019s concerns. Now Kraft just needs its share price to rise and help do the rest of the work of making the bid more attractive to Cadbury\u2019s shareholders.<\/p>\n Share Investor Links<\/span><\/a><\/a> <\/p>\n Share Investor Blog<\/a> – Stockmarket & Business commentary Recommended Amazon Reading<\/span><\/p>\n\n
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