Rule No. 1 in M&A

A transaction that started Labor Day weekend just got to a flash point: The U.K.'s M&A regulator has given Kraft Foods six weeks (till Nov. 9) to make a binding offer to buy Cadbury PLC — a "put up or shut up" demand — or Kraft will have to walk away for six months. Cadbury's board has rejected Kraft's initial advance, a $16.7 billion combined cash and stock bid.

Ah — there's the rub. Cash and stock. Maybe Kraft needs to revert to Rule 1 in M&A to get this deal done. And what is that rule? I turn to one of my past authors, D. George Harris (pictured), who stated it with simple elegance:

"Rule No. 1 in the takeover game: If someone makes an all-cash, any-and-all-shares tender offer, and they've got any kind of a reputation to back it up, you know that company is going to be sold to someone. The question becomes: To whom, and what degree of control will you have in that determination."

Harris had intimate familiarity with this rule. He lost his company to a hostile acquirer. He was head of chemicals company SCM Corp. when it was bid on by Hanson Trust PLC in the takeover mania of the mid-1980s. He wrote a detailed case study for Directors & Boards of the attack, defense, and ultimate surrender to the voracious British conglomerate.

I titled the article, " 'This Can't Be Happening': The Takeover of SCM." That title was inspired by another of Harris' hardbitten lessons, which Cadbury's board and management might heed. Warned Harris: "One of the things defenders have to contend with — a wish, really — is that 'this can't be happening to us.' As a director of such a company, I think you have to make sure management knows: It can happen, and it is, and if you want to do anything about it, you'd better get a move on."

Post-SCM, Harris went on to a distinguished next phase of his life as an investor in and owner of chemical companies. I was saddened to learn as I was writing this that he died in 2007. Let's see if his "Rule No. 1" lives on in how the Cadbury transaction concludes.

Dominic Cadbury on Brand Power

"Cadbury Vision Is to Stay Single" is the headline of a recent piece in the Financial Times covering the $16 billion bid by Kraft Foods for the British confectionary company. "Cadbury, On Its Own, Says Future Looks Sweet," chimed in a headline in a Wall Street Journal report today of the company's desire to swat away Kraft's acquisitive interest.

That desire is as true now as it was 18 years ago when Directors & Boards Publisher Robert Rock and I had a chat with Dominic Cadbury (pictured). He visited the journal's office on the way to giving a presentation to the Financial Analysts Society of Philadelphia.

He was group chief executive at the time of the company then called Cadbury Schweppes PLC. The three of us huddled to talk about the power of brands. The resulting interview appeared in a special 15th anniversary edition of Directors & Boards, themed "Being a Global Leader," published in the fall of 1991.

Here are two snippets from that interview that echo over the decades to the present stance being taken by both sides of this bidding interest (remember that Kraft has been in and out of Philip Morris):

• On the Prospect of a Takeover: "Philip Morris wanted to be a major global competitor in coffee. It bought Suchard, which gave them that opportunity. It also took them into confectionary. Will they decide to be a global competitor in confectionery? If so, everybody knows that they've got the cash flow to buy anything in the world. We're all public companies. Theoretically, they could say, 'Why don't we buy Cadbury Schweppes?' That would give them a very strong confectionary position in worldwide markets. I have no idea whether that could happen. My guess is that what it will come down to is, year by year, who does the best job individually of developing their business. If we do an excellent job of developing our confectionary business, my guess is that it would not be very attractive to somebody else to pay a huge premium to buy us."

• On the Value of Strong Brands: "The financial market has attributed over the last few years very high value to brands. It's so expensive and may become even more expensive in the future to build a brand name like a Cadbury. There is a scarcity value. I sometimes think it's a bit like old houses with attractive gardens in an attractive part of the countryside. There are a certain number of those in a country like Britain, and they are going to get fewer. The value tends to keep climbing higher. Brand names fall in the same category. It's going to be very difficult for anybody to build any of these brand names from scratch in the future."

"Build or buy (or, be bought)" is a board's perennial strategic dilemma. Cadbury-Kraft will be a dandy case of how two boards resolve this dilemma. We'll see if Sir Dominic's (he was knighted in 1997) words prove prescient. No matter how the deal jockeying proceeds, his thoughtful musing on the power of brands certainly stands the test of time — past, present and future.