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Kraft and Cadbury, Victors and Spoils

Barring any last-minute surprises, Kraft, the world's second-largest food company, will swallow UK-based Cadbury in a deal which in its reliance on debt bears a family resemblance to...a leveraged buyout.

Barely a month after deriding Kraft as an "unfocused" conglomerate and declaring "There is no strategic, managerial operational or financial merit in combining with Kraft", Cadbury Chairman Roger Carr (an advisor to buyout giant KKR) announced that the price was right. He praised Kraft for its commitment to "our heritage, values and people throughout the world"…and acknowledged the inevitability of job cuts.

Prior to moving on Cadbury, Kraft's debt stood at nearly half the company's market capitalization. Despite the sale of its North American frozen pizza business to Nestlé for just under USD 4 billion, new debt taken on to fund the Cadbury takeover will push the debt ratio still higher.

Hedge funds played an active role in driving the deal forward. In the positioning over the sale price, hedge funds gobbled up as much as one third of Cadbury stock and will be insisting on their share of the expected windfall.

One of these funds, Pershing Square Capital, reportedly increased its stake in Cadbury to 2% in the final run up to the sale. Pershing Square is the hedge fund which, in April 2005, acquired a 5.6% stake in Wendy's International and in June hired Blackstone to advise on "unlocking value" from the company. Later in the same month, Wendy's announced plans to sell the real estate under more than 200 sites to franchisees and begin a partial selloff of its doughnut unit through an IPO. By noon on the day of the announcement, Wendy's shares jumped over 13%. The cash from the IPO and real estate deals was used to fund the buyback of 18% of Wendy's stock.

Two months after Wendy's finished unloading the rest of the doughnut business, Pershing Square dumped its shares in Wendy's. The Cadbury takeover has provided these "investors" with a lucrative target for the profits generated in the heady days before the financial meltdown and the stock market dive.

In finance, however, it is not always the swiftest who reap the spoils. Under growing pressure to meet investor "expectations", Kraft eliminated over 19,000 jobs in 2004-2008 and took on huge amounts of debt to fund share buybacks. Until last year, when momentum slowed due to the financial hangover from the acquisition of Danone's European biscuit business, the dividend was raised annually, even quarterly, while the company scrambled to meet earnings targets through progressive rounds of cost-cutting.

Cadbury moved more slowly to accommodate pressure for "shareholder value", only shifting into high gear with the 2008 "Vision into Action" program which coupled increased dividends with plans to eliminate 15% of the global workforce. Having started later, Cadbury's balance sheets were in better shape when Kraft and the dealmakers began to circle the company. So in December 2009, as the jockeying over the takeover price continued to heat up, Cadbury announced that it would deliver even more to shareholders by slashing investment and ramping up margins.

The UK's Unite, which fought to keep Cadbury independent and warned that a heavily leveraged takeover would inevitably encourage asset-stripping and job losses, now has to confront the weight of even more debt: over 7 billion borrowed UK pounds out of the purchase price of GBP 11.9 billion (USD 19.4 billion). That burden will weigh not only on Cadbury, but also on workers throughout Kraft's global operations, who will have to build a global defense.

Cadbury top management can enjoy their windfall, financial advisors on both ends of the deal will pocket millions and the hedge funds who loaded up on Cadbury shares) as the takeover war raged can cash in their chips and turn to short selling Kraft.

It is easy, but ultimately pointless, to accuse people like Roger Carr of treachery. He has a long history of presiding over company breakups. But it is hugely relevant to question the meaning of "investment" in a world where "investment banks" have no stake in the companies on the receiving end of the deals, when "investors" buy and sell shares with a perspective which has been compressed from years to days and even minutes, and when pension funds ostensibly acting on behalf of employees' long term interests are increasingly indistinguishable from traders motivated solely to increase their assets under management. The only group with a long-term investment in the future of their workplaces, it would appear, is the workers who build the businesses. The Cadbury deal shows just how few cards they hold - and what has to change.