Saturday, January 23, 2010

Why Warren Buffett believes Cadbury's sale is a lousy deal for Kraft shareholders

Alice Schroeder usually has some interesting commentary on Buffett, this is no different.
The great investor also doubts Kraft CEO Irene Rosenfeld’s ability. He complimented her as a business ‘operator’, implicitly criticising her as a financial manager.
Buffett has a near-moralistic view of executives’ duty to steward investors’ money. Failure is, for him, a sin that could be termed ‘theft by incompetence’ (or indifference).

He criticised Kraft directors for admitting their stock was under-valued only after he said so. He fears Rosenfeld succumbed to ‘deal momentum’ that drove up the price.
That no other bid than Kraft’s arose buttresses his view. However painful for fans of Cadbury, Kraft’s bid was not ‘derisory’.
Buffett stewards money by avoiding auctions and negotiating in private. He is utterly inflexible, waiting patiently for the other party to become desperate and talk his own price down.

I call this ‘Buffetting’ the seller. We saw it in action during the financial crisis when only one investment bank, Goldman Sachs, dangled a high enough reward to make him bite on their stock, even though all of their peers were in danger of bankruptcy. Buffett has made an estimated £2.5billion profit on that £3billion deal.
Of such discipline is Buffett’s great fortune made. Behind it lies a mind incapable of succumbing to deal momentum over Cadbury.

Case in point: when Buffett bought See’s Candies, he would have walked had the seller wanted just £60,000 ($100,000) more on a £15million deal. Inflexibility over trivial amounts has saved him billions in losses over the years.
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