Warren Buffett had to give Kraft a lesson today. Buffett's Berkshire Hathaway is the largest shareholder in Kraft, which is attempting to acquire Cadbury. Kraft has asked its shareholders for permission to issue 370 million new shares to use as a part of the $16 billion it proposes to spend for this transaction. The problem with this proposal was that it would have given Kraft executives unlimited authority to change the terms of the deal without coming back to the shareholders for approval. Berkshire announced that it would vote no. They don't have a majority stake, but Kraft would not be foolish enough to try to override Buffett, even if they could get the support of the other shareholders.
Berkshire said, “The share-issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury – in any way it wishes – from the transaction presented to shareholders in the proxy statement. And we worry very much that, indeed, there will be an additional change from the revision announced this morning.”
This seems probable, as there is at least one other possible bidder.
Berkshire's response is an important lesson for Kraft and for any other corporate executives who think they can get the shareholders to grant them unlimited authority. It is a lesson in economics about the moral hazard in a deal that allows executives to impose all downside expense on the shareholders. It is a lesson in fiduciary obligation -- Kraft management was attempting to evade their obligation to their shareholders and Berkshire was upholding their obligation to theirs. It is a lesson in fairness and logic and judgment and credibility. We have seen this over and over. Everyone wants to externalize their risk, and in the past we have made it too easy too often.
Berkshire's statement concludes that if by the deadline of January 19 it finds the terms of the deal beneficial to Kraft shareholders, it will change its vote to yes. Will Kraft be able to put together a deal with terms that meet Berkshire's standards of transparency and accountability? Well, one thing we know is if they don't, the answer from Omaha will still be "no."
Nell Minow - Editor
