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26 May 2024

Big is not always better when it comes to business

By David Robertson

Kraft, the food conglomerate, finally won its battle to take over Cadbury last week in a deal that looks good for neither party.

Cadbury, the chocolate maker, has been holding out for a higher bid for weeks claiming that a takeover by Kraft or Hershey or one of its other suitors would be disastrous for jobs, growth, investors, etc. However, when Kraft upped its bid (against the wishes of some investors including Warren Buffet) the Cadbury board caved in. Shareholders in the 184-year old chocolate maker may be reasonably pleased with the deal they have got but other stakeholders should rightly be concerned about being subsumed into a megalith like Kraft.

The problem is that when multinationals reach a certain size they become too big to move at anything other than a glacial pace. Innovation is snuffed out by the shear weight of management bureaucracy and ideas are thrashed out in committee until there is not a jot of creativity left.

Eventually, the only way senior executives can see to significantly boost revenues and profits (and thereby justify their jobs) is to buy in growth – and Cadbury fits the bill nicely. It has divested its drinks business and concentrated on essentially two areas: chewing gum and chocolate. As such Cadbury is an anti-Kraft, rejecting diversity in favour of focus.

The results are easy to see. While Kraft's share price has done very little for the past decade, Cadbury's share price doubled during the same period. The lesson must surely be that big is not always better.


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