Saturday, 11 December 2010

A bit more on Cadbury

The other interesting thing that Roger Carr mentioned in his LAPFF presentation was the way that the ownership base changed during the course of the Kraft bid. By the end, as I think was fairly well known, hedge funds held something like 30% of Cadbury shares. There are a couple of points to note here. First most these funds piled in during the course of the bid with the aim of making some money quickly from an uplift in the shares. This is what funds like that do, so no big surprise. And they definitely made quick money for their clients as a result. But as I said, according to Carr most of them piled in after the bid had been announced, so they had no great insight into the market, it was a relatively simple bet that the company would get taken out, and as such there was a chance to cash in. Long-term holders may actually have made a lot more money from the deal, though over a longer timescale, obviously.

Secondly, the natural reaction of many (understandably) would be that short-term investors to a large extent determined the fate of the company, and obviously many of the post-bid investors were only looking for a quick return. But how did they get to hold 30%? In reality the hedge funds were only able to build up such a stake because traditional long-only institutions were also cashing in on the rise in the share price resulting from the bid. In a number of cases, according to Carr, they were top-slicing, so were still on the register right till the end, but with a much lower holding. So we should bear in mind, when tempted to stick the boot into hedge funds, that they were only able to have such an influence because traditional institutions allowed them to have it.

None of this is in any way new, nor is the behaviour inconsistent with the mandates given to institutions by their clients (us, and our pension funds). Just a bit of a corrective to the assumption of hedge funds = bad, traditional institutions = good.

Finally, on a separate point, I realise that one of the reasons I found Roger Carr's presentation surprising is that it was a little out of tune with what he had said previously about the deal, see here for example. I think there is a slight element of saying different things to different audiences.

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