Capitaclysm: a tale of two companies

20 June 2017 -

Kraft Heinz’s bid for Unilever heralds a clash of two capitalist paradigms

Simon Caulkin

Kraft Heinz’s daring $143bn run at Unilever in February was over almost before it began. While this was good news for many in Unilever’s Anglo-Dutch home territories, it nevertheless leaves a smell of brimstone in the air.

For starters, with sterling dragged down by Brexit, this will not be the last opportunistic raid on the UK’s thinning collection of corporate crown jewels. With an open-door attitude to corporate control, and a government disinclined (or unable) to intervene, UK companies have few defences against international raiders. Tellingly, the Kraft Heinz bid was derailed not by shareholders or policy but the accident of a premature leak in the press.

Second, it feels like a day of reckoning has been postponed rather than averted – not between these two companies necessarily, but between two very different versions of capitalism.

The contrast is stark. Unilever under CEO Paul Polman, a CMI Gold Medal winner, is the epitome of the social- market, inclusive approach. Polman has pledged to secure Unilever’s future for 100 years; his first advice to shareholders was that, if they didn’t share his long-termist views, they could invest elsewhere. In Ben & Jerry’s and Seventh Generation, Unilever has two ‘B corps’ – companies certified to high environmental and social standards – among its subsidiaries. Polman has mused about certifying the whole group similarly.

Compare this with Kraft Heinz. A classic corporate ‘citizen of nowhere’, it was created by private equity group 3G and Warren Buffett’s Berkshire Hathaway as a ‘roll-up’ vehicle – a serial acquirer deploying the private equity formula of debt and cost-cutting to boost margins and shareholder returns, fast. Heinz having swallowed and rationalised Kraft in 2015, the combined group now needs a bigger target to wave its financial- engineering wand over.

Hence the offer for Unilever; hence also the certainty, once the pair have recovered from their bloody noses, of another one – if not for Unilever then for another large food or personal care company.

The scene is thus set for a deal that, whatever the outcome, may determine the shape of capitalism for years to come. One issue will be its size. At a national level, a long-term industrial policy is a travesty if the economy’s biggest and best actors can be picked off by international rivals focused on slashing and burning. Internationally, as noted in the last issue, industry concentration is already at unprecedented levels across many sectors, dangerously reducing both competition and diversity.

More concerning still is the prospect of behemoths roaming the planet animated by the rootless, globalised, shareholder-driven agenda that has led to the financialisation of the US and UK economy, and contributed to populist protest in the West. That pushes the economic and social stakes even higher.

The next bid will be better prepared and probably target meeker prey than Unilever. That may be a pity. As it showed in the pre-fight skirmish, Unilever would be a determined defender of a more human version of capitalism, which would be a central plank of its case. It has supportive shareholders, 70% of whom have held their stake for seven years or more. It would underline its importance as one of the UK’s biggest companies, and no doubt point as the clincher to the fate of Cadbury, misguidedly sold in 2010 to Kraft, which promptly reneged on its undertaking to keep manufacturing in the UK, and hived it off.

As multiple reviews now prove, everyone knows there is something wrong with Anglo-US corporate governance, but they have little inkling what or how much. A showdown like the one aborted in February would blow away the smoke and clarify the issue for all to see: how companies are managed, and for what ends, is a macro- as much as a micro-economic affair – one of the most important of all. It would be a mighty gamble with an uncertain outcome. Like a storm rumbling in the distance, it’s been a long time coming. Bring it on.