Many observers were appalled by the 2010 takeover of iconic British confectionery company Cadbury by America’s Kraft Foods, angry at its aftermath of broken promises and job losses.
Shareholders, though, could be forgiven for being more sanguine – and indeed, many happily sold their shares, seeing in Kraft’s offer a way of unlocking more value from their investment than Cadbury’s own management had been able to achieve.
And that Warren Buffett and Brazilian billionaire Jorge Lemann subsequently combined forces to buy Kraft in 2015 (by now divested of its snack and confectionary businesses, including Cadbury’s) is one of life’s richer ironies: now it was American factories closing, as Lemann’s fabled cost-cutting tactics got to work.
Déjà vu, all over again
Such thoughts probably went through many people’s minds on February 17th, when Kraft – now joined with Buffett’s HJ Heinz as Kraft-Heinz – submitted a bid for Unilever (LSE: ULVR), promptly sending the shares soaring 14%.
Like Cadbury, Unilever seems to be a company for which people have something of a soft spot. In part, that’s thanks to its array of trusted brands, stretching from foodstuffs such as Flora, Lipton’s, Knorr, Hellman’s, Wall’s, and – of course – Marmite and Bovril, to personal care and cleaning products such as Sunsilk, Persil, Dove, and Timotei.
Not withstanding that, its environmental and sustainability initiatives have also won the firm plaudits, even from green and consumer activists generally ill-disposed to the business world.
And on a personal note, my own interactions over the years with Unilever people and factories have been unfailingly impressive, in part prompting me to make the company one of my larger shareholdings.
Heady returns
As we all now know, the Kraft-Heinz bid collapsed after a few days, as it became clear that Unilever management would robustly defend their business, its heritage and its values. And has now also become apparent, it helped that they had muscular support from politicians and large investors.
But the 14% premium that the bid added to Unilever’s share price has remained – and even increased, after Unilever’s chief executive, Paul Polman, stated that the company would look for ways to accelerate returns for investors.
Not to put too fine a point on it, Unilever shares are at an all-time high, up 176% over ten years – a period over which the FTSE 100 has risen only 13%. Who said that consumer goods businesses were staid and boring?
In other words, it’s a situation very much like the proposed Pfizer takeover bid for pharmaceuticals giant AstraZeneca in early 2014. Although that too collapsed, it bid up AstraZeneca’s share price to lofty levels that remained long after Pfizer had walked away.
In short, for investors, it’s very much a ‘heads I win, tails I also win’ situation: there was a handsome reward for holding AstraZeneca and Unilever shares, irrespective of whether the bid succeeded or not.
Valuing value
That a canny operator like Warren Buffett should see hidden value in Unilever is not surprising.
Very largely, it’s what he has built his career on, having famously learned his trade from master investor Benjamin Graham, whose book The Intelligent Investor remains a classic to this day. (Buffett, incidentally, wrote both the preface and the appendix of the 2003 edition, updated by Jason Zweig – himself no investing slouch.)
Because seeing – and unlocking – hidden value is what all investors should aspire to, looking for companies where the prevailing market price fails to fully reflect the business’s growth or earnings prospects.
It’s what I do, it’s what the analysts at the Motley Fool Share Advisor service do, and – if you invest – it’s what you do, too.
Simple truths
So what are the lessons to learn from all this? There are three, I think.
One: the link between value and price isn’t as strong as you might think. Up until Buffett’s bid, most people would have thought Unilever expensive.
Two: potential value is one thing, unlocked value quite another. If you – like me – hold Unilever and AstraZeneca, then we have predators to thank for our gains.
And three: in companies, as with investing in general, slow-and-steady value-building wins plaudits, and earns trust. Unlike Cadbury, Unilever and AstraZeneca won out because investors thought that their future was better than their past.
