Berkshire Hathaway, the company that Warren Buffett controls, owns nearly 10% of Kraft Foods. That's a large investment worth many billions of dollars. For some time, Kraft has been repurchasing its own stock for $33+/- because it believes it is undervalued (Buffett has publicly stated he agrees).
The CEO of Kraft asked the shareholders to give her a blank check to pursue an acquisition of British chocolate maker Cadbury. For the first time in Berkshire Hathaway's history (or at least, the first time in many, many decades that anyone can remember), Warren Buffett publicly rebuked a fellow CEO by voting "no" on the proposed authorization pointing out that, at the time, Kraft's shares were at $27 per share. By issuing stock to pay for the deal, management would be "selling" part of the existing Kraft business for $27 after it spent years buying shares at $33, supposedly because it believed they were cheap at $33. In other words, by paying in stock, Kraft management was giving away dollar bills for less than their true value.
Instead of backing down, the CEO of Kraft has now structured a deal where she will dilute existing stockholders by 18%, issuing shares and using some cash to pay for the transaction. Why 18%? By law, she won't have to put anything under 20% dilution to a vote of the stockholders. It would seem that the CEO of Kraft just effectively gave Warren Buffett, the most respected investor in history and her largest shareholder, the middle finger.
My family, including my parents, siblings, and businesses, have a lot of our money in Berkshire. The CEO of Kraft basically said she's willing to give away part of the business we already own, which makes everything from Oreos to Cinnamon Rolls, for less than it is worth in order to expand the empire. To boot, it was just announced that the rating agencies are downgrading Kraft's debt to the lowest level above junk to reflect the stress the transaction will have on the balance sheet. That means that interest expense is going to rise.
There is still the possibility that because Kraft's share price has increased by roughly 10% since the original Buffett "no" vote that the Oracle may be inclined to let the deal happen. That's far from a sure thing, though. Either way, unless we're going to get a surprise announcement that Warren is behind the economics tomorrow, I have to wonder about the judgment of someone who would basically tell her largest stockholder, for whom she runs the business, to go screw themselves. If Buffett decided to do something about it, it would be like an elephant swatting a gnat.
Pride comes before a fall. It’s not smart to ‘dis’ your shareholders. Who knows what she’s thinking! Strange.
Not suprised the way CEO’s have acted lately. Maybe after she destroys Kraft she can go to BOA or GM
Buffett is critical of Kraft, yet at the same time he’s issuing Berkshire shares to acquire Burlington Northern.
Seems hypocritical, doesn’t it?