Think for Yourself, Buffett Style

We've written twice about the pending hostile takeover of Cadbury by Kraft. As an illustration of the Agency Dilemma or principal-agent problem and a quick followup. The story continues to remain interesting (at least to me- hey, I find this stuff dramatic, ok? Some like football, I like hostile takeovers. Call me a finance nerd!) Anyway, Kraft's largest shareholder is none other than Warren Buffett's Berkshire Hathaway. Berkshire owns some 9.4% of the company, a significant voting block. Kraft just sent out proxies for a "special shareholder meeting". "Special" shareholder meetings are not, as one might assume, some grand event to celebrate the company's success complete with band, sushi buffet, dancing and balloons.

"Cadbury shareholders stand to lose out massively"

"Cadbury shareholders stand to lose out massively" is the language a shareholder has used in suing Cadbury to reconsider the Kraft offer. More specifically, according to a Reuters story today:

Merger Posturing and Agency Dilemmas

As I watch takeover announcements, something called the principal-agent problem crosses my mind. Also called "the agency dilemma", it can be described as follows (paraphrasing from wikipedia):

"the difficulties that arise under when a principal hires an agent, such as the problem that the two may not have the same interests"

More specifically, the owners of a company hire managers to run the company on their behalf. Those managers, often called "officers" are better known as the CEO, President and other corner office, executive suite titles. The owners or shareholders elect a board of directors who are supposed to find, hire and compensate managers so that owners' interests are aligned with management's interests. Put more simply, if management makes the company more money, the managers earn more money too- at least that is usually the intent.