First with Financial Comment from Arabia

Is the JAL bankruptcy or Cadbury deal the spirit of the age?

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The juxtaposition of two completely separate financial transactions on opposite sides of the world are signs of our times: the $19.7 billion knock out offer for UK chocolate giant Cadbury by US group Kraft; and the filing for bankruptcy by Japanese Airlines with debts of more than $26 billion.

Both are realities and not mere pontification on the state of the global economy. Deals are the wheels of commerce. But what does this tell us?

Premature takeover

Kraft is clearly being aggressive about global expansion and believes an economic recovery is coming. It thinks Cadbury is a good buy even if its biggest shareholder, none other than Warren Buffett reckons otherwise.

Is this another of those too-early-in-the-business-cycle takeovers that shareholders live to regret? Out of the 840 pence a share paid for Cadbury, 500 pence is in cash, so Kraft will be taking up debt and is therefore highly confident of the outlook.

So Kraft needs good luck – not something Warren Buffett has ever relied upon. In the long run bad things can and do always happen in business. Kraft is gambling on an upturn in the business cycle and has not even bought particularly cheaply at the bottom.

Then again what are we to make of the move by JAL into bankruptcy protection for a phased restructuring. The Japanese carrier is to cut around 16,000 jobs, reduce pensions for retired staff, move to more fuel efficient aircraft and restructure a $26 billion debt mountain.

That could not be achieved without $10 billion of government cash to keep the airline going during this process. Too big to fail, too important for national prestige or a state-backed dinosaur, you can take your pick.

Government dependency

But the JAL bankruptcy is also a symbol of everything that has gone wrong in Japan for the past 20 years: over investment in publicly funded infrastructure, market intervention, lack of innovation, price fixing, an uncompetitive currency rate and an ageing population.

At the very least the JAL bankruptcy shows that no government can support loss leaders forever, and that eventually market forces catch up with every nation. Will a new national champion emerge from the bankruptcy process? It really does beggar belief that it should be even contemplated.

But in the recent global financial crisis government support for ‘too big to fail’ companies like GM and Chrysler and banks too many to mention has become a symbol of our age. That this delays rather than avoids that ultimate end-game is clear from JAL, and in the meantime private enterprise is denied its true role in national reconstruction.

Sadly government intervention is the spirit of the age, and it never works.


Written by Peter Cooper

January 20, 2010 at 8:49 am

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