Kraft, Heinz, and Uncle Warren
By: Jonathan M. Lamb. Jonathan M. Lamb is an Economist, Consultant, and Entrepreneur that works in the capital and debt markets.
Full disclosure, I am an Indianapolis Colts fan. As such a fan I root for ANYONE other than the Kraft family and the New England Patriots, and have been on a long campaign to end the Evil Empire. With that said, I would enjoy nothing more than to see Robert Kraft and his Empire dwell in the basement. However, Kraft’s team not only scored a touchdown with the newly announced blockbuster deal, but with the Kraft/Heinz deal giving Berkshire and 3G a seat in the owner’s suite it looks like the Kraft family will be keeping the Lombardi Trophy for years to come.
Who besides the Kraft family, the Heinz family, 3G, Warren Buffett, and other wealthy preferred shareholders win in this deal? Will the American Consumer and the Heinz and Kraft workers win? No. This deal, like every other mega-deal will do nothing in the long run to add value to the common share holder, workers, or consumers. Mergers disappoint, it is not a secret. Don’t get me wrong there will be mega-returns for many in this deal, and Warren Buffet will (and has) scored a touchdown on this deal, but at what cost? The cost will be cost cutting. Don’t hold your breath for cheaper pickles, ketchup, or macaroni and cheese in your grocery aisles. There will not be a host of new of newly created American jobs for all the “value added” from the merger, no, it will be outsourcing, automation, and job cuts.
This merger will need to see a broad savings from cost cutting and efficiency gains to see any trickle down value to common stock holders and the public. Efficiency gains are great things, and one of the basic principles of economics. Without great strides in efficiency we would still be plowing fields with ox, spending our evenings basking in candle light, and using our fingers and toes to add up really big numbers. It takes great minds to have a vision to create efficiency and eliminate waste where others cannot, but it takes magic to make mega mergers “work.” These cost savings will come at a loss to most, and a gain to a luck few.
This merger will not epically fail, though most mergers have a 70-90% chance of failing. This deal is solid for those at the top, but it will be the same story, the rich will get richer and the Patriots win another Super Bowl. For those like me that didn’t have the vision to be holding call options on Kraft, all we can do is speculate on what marriage Buffett will arrange next. Will it be utilities, soup, insurance, or magic widgets? One thing is sure; whatever it is will make money for good ol’ Uncle Warren and those at the top, as it is a beautiful thing to be on the inside.
So what? Kraft was up 40% after the announcement; this is the world we live in. Money remains cheap, so what if Jim Bullard of the St Louis Fed warns that we are on a crash course for the mother of all bubbles when the world has to be taken off Central Bank buying sprees, QE, and the cheap money life support and is forced to stand on its own two feet. As long as we continue to get cheap money there will be more 40% surges as more and more mega-deals are inked. Just once it would be nice to be on the inside of one of these blockbuster deals, and just once it would be nice to see an underdog win and have deflate-gate catch up to the Evil Empire, but I am not about to start holding my breath anytime soon.