Kraft and The State of Advanced Capitalism

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It was almost inevitable. Following Kraft’s acquisition of Cadbury, the US food giant has gone back on its guarantee not to close the Cadbury plant in Somerdale with the loss of 400 jobs. According to the BBC, Cadbury employs 4,500 people in the UK. Kraft has yet to announce plans for its Bournville factory in Birmingham and its head offices in Uxbridge but has already said it expects the takeover to result in “significant cost savings”.

Kraft typifies a more long-term trend in advanced capitalism where large multinational companies boost their profitability through vampire-like acquisitions of profitable companies. Last week The Guardian revealed how two major FTSE 100 companies were stockpiling capital to fund a major wave of acquisitions in the technology market. In the FT in September, however, Gavan Nolan reported that, ‘Kraft has a relatively large debt burden, and it is unlikely that it could increase the cash component [of its takeover offer] meaningfully without threatening its investment grade rating.’ This is because the company is currently £7bn in debt. To fund the acquisition of Cadbury it had to issue bonds worth $9.5bn (£6.06bn), raking in a nice sum, no doubt, for BNP Paribas, Citigroup, Deutsche Bank, HSBC and Royal Bank of Scotland, who managed the deal. Indeed, the investment bankers, lawyers, accountants and PR advisers racked up fees at a rate of more than £2m a day for their efforts. The fear now is that this debt will be unloaded on to Cadbury’s books, providing the rationale for a wave of job cuts and attacks on working conditions and pensions. Fears have already been raised that Cadbury will be the new Manchester United after spiralling debt threatened to hobble the club.

If we look at the long-term profitability of Kraft we see a definite downward trend over the last number of years. This time last year, for instance, Kraft was posted ‘fourth quarter profit losses of six per cent, despite higher volume sales of chocolate, biscuit and beverage brands.’ In other words, production of commodities has become increasingly unprofitable because as revenue increased, profits fell due to high costs of production.

The company said overall input costs for 2007 had increased by $1.3bn, with dairy costs in particular increasing 40 per cent. Prices for wheat, soyabean oil and cocoa now at “significantly higher levels than the 2007 costs”, Kraft added.

Net revenues for the quarter hit $10.4bn, a 10.9 per cent increase compared to the year before, but the cost pressure resulted in a 10 per cent decline in operating income.

For the full year, Kraft’s operating profit fell 15 per cent to $2.6bn, down from $3.06bn in 2006. Full-year revenue climbed 8.4 percent to $37.2bn from $34.4bn in 2006.

As we can see, share prices have begun to pick up against following the acquisition, a sign that investors anticipate higher profits to come. There are signs, however, that these post-acquisition profits of this sort will be at the expense of British manufacturing. Reading between the lines in a recent statement from Richard Lambert of the Confederation of British Industry and spokesperson for the industrial bourgeoisie, who warned against ‘making value-destroying acquisitions as Britain starts to emerge from recession.’ This is not surprising because manufacturing was hit hardest in Britain by the latest recession.

This phenomenon is a symptom of the subjugation of industrial capital to financial capital. Alfred Chandler, the business historian at the Harvard Business School, concentrated his work on the growth in ‘scale and scope’ of industry, as companies since the beginning of the twentieth century became larger through mergers and developed into the modern corporation, with a management structure separated from its ownership-this process was noted much earlier by Marx in Vol. III of Capital as the ‘transformation of the actually functioning capitalist into a mere manager, administrator of other people’s capital, and of the owner of capital into a mere owner, a mere money-capitalist.’

Qualitative developments in the structures of the multinational corporation did not stop there, however. In response to the declining position of American industry throughout the 1960s and growing fears about the profitability of America’s core industries, mergers and acquisitions became a central preoccupation of American corporations. Nick Beams, citing figures from Chandler, notes that the number of such transactions grew from 2,000 in 1965 to more than 6,000 in 1969. This ‘third wave of mergers and acquisitions’ was then followed by a fourth wave in which short-term trading took on an ever greater significance to the profitability of corporations. Again to quote Chandler, ‘Before the acquisitions binge of the late 1960s, almost no investment banking house had merger and acquisition departments. Very soon such specialized departments became their banks’ largest money makers.’ The figures are pretty startling: in 1980 only 6 percent of corporate profits were realized in the finance industry. By 2005, the finance industry generated 40 percent of corporate profits.

As we have seen, banks such as RBS (which was less than 2 years ago bailed out by the taxpayer) are leading the charge for mergers and acquisitions and profiting handsomely from the fees involved in managing such deals. Moreover, the underlying impetus for the general trend of acquisitions is from the investor funds which own most of the stock in manufacturers such as Kraft, and who are in a desperate search for high returns for their investments. For example, the top shareholders in Kraft are all investment funds: Berkshire Hathaway, Inc. Investment Management, State Street Global Advisors, Capital Research Global Investors, Capital World Investors and BlackRock Global Investors. Behind these are likely to pension funds and sovereign wealth funds, as an interesting analysis from Phillip Inman explains.

The upshot since the Kraft bid was announced in September 2009 has been to push the FTSE 100 over the 5000 level for the first time since the Lehman Brothers collapse. We must not forget that these share price levels are not rising due to increased profitability of productive companies but of the profits of investors and the operations of banks using public money to fund acquisitions by predatory companies looking for a bargain. As a Citigroup note said: “Aggressive policy support and improving economic and corporate profit data have driven share prices higher. There will be many international investors casting their eye over UK and European companies at the moment, looking for a bargain.”

This points to a systemic crisis whereby the falling profitability of production is counter-weighed by the increased importance of fictitious capital and finance, leading to speculation, debt, and bubbles that inevitably burst. It is just like trying to keep a balloon in the air indefinitely without running out of breath. This much is evident from the long-term GDP growth levels since the 1960s. If we look at the G7 countries (minus Canada for the sake of visual clarity) taken together with the world average, the increasing periodicity of boom and bust cyclical movements is clear:

GDP Growth Rate

The following decades do not look rosy for the capitalist system, and for all of us who will be forced to sell our labour to survive within it. This latest wave of mergers and acquisitions will be a mere stopgap in the inexorable decline of the productive economy of the West, and the increasing volatility of the world economy will be symptomatic of a system increasingly unable to meet the material needs of humanity. In other words, the ‘monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it.’ The Left need answers to this crisis and fast. To quote Rosa Luxemburg in her Junius pamphlet written during the savagery of World War One, ‘Friedrich Engels once said: “Bourgeois society stands at the crossroads, either transition to socialism or regression into barbarism.”‘ With imperialist wars in the Middle East not set to end any time soon, the spectre of global terrorism, environmental destruction and numerous humanitarian crises, we cannot afford the latter.