Thinking about how Kraft foods 'bought' Cadburys and the Glaziers bought Manchester United. What do you think about the way in which these deals are funded.

As I understand it. A comany which has few debts and is trading profitably is targetted by someone who says that he can make that company 'sweat its assetts'. He then trots around his pals and gets them to put up mega bucks. The stalked company is then purchased.

That company's balance sheet is then loaded with the debt of the purchase price, thus effectively making the company pay the price for its own purchase. The new owners now own a company at no cost to themselves and have an assett that they hope will bring them an income and, even it if goes bust, there is no cost to them except possibly a bit of pride or reputation.

Perhaps someone will clarify things for me, as it seems there must be something wrong that Bernard Madeoff is jailed for being a crook when Kraft and the Glaziers are operating legally, if of doubtful (in my view) ethics.

I know that shareholders have to sell for the deal to go through but, as so much stock is now held by the same crowd who conduct these deals the whole circus seems somewhat dicey.

Is there any such schemes operating in the agriculatural sector and do governments get up to these sorts of tricks?

Mr Wells, you raise an interesting dilemma,

Capitalism has worked pretty well most of the time. Regulation has been an integral part of it's operation.

It's easy to make the case that the financial engineers have become much sharper than the regulators over a considerable time. The regulators are ultimately responsible to the people or governance of the Country. I think the political class have failed miserably in keeping up with the financial wizards, perhaps blinded by rising stars such as the Chinese, perhaps just bloated on their own ill gotten gains.

Good corporate governance has been encouraged by the threat of take over by ambitious predators, this is a good thing. Lonhro caused a few CEO's to sweat! RBS had eyes bigger than their belly and we are witnessing an ongoing battle in the fertiliser industry at the moment.

Funding companies is an interesting subject.

If it's done with your own money you will always return a lower yield than if you use some borrowed money. Doesn't stop farmers being 85% self funded and that’s one of farming's strengths.

Most takeovers are funded by synergies and gaining ground on the experience curve. In agricultural economics we often discuss economies of scale. The experience curve is not the same and explains how the next unit of production always costs less to produce than the previous one. Thus when Kraft buys Cadburys instead of making x tonnes of chocolate the new company plans to make 2x tonnes and makes a huge leap down the curve and lowers it's cost of production. The savings are of course all profit and often go a long way to paying the cost of a takeover.

If they fund the takeover with some or all borrowed money it is not impossible to imagine it being repaid rapidly with the extra profit generated.

It must be time to reconsider gearing and the pressure for companies to work on large amounts of borrowed money. If we don’t industry will just have to shift to where capital is cheapest. It looks like this is happening a bit by default at the moment with businesses repaying debt as fast as they can.

Perhaps it's time to champion the less aggressive use of finance, perhaps it's time to exploit the low interest rates and do the opposite. Only time will tell which is right, but its extremely interesting watching it happen!

Bon courage,

JC.

Well worth looking at (until recently) Microsofts policy of aquisition and business funding - everything financed on very short term credit and payed off from cash generated. Contrast this with the standard model of land financing - long-term interest-only loans with economic inflation essentially paying off the capital.

From a farming point-of-view, repaying capital is almost a folly as this needs to be paid out of income after tax. Better to finance the interest only, and repay the capital, say £1m, in 40 years when that will be the cost of a small family car ;)

The best performing farm business units are infact quite indebted, at least in the short-term. Consider potato contractors on rented land as a case-in-point. hey for certain dont finance their businesses with cash as they have a few short peaks of expenditure - what would they do with the cash inbetween? Farming units generate small returns when viewed relative to the value of assets - higher returns are generated through other land uses - a field may generate you 2% return, but put a shed up and the shed may generate you a 15% return on its cost. Rented arable units will perform best run "tight", on overdrafts, with all the surplus for the year tax-paid and removed from the farming company to generate a higher return almost anywhere else.

People buy dept-free firms and leveraging them is just a reverse way of asset stripping.