M&A transactions with several bidders chasing one company often get so expensive that the winner in the auction become the later loser financially.

Kraft (NYSE:KFT) has offered $16.5 billion for Cadbury. Cadbury trades at nearly $55 a share. It traded for less than half of that in March. Cadbury’s earnings do not justify the higher number. As a matter of fact, the company’s shares traded for below $38 as recently as early September.

Cadbury’s stock price is about to go even higher.

The trust that control Hershey (NYSE:HSY) is pushing the company toward making a $17 billion bid for Cadbury and Nestle may join the bidding as well. There are likely antitrust problems with each of these potential offers, should one succeed, especially in the EU where regulators look especially hard at market share. Cadbury and Hershey could effectively control a huge portion of the chocolate market in a number of regions around the world.

Typically, CEOs and boards argue “synergies” that almost always involve cost cutting are a reason for paying high premiums for companies in related businesses.Cadbury earned $582 million last year on $7.8 billion in revenue. Those numbers make a $17 billion offer for the company rich and perhaps unjustifiable. Kraft has sales and margin problems of its. own. The risk that an integration with Cadbury could be costly and only partially successful is a very reasonable risk given how many other public companies marriages have failed in the past.

Kraft may win Cadbury, but at a cost that its shareholders will regret.

Douglas A. McIntyre

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