Two years ago, Warren Buffet teamed up with Kraft Heinz to takeover Unilever with an offer to purchase its shares from owners. Kraft Heinz was a merger of two companies, each owned by 3G Capital in Brazil. 3G’s business model is to strip costs down, leaving only sinews and so boost short-term profits. The Buffet/3G alliance proposed to do the same to Unilever and so to maximize its profitability – survival of the fittest and no remorse for those deemed expendable in the drive to spend less and less.
My friend and our supporter Paul Polman, CEO of Unilever, stood up to them, saying the Unilever strategy for sustainability would be better for shareholders in the long run than selling out to Buffeet/3G for a premium of 20% over the market price of shares (depressed due to a lower British Pound as a result of Brexit anxieties).
Well, on Saturday, it was revealed that Kraft Heinz has been forced by market prospects to write down the value of two of its brands by $15.4 billion, a hefty loss for its owners, 3G and Warren Buffet. Turns out a focus on cutting costs while ignoring shifting customer preferences has cut down the equity value of Kraft Heinz.
Buffet’s Berkshire Hathaway investment company then had to book a loss as well – a $3 billion write down last year arising almost entirely from their equity interest in Kraft Heinz.
Polman’s moral capitalism business model has been vindicated. Unilever is better off – and its owners, employees and customers – under his stewardship than it would have been if Kraft Heinz were running it. Paul worried about all stakeholders first and foremost and how to make the company sustainable for the long haul.
Intense to the point of viciousness, cost-cutting does not invest in keeping up with the times, with responding to competition, new customer tastes or fading allure of old brand names. This is what I described as “brute” capitalism in my 2004 book, Moral Capitalism. Failure to invest properly compromises future ability to earn profits reliably, thereby lowering present discounted cash flow and company value.
The failure of the 3G Capital business model points to the need to re-think how we calculate the financials of business success over the long run.