Chocolate and the Efficient Market Hypothesis

Kraft Foods has made a $16 billion bid to acquire Cadbury PLC, maker of fine British chocolates.  Naturally, Cadbury turned them down:

Prior to Kraft going public with its offer on Monday, Cadbury had already rebuffed the advance in private. In publicly rejecting it, Cadbury said the offer, a 31% premium to its closing share price on Friday, “fundamentally undervalues” the company.

This is precisely what every company always says whenever someone offers to buy them: even though the offer price is 20% or 30% or 40% higher than the current stock price, it always “fundamentally undervalues” the firm.

In other words, corporate CEOs universally reject the efficient market hypothesis, and since Wall Street as a whole seems to agree, that means that essentially the entire finance industry rejects the EMH.  So if that’s the case, why should anyone else believe it?

POSTSCRIPT: Related trivia: my mother once had a cat named Cadbury.  I conducted a blind taste test once of British-made Cadbury’s chocolate and its American-made twin, and everyone involved could taste the difference and preferred the British version.  Cadbury Australia has a phenomenal selection of varieties, far more than the pitiful three or four we have in America.  The last time I was there in the early 90s, one of the varieties was chocolate with a creamy chocolate filling, and it was great.  Sadly, their website suggests it’s no longer made.  Sic transit etc.  On the other hand, some of the other varieties look well worth a try.

Fact:

Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn’t fund the type of hard-hitting journalism we set out to do.

Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. If you value what you get from Mother Jones, please join us with a tax-deductible donation so we can keep on doing the type of journalism that 2018 demands.

Donate Now