Introduction
Kraft succeeded in 2010 in taking over British, and the world’s second-largest confectioner Cadburys. Kraft had initially approached Cadbury with a $16.3 billion offer which the Cadbury leadership rejected by Cadbury with the latter describing it as “derisory”. In the new deal, Kraft raised the offer to $19.5 billion besides offering its own shares (Rusten et al., 2010). Cadbury’s shareholders approved the takeover with over 70% of members voting in favor. Though the future of Cadbury seems secure with Kraft, the takeover came under heavy criticism especially concerning the behavior of Kraft after the merger went through. Kraft’s decision to close the Somerdale factory in Bristol and move operations to Poland and the subsequent loss of over 400 jobs attracted anger among Cadbury faithful while prompting calls for an investigation into the firm’s behavior.
This analysis will focus on the events that characterized the takeover and the status of the merger. The analysis will especially lay emphasis on the prospects of the new firm and how it is likely to perform when gauged against major business indicators.
The takeover
Kraft launched a 9.8-billion-pound hostile takeover bid in November 2009 for Cadbury having failed in its first attempt when it offered a 10.2 Billion pounds indicative bid. The deal that both companies struck in January 2010 allowed Kraft to purchase Cadbury for 11.5 billion pounds with a valuation per share of 8.40 pounds (Worth, 2011). It is important to note that Kraft funded its takeover through an RBS loan of 7 billion pounds. Besides, UBS, Goldman Sachs, and Morgan Stanley provided M&A advice to Cadburys throughout the takeover process. Kraft also contracted other banks such as HSBC and French bank BNP Paribas to help in selling Cadburys businesses in Romania and Poland (Holmes, 2010).
Many analysts believe the Berkshire Hathaway Company associated with billionaire investor Warren Buffet was also considering bidding for Cadburys. Both companies (Berkshire Hathaway and Kraft) sought Cadburys with the aim of broadening their access to fast-growing international markets. Berkshire Hathaway however backed out of the bidding process by announcing that it would not counter the offer by Kraft.
Assessment
According to Kraft management, the acquisition of Cadburys placed it in a better position to grow into a global powerhouse in the snacks industry as well as confectionery and quick meals. The Kraft management further justified the takeover through value propositions including targeting long-term growth in organic revenue growth, which they estimated could exceed 5%. Besides, the combined company projected sustainable long-term EPS growth of 9 to 11% which will be more than what Kraft could have produced on a standalone basis.
Kraft management believes that the revenue synergies and over $620 million annual costs will help in long-term growth in revenue and bottom lines.
The Kraft management also believes that will complement Kraft in the geographical shortfall by increasing its presence in developing markets. The contribution, to the revenue that Kraft hopes to make from the increased footprint, thanks to Cadbury, will likely fall between 20%-25% (AFG, 2009).
The above value propositions are very ambitious and can easily propel the new entity to the projected position. However, candid analysis of each entity is likely to dampen the expectations besides portraying Kraft Management as overly ambitious. There is consensus however that expansion to new markets that Cadburys’ geographical presence will help achieve is a step in the right direction.
Careful analysis may justify the assumption that there was a slight overestimation of Cadburys’ market value. The 8.4 pound per share price that Kraft paid requires Cadbury to post growth averaging slightly over 10%. Additionally, Cadburys must post Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margins averaging 27% and above per year for five years from the day of takeover to ensure returns commensurate with the price of purchase. The company, however, is unlikely to meet the above projections given its performance prior to the takeover by Kraft.
Cadburys
Cadburys has consistently and historically posted organic growth margins averaging 4%-6% while its Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) have actually fallen in recent years to stand at 15% in 2008 (Visser, 2011). Taking into consideration the $625 million in savings that Kraft presumably will save, there is the likelihood that EBITDA may slightly rise to 23% in the five-year period. Despite the optimism though, the above score is still way below the benchmark 27% necessary to ensure Cadbury performs optimally. Based on the above scenario, therefore, it will be difficult for Cadburys to achieve the growth targets that Kraft has projected and there is a very real chance that its performance is unlikely to justify the buying price.
Kraft foods
Kraft on the other hand is in a position to achieve annual top-line growth of 4% on a standalone basis. Besides, the company is also able to post growth in EPS that can easily hit 9%. As opposed to Cadburys; the company’s asset efficiency is better off, potentially raising the prospect of productivity gains. When Kraft announced the impending takeover of Cadbury’s its shares received no significant boost from the announcement contrary to what analysis could have expected. In fact, the company’s shares underperformed, posting an 8% dip in the S&P 500 (Cornelissen, et al. 2011). Given the fact that Cadbury may not meet targets as highlighted above, it is important that Kraft revise their projections and probably pursue improvement of operations that will boost shareholder value.
It is important to also note that a large part of the takeover financing was by debt thus, its leverage is dangerously high considering the economic uncertainties plaguing the current economic environment.
The above assessments only reflect the worst-case scenario of what can happen considering global economic trends and company performance in the long term. It is therefore important to note that the acquisition is likely to achieve the set targets. Maintaining any good performance, however, will be the challenge Kraft will be facing.
Short-term results
Results released by Kraft in the second quarter of 2010 showed commendable growth in revenues which were attributed to the entry of Cadbury into the business. The report indicated positive growth in net profits by 25% with Cadbury’s contribution being 22.8% (Szalai, 2010). However, Kraft’s net revenue in organic terms only increased by 2.2%. Furthermore, there was a downward revision of the company full-year organic growth forecasts citing challenging economic climate and costs related to the integration of Cadburys. The above assessment is consistent with the one given in the preceding section citing over-optimism on the part of Kraft. Also consistent with the assessment is the assertion by the report that there was a boost in performance in developing markets. True to its value proposition, the report cited increased revenue in all regions both old driven by new assets mainly from Cadbury.
Impact
There is every reason to believe that Kraft’s goal of establishing a footprint in developing markets is on course. It is possible that the new entity will achieve the 1% target on top line growth courtesy of a large revenue base. Kraft will especially find useful the goodwill Cadbury enjoys not only in the UK but also other markets where it operates. The new company will find competitiveness in three fronts thanks to Cadbury namely chocolate, gum and candy. It is worth noting that the above competitive fronts are in line with one of Kraft’s value propositions in establishing an entity with a global presence and multiple products. Kraft is now able to control a 20% share of gum and candy business in Europe with Britain and Ireland as the largest markets. Besides, the company will control the second largest gum market share of 34%. According to the Cadbury 2008 annual report, the company currently has the largest coverage in emerging markets (Ruggiero. 2011). Additionally, its market grew by 12% in the last five years in these markets accounting for over one-third of the company’s confectionery revenue as well as over 60% of revenue growth. The new entity will therefore inherit and enhance the above advantages.
The bottom line is that Kraft has a base on which to build a successful brand, drawing mainly from the successes that Cadbury currently has.
Before the merger took place, Kraft held a significant portion of the world food market. With Cadbury’s takeover, the company’s dominance in the global food industry is likely to increase, giving it a foothold that will likely subject it to anti-trust laws in the territories where it operates. According to the 2010 quarterly report, some emerging markets such as Africa and Middle East are performing weakly. However, the report indicates that Kraft has consolidated its positions in Asia-Pacific and Latin America (Benoliel, 2011). The company expects both markets to grow at a 3% rate in the five-year period discussed earlier.
Perhaps as failure to focus on its traditional markets, the report indicated a decline in the North American market. This observation concurs with the analysis in previous section citing “overoptimism” and overemphasis on the emerging markets at the expense of the traditional market.
When mergers and takeovers take place, employees of the acquired company normally bear the brunt of any restructuring changes the new owners make. Unless there are specific clauses in the sale agreement specifically stating the terms under which the inherited workforce will work, it is highly unlikely the new company will take into account their plight.
It seems the impact on talent in inevitable including Kraft’s takeover of Cadburys. There is an apparent lack of acknowledgement on the part of Kraft management that showing goodwill is important in business and the need to appreciate both the corporate and social cultures of new markets. The controversy surrounding the Kraft’s decisions about the future of Somerdale factory do little to paint the new company in good light (DePamphilis, 2011).
Initially, Cadbury had earmarked the factory for closure. However, Kraft indicated that it will maintain the factory’s operations only to reverse the decision after completing the takeover. A candid assessment of the immediate impact on the new company from an already resentful public will reveal feelings of mistrust (Cornelissen et al., 2011). The fact that people lost jobs through Kraft’s actions does not augur well with both the public and the authorities. Further loss of manufacturing job is likely depending on the decisions the new owners will make. Furthermore, there have been top-notch resignations from the company including the CEO, Chairman and CFO.
Conclusion
It is a somehow too early to conclude on the direction the new entity will take. A number of initial reports however, suggest the company has met its targets, and, is on course to achieve greater success as envisioned on the value propositions. For instance, the figures in the annual financial report of Kraft since the takeover showed a 30% boost in the company’s sales thanks to Cadbury (Buckingham, 2011). According to an interview given by the President of Kraft foods UK and Ireland, the performance of Cadburys as a subsidiary of Kraft has been within targets. According to him, the Cadbury plants in the Midlands have shown little of no change at all since the takeover. Despite the encouraging results, it is important note that Kraft is servicing a loan that it used to finance the takeover and will only declare stability after posting a series of steady financial reports in the next five years. In a nutshell, the direction taken by Kraft is a right one. There is however, need to scale some projections to capture the realities on the ground especially concerning the prevailing economic climate.
References
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