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GOOD Project to find kraft and cadbury aqusition strategy.Also key insigths into valuation and sucess of the acquisition.
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Mergers & Acquisitions
Cadbury• Started by John Cadbury in 1824• Headquartered in Cadbury House in the Uxbridge
Business Park in Uxbridge, London Borough of Hillingdon
• Started producing the world famous Dairy Milk Chocolate in 1905
• In 1969 the Cadbury Group merged with Schweppes
• Taken over by Kraft foods on 19 jan, 2010
Kraft Foods• World’s second largest food company after Nestle with
presence in more than 150 countries• Headquartered at Northfield, Illinois, US• Current Chairman and CEO : Irene Rosenfeld• Kraft Foods was formed on December 10, 1923 by
Thomas H. McInnerney• Famous Brands include - Philadelphia cheese, Oreo
biscuits and Trident gum • Eleven $1 billion brands with operations in about 70
countries
Timeline of Deal
August 28, 2009
•Kraft's Chairman and CEO Irene Rosenfeld meets Cadbury's Chairman Roger Carr offer to buy Cadbury in a cash and share deal which valued Cadbury's shares at 755 pence each, but Carr dismissed the approach, the Kraft bid was worth 300p in cash and 0.2589 new Kraft shares for each Cadbury share
September 7, 2009
•Kraft goes public with the bid, but by this time the value of the same offer had slipped to 745p per Cadbury share, or 10.2 billion pounds. Cadbury promptly rejects the bid.
September 12, 2009
•Cadbury's Carr in a letter to Rosenfeld again rejects the bid saying it was an "unappealing prospect" being absorbed into Kraft's "low growth conglomerate business".
September 16, 2009
•Warren Buffett, the world's second richest man and a leading shareholder in Kraft with a 9.4 percent stake, warned the U.S. food group not to overpay for Cadbury.
Timeline of Deal (contd.)
September 21,2009
•Cadbury contacts the UK Takeover Panel to request a "put up or shut up" request be sent to Kraft, which would give a time frame for Kraft to come up with a formal bid
September 30, 2009
•UK Takeover Panel rules that Kraft has until 1700 GMT on Nov 9 to make a formal offer for Cadbury or walk away for six months. Cadbury reiterates its rejection of the Kraft bid
Nov 3, 2009 • Kraft's third-quarter results disappoint investors with weaker-than-expected revenue and as it cut its 2009 sales forecast. CEO Rosenfeld says she will not overpay for Cadbury
Nov 9, 2009 •Kraft formalises its bid at the same terms for Cadbury as the original approach -- 300p in cash and 0.2589 new Kraft share for each Cadbury share -- valued at 717p
Timeline of Deal (contd.)
November 18, 2009
•Both Italy's Ferrero and Hershey said separately they were reviewing a possible bid for Cadbury but gave no assurance that either would make an offer
December 4, 2009
•Kraft posts its offer document to Cadbury shareholders starting off a two-month fight for the British group under UK takeover rules. Kraft says its bid is now worth 713 pence a share or 10.1 billion pounds
December 18, 2009
•Cadbury CEO Todd Stitzer tells Reuters in an interview that a significant number of its major shareholders do not believe Kraft's bid reflects Cadbury stand-alone value
Jan 3, 2010 •Kraft sweetens bid with 60p more cash but cuts shares on offer to keep offer price unchanged
Timeline of Deal (fnshd.)
January 14, 2010
•Cadbury releases it final defense document, attacking Kraft's management and revealing that it beat its own target for operating margins in 2009
January 18, 2010 •Cadbury board recommends £12
million sale to Kraft
Reasons for the DealEntering Emerging market through cross
border AcquisitionsOvercoming Entry Barriers in New MarketsIncreased Market PowerValuation of Cadbury by 50% more than
market valueBreaking new grounds by Cadbury
Entering Emerging Markets
India, China, Mexico , Brazil & South Africa are among the strongest emerging markets
Kraft has very little footprint in these places apart from China
Most of its revenues come from North & South America & Europe which have very slow growth
Cadbury is a cross-border acquisition to enter into growth markets in Asia, Middle-East & Africa
Entering Emerging Markets
Overcoming Entry
Barriers
Established brands:ITC, Pepsico etc. are already established in food & beveragesKraft alone would have to spend a fortune on S&M to enter those marketsStrong brand name of Cadbury in emerging markets would result in cost saving & easy penetration
ESTD.
Extensive Distribution Network:Fragmented supply chain in developing countriesCadbury sales out of 1.2 million kirana stores in India. 98% of food purchase done through these storesAccess to this huge network which from scratch would have taken millions of dollars & years of time
Entering Emerging Markets
Overcoming Entry
BarriersEconomies of Scale
scale necessary to grow sales and distribution in new and existing markets
$1 billion in incremental revenue synergies & $750 million in cost synergies - by 2013
Diversification and Risk ReductionCoverage of more diversified & promising markets
High margins --Chocolate & chewing gum. 14% confectionary market: Gum, highest growth rate:Gum
Increased presence in the Gum market: Cadbury market leader: share 29%, Kraft: share 0.1%
Entering Emerging Markets
Overcoming Entry
Barriers
Increased Market Power
Overall Size and Market ShareJoint portfolio of more than 40 confectionary brands,
each with annual sales in excess of $100 million
Created the world's biggest confectionary company
Kraft Foods became the undisputed world leader in Snacks a high-growth, high-margin category
Increased Cost and Revenue based Synergies Horizontal acquisition: Economies of scope
More bargaining power vis-a-vis customers & suppliers
ProblemsInadequate Evaluation of Target:500p in cash and 0.1874 Kraft shares for each Cadbury share. According to Buffet which was “a pretty full price” i.e. much higher than actual & Kraft shares undervaluedLarge Debt: Debt of $ 9.5 billion. Recoverable within 13 years at the then income level (3.25, 6, 10, 30 year bonds through DB, HSBC, RBS, BNP Paribus)Too much diversification? Not reallyManagers Overly Focused on Acquisition?PossiblyToo Large? Should not be a problem
Integration Kraft
Mananged radically different from Cadbury How much can Kraft be expected to change its own
culture. Honouring Cadbury's Fair Trade credentials Unreliable precedents:
Closed the Terry's factory in York after buying it in 1993, despite promising to keep it open. Kraft is, in fact, known to have integrity issues.
Habit of taking over great national institutions – Danone, Cadbury
Did not close biscuit manufacturing facilities in France for at least three years and increased investments also
Cultural• Sir Dominic and Sir Adrian Cadbury said: "In the context
of a bid, the high percentage that fail to live up to the
claims of the bidder are well documented. The risks of
relative failure in takeovers are therefore clear. Those
risks are considerably increased if the bidder fails to win
the loyalty and support of the employees on whom the
continuing fortunes of the enterprise depend."
Softer cultural problems crucial impediments to effective integration
Successful creation of leadership team is led by the CEO: requires
commitment and focus on the part of CEO to get beyond just hitting
‘synergy targets' and set time aside to develop the leadership team early on
Leadership team developed most effectively by involving employees from both the merged
entities in specific business planning activities
Building a leadership team following an acquisition is an important, painful
process that sets the tone for the wider integration
Fears at Cadbury
About taste of chocolates to work environment
Kraft's bureaucratic work structures
Orwellian feel
Cultural (contd.)
Other Aspects Working Relationship
Irene Rosenfeld's remote management style Turnover of Key Personnel
Exodus of experienced Cadbury management HR Integration
Job Redundancies Changes to compensation package
Non-resolution of Uncertainty Lack of clear communication with acquired employees
Implications of Cultural Change
Kraft Cadbury
Strengthened Brand Damaged Heritage
Drives higher performance leading to better revenues
Lower Moral and Performance
Better Control of organization Staff Burnout
Better Reputation Risk of losing benefit schemes
Efficiencies through alignment of processes
Trust Issues
Alignment of goals Changed Brand Personality
IT Kraft hoped to save £430m annually, largely by integrating the companies' IT systems
Both Kraft and Cadbury rely on systems provided by SAP, one of the world leaders in
enterprise resource planning (ERP) systems
Due diligence process in any merger should include an assessment of the target
company's IT to quantify any risks to business continuity, outline the required operational
and capital expenditure for the first 12 months following the acquisition, identify the
opportunities for synergy and define the high level integration plan
Unfortunately CIO is often the last person to know about the deal!
Where a larger company takes over a smaller one, it is common to export data from the
smaller company system and merge it into the larger one
Both Kraft and Cadbury relied on SAP giving them a slight advantage, but SAP and other
ERP systems are usually heavily customised to suit different situations, so integration was
an issue
Market Presence
• 160 countries
• 99% households in US
• 15 ‘billion dollar’ brands• 70 ‘mn dollar’ brands
• More than 40 brands are 100 years old
• Regional brands• 80% are #1 or #2
Recommendations• Focus on power brands
– Global Brands: Oscar Mayer, Jacobs, Tang etc.
– Local Brands: A-1 steak sauce(North America), Dairylea cheese(U.K.), Vegemite spreads(Australia) etc.
– Acquired brands: Cadbury, Halls, Bubbaloo etc.
– Flexible business models, Nimble marketing
Recommendations (contd.)• Snacks category
– High growth, high margin– Shared innovation, Integrated marketing– Reframe biscuit category
• Umbrella branding
– Brand repositioning
15 overall
10 in snacks
Recommendations (contd.)• New categories
– Gum, candy– New markets– 360° communication strategy, range re launch, new
products
• Cadbury’s strongholds– India & other colonial countries– o– Supply chain networks, distribution channels
Recommendations (contd.)• Cost based synergies
– end to end productivity growth • procurement, manufacturing, customer service & logistics.
– Integrated manufacturing facilities • cross category model, simplified processes
• More acquisitions– Years of expansion in Europe– Successful
track record
Overhead costs
LU(2006)
United Biscuits(2007)
Cadbury (2010)