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Mergers & Acquisitions

Kraft Cadburymerger 130313121000 Phpapp01

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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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Page 1: Kraft Cadburymerger 130313121000 Phpapp01

Mergers & Acquisitions

Page 2: Kraft Cadburymerger 130313121000 Phpapp01

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

Page 3: Kraft Cadburymerger 130313121000 Phpapp01

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

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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.

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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

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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

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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

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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

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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

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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

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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%

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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

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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

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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

Page 15: Kraft Cadburymerger 130313121000 Phpapp01

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."

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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.)

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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

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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

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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

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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

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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

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Recommendations (contd.)• Snacks category

– High growth, high margin– Shared innovation, Integrated marketing– Reframe biscuit category

• Umbrella branding

– Brand repositioning

15 overall

10 in snacks

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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

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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)

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