Kraft Acquisition of Cadbury

Question: Discuss about the Kraft Acquisition of Cadbury. Answer: Introduction In the given case we are dealing with two companies, Kraft and Cadbury, they are in the confectionery business. Kraft is the second largest food company, while Nestle being the first. Cadbury was started by John Cadbury in 1824, as he wanted the society to use coffee, chocolates etc rather than drinking alcohol. Even though they started off with chocolates, coffee etc, their major sales was in chewing gum segment rather than chocolate. In 2008, the shareholders were not very happy with the companys management team. In the given case we have to see whether Kraft has overpaid for acquisition, problems during the acquisition and how to handle these problems. First, we have to see the benefits of acquiring Cadbury by Kraft. Then we have to provide a solution to any problem faced by Kraft during the acquisition of Cadbury, which generally relates to integration process. Analysis: Benefits of acquiring Cadbury Kraft is the second leading food company in the world, and to increase its market share it has decided to acquire Cadbury for it. Entering new Market: By acquiring Cadbury, Kraft will be able to enter new markets and in a more established way. It does not have to wait for its product to reach these markets; by acquiring Cadbury they can enter these markets easily. Some places like India, Brazil, China, Mexico and South Africa are markets where Kraft is not much known, by acquiring Cadbury it can enter and establish itself in these markets. Known Brand: If it enters new market with a known brand, it will save huge cost and make easy entrance in these markets, otherwise selling and marketing will cost more money than the cost incurred for acquiring Cadbury. New distribution Network: Cadbury has great distribution network in the world, it sales more than 90% of its product through Kirana stores in India. Huge networks can be accessed easily once Cadbury is acquired by Kraft. Diversification: Multiple markets will be covered through this acquisition which will help in diversifying the risk. It will be able to enter into chewing Gum market, in which Cadbury is leading company. Market share: Combine portfolio of more than 40 brands will each with yearly sales of more than $ 100 million; it will become the leading company in the confectionery industry. (Wikipedia, 2016) Issues and problems faced during the acquisition and how to resolve them Offer Price: Kraft chose bear hug ultimatum process for acquisition. According to Cadburys CEO offer made by Kraft was undervalue, as there company was of much more value. They moved to UKs takeover panel for better offer from Kraft or stop it from making any acquisition attempt i.e. Put it or shut it. Right after the offer the share price of Cadbury increased, and it was showing a steady rise in its share price after that. This made it clearer that the price offered by Kraft Food is less than what the companys shareholders deserve. They showed and immense increase in its revenue of 3rd quarter which made the company more valuable. There revenue increased by 5-6% in 2009, a growth of 16% in its EBITDA which was more than they estimated. They were mostly against the offer as most of the offer was made in share of Kraft Foods, which showed uncertainty as it fell right after the announcement of acquisition. This was when the deal was changed from 60/40 stock/cash payment to 40/60 stock/cash payment. The offer was now more liked by the company. Change in culture: Kraft is US based company, while Cadbury is a UK based company, there was a vast difference in culture. Culture will be a major problem in integration process. And how much Kraft is willing to change its own culture to settle with Cadbury. Fear of employees: Employees are the one who are more afraid of acquisition than the shareholders; there general fear is of change in wok environment, compensation change, and job redundancies. A major change in the work environment will happen, from UK based management team, they will be handled by US based team. After any acquisition there is high probability of change in management. Integration: Kraft is known to have issues with integration after any acquisition; it closed down Terry factory in New York in 1993 when it promised to keep it open after acquisition. These cases made Cadbury afraid of this takeover. Change in Procedure and rules: The procedures followed by Cadbury would be changed if they come under Kraft Foods, they will change from British procedures and techniques to American based procedures and techniques. Public of UK: Public of UK were strongly against this merger, according to them another British company will be taken over by Americans, Lord Mandelson advised to scrutinize any foreign takeovers were made. Strong comments were also made by them regarding this takeover. Strategy Recommendation Kraft Foods offered a deal of 745p to be paid with 60/40 stock/cash split. When Cadbury head Roger Carr refused the offer, Kraft made a public announcement to the Cadburys share holder for purchase of Cadbury. During that time, the shareholders of Cadbury were not very happy with the management team of Cadbury. 50% of the shares of Cadbury were held by North American investors. Right after such announcement, the share price of Kraft Food fell by 6% which showed that the share holders are not happy with the offer. While the shares of Cadbury rose by 38%. For funding this acquisition they need 370 million shares, and for that Kraft Food was ready to issue 370 million shares, which was highly criticized by the shareholders as well as Warren Buffet. They were determined to purchase Cadbury, and to fund their money, they sold their Pizza joint to Nestle at US$ 3.7 billion. This was also done to gain approval from the Cadburys shareholder as they were keen to have more proportion in cash deal. By doing this they also didnt need the approval of their own shareholders, as they were against this mostly because they were considering this be very expensive. By that time the Shareholders of Cadbury made it clear that they were ready to negotiate for a better price, they raised the price to 840p along with 10p dividend on which the dividend was sealed. Regarding the problem with culture, there are many examples of acquisition where culture was a major problem, but it went off successfully. Kraft Food is one of those companies which has a history of acquiring different culture company, their employees are comfortable with multi-culturism, and encourage it more. Management of Kraft are more bureaucratic than that of Cadbury, there they may face problem, but if Kraft Food use a slow approach to integrate the company and include their way of management, then it might lead to a successful acquisition. To make it successful, Kraft Foods need to make it clear about its intention. They should make the people understand about the changes they will make and the future the employees of Cadbury. This will give the employees time to make decision about their future. If the employees are told the plan and process of integration and what are the things that will remain unchanged, then it will be easy for the employees to participate to make the merger a success. Kraft Foods should ensure that they achieve the desire result of revenue, which according to them will be achieved once they acquire Cadbury. They should let the people of UK see that it will benefit not only Americans but also UK, there will be an increase in their earnings as well as good innovation team will form. Conclusion From the above analysis we get to see various results, the benefits of acquiring Cadbury and the way to overcome issues related to this acquisition. We first checked benefits if Kraft acquired Cadbury, we saw various benefit due to acquisition, those are: Entering new market Market share Known brand New distribution network Diversification Along with this there are many problems also which Kraft Foods is facing due to this takeover, main issues are employees resistance, cultural change and offer price. Kraft had to negotiate continuously to come to an agreement regarding their offer price, their main hindrance was the option of Nestle taking over Cadbury, which was eliminated when Kraft sold off their Pizza joint to Nestle to fund money for the acquisition. This not only removed Nestle from taking over, it also made the shareholders of Cadbury liking the offer which was more cash oriented than that of shares. Another problem of this acquisition is difference in culture, which can be overcome if Kraft molds Cadburys culture into their own culture for better control of the organization and operation. It will require good leader to lead this merger, along with proper and open communication between both the companies. The employees resistance can be dealt with if the company is clear in its strategy and plan. If their strategy and plan is clear, it will be easy for the employees to accept their model and their procedure. And to plan out their future relating to the company. Overall the deal finalized at 840p per share with 40/60 stock/cash ratio and dividend of 10p per share. If Kraft Foods take a slow and proper approach to this takeover it will be easier for them to integrate. Reference Wikipedia, (2016). Kraft Foods Inc. [online] Available at: https://en.wikipedia.org/wiki/Kraft_Foods_Inc [Accessed 15 July 2016]. Wikipedia, (2016). Cadbury. [Online] Available at: https://en.wikipedia.org/wiki/Cadbury [Accessed 15 July 2016]. Cadbury website, (2016). Cadbury. [Online] Available at: https://www.cadbury.co.uk [Accessed 15 July 2016].