Survival of Cadbury from the Hostile Takeover Attempt of Kraft - Case Study Example

The Survival of Cadbury and Section # of This essay is about the survival of Cadbury from the hostile takeover attempt of Kraft. The paper discusses the individual growth prospects of the two companies and then the business models of the Cadbury and Kraft are compared. The reasons for Cadbury being targeted by Kraft are mentioned in the essay and the potential synergies are also commented upon. Competition policy in the food industry of UK and US is identified then and its implications for the merger of Cadbury and Kraft are put down. Individual Growth Prospects of Cadbury and Kraft Cadbury Cadbury has become one of the best and the biggest confectionery company in the world. Since 2002, the company has undertaken major steps to improve its future prospects. The company made layoffs of about 6,750 employees worldwide and repaid the debt outstanding. Through innovative marketing techniques and product innovation such as the Wispa chocolate re-launch, the company continues to capture more and more market. The future prospects for the company are bright as it has shown a growth rate of 12% in the UK and is number one in many countries. The company is currently operating as the market leader in half of the largest confectionery markets of the world. The chief executive of Cadbury Stitzer commented on October 22, 2009 that “the business has a great momentum and the new confectionery strategy has yielded results beyond expectations.” This was evident in the sales of the third quarter of 2009, which showed a seven percent rise since the second quarter. As the sales rise in the future and the business grows, rise in the share price is also expected. Kraft Kraft is the second largest food group after Nestle and generates US$ 42 billion in sales each year. The company has almost 98,000 employees and 168 plants. Unlike Cadbury, Kraft is not focused on any fast growing business. Although the sales of Kraft’s frozen pizza has been growing but it is losing sales on many other brands. Many of its products are prone to heavy competition from smaller firms (Hughlett, 2009). This makes difficult for Kraft to concentrate on so many products and to come up with innovative ideas of marketing and making products. Many brand of the company have lost their market shares and the future prospects for Kraft do not look very bright either. BUSINESS MODELS OF KRAFT AND CADBURY Cadbury Cadbury has been growing because of the employment of its robust business model. The company focuses on three major categories of confectioneries which are chocolate, gum and candy. The company has strong brands and excellent competitive positions in these categories (Cadbury, 2008). The company’s revenues are mainly dependent upon the products sales which are available in these categories. The company has a stronger presence in categories which are faster growing such as gum. Cadbury has 10.7% share in the global confectionery market and the main source of growth in the business and sales is stronger position of the company than that of the key competitors. The company believes that strong performance can make the market share grow even in the current economic recession. The business model of the company focuses on the highest return areas rather than handling many brands and entering new markets. The business model keeps the tasks of the employees and management simple and in many parts of the business, complexity is reduced. Kraft Kraft has a business model which lowers the risk of failure but also lowers the chances of growth and success. A more durable business is done by Kraft which involves less risk of losses and fewer setbacks from failure of some brands. For this model to work, the company has introduced many brands and diversified its product range. The company offers hundreds of brands related to food and consumables industry. A well diversified range of products offered by the company ensure high division of risk but the growth will be limited. The company invests in new products every now and then. The company does not seek to be a market leader in all the product categories. This is because a lot of Kraft’s resources will be required to focus on some brands as there are many other brands to take care also. The business model of Kraft focuses on short-term paybacks but the business model of Cadbury focuses on the performance and not the payback. REASONS FOR KRAFT TARGETING CADBURY Kraft investors have not benefitted from rise in the stock price because the company’s shares suffered from downfalls in the starting of this year and the share prices are still not much high. These investors have to be won over and this is one of the reasons that Kraft targeted Cadbury for takeover which is a high growth and performance oriented company at the moment. These investors are anticipating that once Cadbury is taken over by Kraft, real growth will be delivered then. And most probably the share prices will also go up which will be in the favor of the investors. In the past also, the Kraft Company took over Danone Crackers and Biscuit business which turned Kraft into largest cookie company in the Europe. It is expected that the takeover of Cadbury would be truly transformational for Kraft. Cadbury has been performing very well in the market since the past few quarters, as the candy sales increased by 11% and chocolate sales by 7%. These attributes when added to Kraft, the company would also grow and its performance in the market will go up. ROLE OF PRICE IN A TAKEOVER The deal price that the predator company is offering plays a major role in takeovers such as Kraft’s. If the management of the target company is offered a high or fair price, the company’s management might agree on the takeover. A price too low, which does not equals the enterprise value and the future cash flows generation ability of the company, will not be able to persuade the management of the target company to agree on the takeover. If the predator company is not able to persuade the management for the takeover, the company will approach the shareholders for purchasing the shares. In this case also, the price per share that is offered plays a vital role in the takeover. If the shareholders think that the price per share is enough for the company’s brand image and value, the shareholders will sell the shares. On the other hand they will not accept the offer if they think that a higher price should be offered because they anticipate the growth of the firma and the share price to go up. Same is the case with Kraft. Kraft has not been able to offer a good price for Cadbury; therefore it was not successful in taking over the company. The main reason behind this was the low price that it bid for the company. Neither the management of the company nor the shareholders were interested to trade at this price of $ 16 billion. POTENTIAL SYNERGIES The potential synergies for the two companies Cadbury and Kraft, if the takeover is successful, will be $625 million in cost saving and other synergies. In general in the food industry, if a takeover is successful, strategic distribution of resources will take place. The resources such as plant and equipment can be used for the production of similar products. This will allow the merged companies to close down inefficient facilities and save cost. The main synergy will come from the shutdown of the plants which are being underutilized. Another synergy will come from sharing the suppliers. The two companies when purchase material from the same supplier under one name, the merged company will get more discounts and allowances on greater quantity of purchases. The merged company can contract for services such as market research, quality control and rent a car services which will cost lower than it would have cost for two different companies. COMPETITION POLICY IN FOOD INDUSTRY AND MERGERS Mergers and takeover (MNA) might be harmful for the interest of the public. Especially when the two firms involved in an MNA activity are huge in size like Kraft and Cadbury. The main disadvantage for the customers is that when two very large organizations in the food industry merge, market share for this merged company will make up a very high percentage. This will allow them to control the prices of the products and may be set prices in the market. According to the laws and competition policy in the US and the UK, the food industry needs to be competitive enough to ensure best prices to the public. Therefore the regulatory committees closely follow very big mergers such as the one we have encountered for Kraft and Cadbury. There are many regulatory requirements for the firms getting engaged in mergers in food markets. There is also a favor for the target company when there is a hostile takeover as mergers are discouraged in food industry by the government. CONCLUSION Kraft tried its level best to take over the company Cadbury which was experiencing high growth rate and a high market performance. With the motivation of achieving synergies and better returns in the future, Kraft group decided to take over Cadbury and work with their strategy. This deal had many issues to be completed successfully and the legal implication illustrated by the competition policy was not even taken into account and the deal came to an end. BIBLIOGRAPHY Cadbury. (2008). Annual Reports and Accounts 2008. Internet. Available from http://cadburyar2008.production.investis.com/en/strategic-review/our-business-model.aspx (accessed December 10, 2009). Northcliffe Newspapers Group Limited. Sales rise for Cadbury may halt takeover. 2009. Evening Post, October 22,  http://www.proquest.com/ (accessed December 10, 2009). Hughlett, M.  2009. Kraft Foods: Pizza helps it grab bigger slice of market, but private labels continue to hurt other brands: Acquiring Cadbury would improve food giants growth prospects. McClatchy - Tribune Business News. October 25. http://www.proquest.com/ (accessed December 10, 2009). Burns, J.  1987. Competition Policies for the Food Industry. Food Marketing, January 1, 7.  http://www.proquest.com/ (accessed December 10, 2009). Internal market and sectoral issues. 1994. European Trends, October 1, 7.  http://www.proquest.com/ (accessed December 10, 2009) Read More