The Recent Controversial Acquisition of Cadbury by Kraft Foods - Term Paper Example

Table of Contents Introduction 2 Cadbury, Plc 3 Kraft Foods, Inc 5 Kraft’s Interest in Cadbury 7 Advantages and Disadvantages 8 Implications to Shareholders 9 Ethical Issues 10 Conclusion 11 References 12 Introduction It is rightly observed by the experts of the industry that the word ‘change’ is the only constant thing in the world of today. With the massive developments in the arenas of information technology and the communication process, the tricks and the terms of trade are fast changing. Globalisation, being another major factor of the modern day business, has definitely rendered the world to be a smaller place to live in. Today, even the end – customer is not required to visit the market place or the super malls physically to purchase his or her requirements, rather just a few clicks of computer mouse would ensure that the goods reach the customer’s doorsteps. The influential factor of globalisation has almost discarded the international geographical borders as the companies of today are multinational in nature, having not only selling offices and units overseas but also their manufacturing units and production offices. The other major trend that has been observed off late has been that of mergers and acquisitions. It is regarded by the industry that in order to ensure sustainable development in the ever changing business environment of today, the similar sized companies often come together to consolidate willingly to share know - how, resources, market and other technical issues, known as mergers. When a large sized company tries to buy out a smaller sized company for the above reasons, it is termed as acquisition. Though, mergers and acquisitions are increasingly felt as indispensable in the present scenario, the fact is that even 10% of the mergers and acquisitions that happened in the last two decades all across the globe, did not prove successful. The recent controversial acquisition of Cadbury by Kraft Foods has been on the headlines since the process started off in 2009. The essay deals on the various related issues of this hostile acquisition. Cadbury, Plc It was in the year of 1824 when a budding entrepreneur of England, named John Cadbury opened a shop in the city of Birmingham that sold the products of cocoa (tea and coffee) and drinking chocolate. During the initial years, Cadbury was a partnership in between John and his brother, Benjamin and was known as ‘Cadbury Brothers of Birmingham’. In the year of 1854, the Cadbury brothers moved to London to set up office at the capital. In 1861, the founder of this future prestigious brand, John Cadbury retired from his office and was replaced by the two sons, Richard and George. The war years were tough for this chocolate manufacturing company as they were closely supervised by the government. In 1969, the company merged with Schweppes and was known as Cadbury Schweppes hence forth. Almost fifty year back, Cadbury went public and was listed in FTSE 100 of the London Stock Exchange since the inception of the index. The management of Cadbury was presumed to be experts in mergers and acquisitions as they did many of the successful deals that took Cadbury in the present stature of today. Under share holders’ pressure, Cadbury underwent a demerger with Schweppes in 2007. In another unexpected scheme of things, Cadbury was acquired by the US food giant Kraft Foods in February 2010. The company today is basically into three food segments namely chocolate, gum and candy. The company that operates in more than 60 countries all across the globe has over 45000 employees worldwide with the hoping 35000 direct and indirect suppliers associated with the group (Cadbury, “Company Overview”). Kraft Foods, Inc Kraft Foods, Inc is undoubtedly one of the largest food processing companies of the world. Headquartered at Northfield of Illinois near Chicago, Kraft Foods is listed in the New York Stock Exchange. It is regarded as the largest confectionary company within the United States and after the recent takeover of Cadbury, Plc, it is regarded as the second largest food processing company in the world just after Nestle. Kraft was started by James L. Kraft in the year of 1903 with the wholesale business (door – to door) of cheese. But, the business did not pick up in the first year of inauguration and the James Kraft incurred a loss of US $ 3000 along with a horse. But with sincere and tremendous efforts of James Kraft, from second year onwards, the profits started to yield and the four brothers of James Kraft joined the business thereby forming J. L. Kraft and Bros. Company in the year of 1909. The company set up its office at New York City in the year of 1911 primarily for the international expansions and there has been no looking back since then. The company had number of mergers and acquisitions in its credit. The notables include Phenix Cheese Company in 1928, Dart Industries in 1980 and Phillip Morris Companies in the year of 1988. The company made huge profits in the war years as cheese was high on demand. Kraft Foods had been listed in the Chicago Stock Exchange since 1924 and that of New York Stock Exchange from 1926. The latest acquisition of this food major has been that of Cadbury, Plc under the leadership of Irene Rosenfeld in 2010 (Kraft Foods, “Fact Sheet”). Kraft’s Interest in Cadbury It was in July 2008, Sunderland was replaced by Roger Carr as the Chairman of Cadbury. Since the early days of assuming the role, Carr was under immense pressure to perform as the company was not having great financial performances in the recent past. Carr initiated ambitious targets and various cost cutting measures to take the profits of the company well past 10%. The intelligent CEO of Kraft, Irene Rosenfeld understood the fact very well that Cadbury was not in its best of the times. Also, she had a desire for the iconic brands and what better that 186 year old Cadbury that has been time and again associated with the British national sentiments! From the perspective of business, Kraft tried to acquire Cadbury as the acquisition will help to overtake the market leaders of the candy and chocolate industry namely Nestle and Mars. It would also help Kraft to become a household name all across the globe, thanks to the popular products of Cadbury like Dairy Milk, Trident chewing gums or Halls cough drops. The CEO of Kraft Foods, Irene Rosenfeld has been of the view that the takeover would be ‘transformational’ while experts of the industry believed that it would enable a greater market reach for the consolidated company as it could bank upon the strong presence of Cadbury in countries of India, South Africa and Turkey while the sale of Cadbury can be increased in the areas of Brazil, China and Russia, where Kraft has stronger presence. Therefore, it can be said without much hesitation that Kraft has enough arguments in their favour to be interested in the takeover of Cadbury (Liebermann & Krantz, “Is Kraft’s $19B Cadbury buy a sweet deal? Buffet has doubts”). Advantages and Disadvantages Since August 28, 2009, when the takeover deal was proposed by the Irene Rosenfeld, CEO of Kraft to Roger Carr, the then Chairman of Cadbury, Cadbury consistently opposed the acquisition. In the outset, Cadbury thought Kraft was not serious enough for the takeover as the price offered was ‘too low’. There were no such advantages for the British company as it was a hostile takeover. The disadvantages of Cadbury included being more of the national sentiments rather than business. The number of political leaders including that of the Prime Minister, Mr. Brown, virtually warned Kraft in order to resist the takeover in the initial stage. Cadbury was thought to be a British company which had social values imbibed in it. Once Kraft increased their bid to 850 pence per share and the cash to comprise of 60% among the stock – cash ratio, the management of Cadbury made a 180 degree about-turn and asked their share holders to support the bid. Also, the government did not involve themselves at the time of action. The other major disadvantage of the takeover bid was the speculation of job cuts in the United Kingdom. It was further intensified as a production unit was closed in United Kingdom and taken to Poland rendering 400 employees jobless. The advantages that Kraft Foods had were many fold. With the takeover of the Cadbury, Kraft can think of penetrating the various unexplored yet emerging markets of the world in which Cadbury had high orientation like that of India and South Africa. The company, with Cadbury in its kitty, can easily surpass the other two leading confectionaries namely Mars and Nestle. Also, the brand value is expected to enhance with such acquisition of the reputed company like Cadbury. There have been no major dis-advantages in the side of the Kraft Foods because of this merger. Yet, the holding company should be able to understand the organisational culture prevalent in the Cadbury and should not go for any abrupt changes. If Kraft cannot align the organisational culture of the two companies, the entire acquisition might fall flat and might not reap expected benefits. The other challenge that Kraft faced was that its principle share holder, Warren Buffet was against the deal in the initial days of offer though the company was not required to pay heed to such views. Implications to Shareholders The shareholders of Cadbury, Plc were against the takeover from the outset. The reasons were mostly nationalistic sentiments of the British shareholders rather than financial gains. In the initial stage, Kraft Foods had offered 745 pence per share for cash and stock, that was straightway 31% above the prevailing market price of the shares of Cadbury. But the chairman Roger Carr declined it outright accusing it to be quite ‘low’. But when it was increased to 850 pence per share with cash being 60%, the management did a U-turn and requested the shareholders to accept the deal. There was significant discontent among the general share holders though almost 72% of the shareholders voted in favour of the takeover (Castle, “Cadbury shareholders approve Kraft takeover”). As per the Financial Times report, “Cadbury’s second-largest shareholder, Legal & General, issued a statement saying the final price did not “fully reflect the long-term value of the company” and that it was “disappointed” management had recommended the offer for an “iconic and unique British company” ” (Wiggins, “The inside story of the Cadbury takeover”). Many of the individual shareholders of Cadbury thought the company was better in making deals and poor in day – to – day management as according to them well managed companies are not taken over in the way Cadbury was. Analysing on the basis of financial returns, it could be said that the shareholders had a respectable deal with enterprise value being 13 times of historical earnings before the calculation of tax, interest, amortization and depreciation which had been very unlikely for any deal in the food industry in recent past. Ethical Issues The ethical issues primarily comprised of the job loss fears among the employees of Cadbury in United Kingdom. Though prima facie it appeared that there are no instant job cuts on the cards, but the employees union of Cadbury had serious concerns over the issue. The management of Kraft had assured that the company wanted to invest in Bournville site and continue production from Somerdale, Bristol. But the company also suggested ‘meaningful cost savings’ because of the merger which was expected to be the job cuts by the concerned quarters (BBC, “Cadbury agrees Kraft takeover bid”). The general public of United Kingdom and the political fraternity also posed an initial threat as Cadbury was treated as a company that promoted British values. But once the deal was on action, the government did not initiate any measure to prevent it. In fact, it was the nationalised Royal Bank of Scotland that financed the deal for Kraft. Also, the management of Cadbury failed to rope in any active bidders that could have prevented the takeover. Conclusion It is true that the hostile takeover of Cadbury had certain grey areas. The most important among all of them is the cultural mis-match of the American and the British society and companies. In order to turn the acquisition into a successful one, Kraft has to be aware of the organisational culture prevalent in Cadbury all these years and act accordingly. The deal is rightly regarded as more of a failure for the Cadbury management than being a success of their counterpart at Kraft. References BBC. “Cadbury agrees Kraft takeover bid”, March 24, 2010. News, January 19, 2010. Cadbury. “Company Overview”, March 24, 2010. Our Company, No Date. Castle, Tim.“Cadbury shareholders approve Kraft takeover”, March 24, 2010. Reuters, February 02, 2010. Kraft Foods. “Fact Sheet”, March 24, 2010. Building a Global Powerhouse, No Date. Liebermann, David & Krantz, Matt, “Is Kraft’s $19B Cadbury buy a sweet deal? Buffet has doubts”, March 24, 2010. USA Today, January 20, 2010. Wiggins, Jenny. “The inside story of the Cadbury takeover”, March 24, 2010. The Financial Times, March 12, 2010. Read More