International Mergers and Acquisitions - Kraft and Cadbury - Case Study Example

International Mergers and Acquisitions Name Course Lecture Date Executive Summary Kraft food Inc is a company that mainly majors in food and beverages and it is the largest food and beverage company in the US. Cadbury on the other hand is a British confectionery and it is the second largest in its industry while mars incorporated is the first. The company is greatly recognized due to its crème egg, dairy milk chocolate as well as the rose’s selection box. The company has its operations in more than fifty countries around the globe. This report first explores the history of Kraft and Cadbury as being companies that are the category of international mergers and acquisitions. The report further discusses about the timeline of Kraft acquisitions over the years and an in-depth analysis of how Kraft acquired Cadbury. This is closely followed by the motives for the takeover and whether the acquired from have been effectively integrated. Lastly there is a conclusion and recommendations section and sums up the content in the report. The report recommends that: Individuals must be able to the fact that a monopoly may be created in the industry and be aware of the costs that are associated with one company being a monopoly. Organizations therefore ought to consider their motives clearly so as to ensure the success of the merger and acquisitions. Thus before any merger and acquisitions people ought to look at both the positive and negative consequences of the deal. Investors and shareholders need to consider all the complex issues that may be involved in Mergers and acquisitions for them to be able to reap the benefits. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Discussion 5 Motives for mergers and acquisitions 5 Success or failure 8 Conclusion and recommendations 10 References 11 Introduction Kraft food Inc mainly operates in the food and beverage sector and it is the largest food and beverage company in the US. The company has its operations in 70 other countries and has an employee base of 98,000 and it sells its products in 150 countries through its subsidiaries (Kraft Foods 2013). The company operates in two major segments that are: the Kraft international commerce and the Kraft North American commercial. Besides the two geographical divisions their products are further divided into the following categories: beverages, snacks and cereals, grocery, cheese and dairy as well as to convenient meals. Kraft foods attained a continued and undoubted dominance in the market in the year 2012 and its value share stood at 28%, this value remained unchanged as compared the previous year (Kraft Foods 2013). This continued dominance is mainly due to the processed cheese. Kraft has been able to extend its cream brand cheese and they have included the cooking crème in their range of products thus leading to a greater market share. Cadbury on the other side is a British confectionery and it is the second largest in its industry while mars incorporated is the first. The company is greatly recognized due to its crème egg, dairy milk chocolate as well as the rose’s selection box. The company has its operations in more than fifty countries around the globe (Betton & Eckbo 2000). Over the years Kraft has made a number of acquisitions. For example in the year 1986, the tombstone Pizza Corporation was purchased by Kraft. Also in the year 1993 it acquired NABISCO and lastly Kraft was also able to acquire Cadbury. On 7th September 2009, Kraft suggested a US$ 16.2 billion takeover bid of cardbury. At first the offer was rejected on the basis that the company was being undervalued. After some time Kraft made a formal as well as hostile bid to takeover cardbury (BBC News 2009). On 19th January the year 2010, it was broadcasted that Kraft foods and Cadbury had made a deal and that the company would go for £8.40 per share and by this Cadbury had been valued at a cost of £11.5bn. After this Kraft issued some information that stated that the deal between the two companies would in a way create a global confectionery leader and for the deal to be completed Kraft was forced to borrow £7 billion so as to finance the takeover (Merced & Nicholson 2010). The acquisition faced a lot of resistance from the public, various organizations and groups since they viewed Cadbury as very essential driver of the British economy. By the 2nd of February 2010, Kraft had been able to secure at least 71% of the shares and this meant that the deal could be finalized. Kraft was supposed to have a 75% of the shares for them to be able to delist Cadbury in the stock and this was achieved on 5th February 2010 and it was announced that the shares of the acquired company would be delisted on 8th march 2010. Discussion Motives for mergers and acquisitions Mergers and acquisitions usually take place for various strategic reasons. Mergers and acquisitions which are commonly abbreviated as M&A is an aspect of management which mainly deals with selling, buying, combining or dividing different or similar entities that can assist a company in expanding its horizons in its respective sector or location or in a new location or field (Dong et al. 2006). With respect to this there exist a number of motives or reasons as to why companies undertake mergers and acquisitions for example Kraft foods interest in Cadbury despite the fact that Cadbury was not on sale. One of the major reasons in more related to diversification. This can be seen as being a core reason as to why Kraft acquired Cadbury. Based on this Kraft would be able to sell even products that were manufactured in the Kraft food companies in other geographical areas that Cadbury had established their presence. The two companies were in two different but related industries (Fee & Thomas 2004). In respect to diversification companies can diversify in form of product diversification, multi industry diversification and lastly geographical diversification. Through the acquisition of Cadbury Kraft was able to add on to the items that are offered to its customers and thus the merged company will have a competitive advantage over their competitors in their respective industries. Also through the acquisition Kraft would be able to increase its capabilities. In relation to this the increased level of capabilities may be derived from expanded development and research opportunities or robust and enormous manufacturing operations (Srinivasan & Mishra 2007). Through the acquisition of Cadbury Kraft food was able to be acquainted with the manufacturing operations that Cadbury used and this in a way increased their capabilities. Another major reason behind the acquisition of Cadbury is closely related to gaining a larger market share and gaining a competitive advantage over their competitors in the industry. Through merging and acquisition companies are usually able to gain a better and formalized distribution and marketing network. A formalized distribution and marketing network ensures that company’s goods are delivered to the consumers at the right time and place. And through this the consumers will not be frustrated and this seems to work as a benefit to Kraft after the acquisition. Through the networks the company will be able to attain a great number of customers within a short period of time. Companies are also able to attain a greater market share since the customers of both companies will tend to buy from the buyer company and this seems to be a benefit to the company (Harvard Business Press 2001). For example in India, Kraft foods were able to make great use of the already existing distribution network that had been established by Cadbury to make products such as Tang and Oreo available to various retail outlets within six months from when they were launched. Similarly in places such as Brazil, Cadbury expanded Kraft sales into almost 650,000 retail outlets. Companies also engage in mergers and acquisitions due to various financial motives. In most instances mergers happen since firm and companies are more open to diversification. Diversification is more related to the reduction of risks facing the company through the various investment decisions (Grüsgen, Kyriakides & Venizelou 2011). Based on this in a certain large and international business feels that it is greatly exposed to risk since their business operations are only invested in one industry, it may opt to buy another business in a different industry. Through this the company would have a measure of diversification in the acquisition of the firm. Also due to recession companies such as Cadbury experienced a drop in their sales, and like other companies in the confectionery market, it recognized the urgent need of merging with their core competitors in the aim of becoming competitive and achieving economies of scales. Thus based on this recession seemed to be a core reason for the merger of the two companies (Geringer et al. 2000). Through the merge each of them brought with it certain strengths and weaknesses that would be of benefit to both companies. Through the merger Kraft food would be able to enter new and emerging global markets since Cadbury was already experiencing this growth. Also Kraft was greatly attracted to Cadbury due to the strong performance it made and maintained in the economic crisis (Gugler et al. 2003). Success or failure M&A are not a simple process and they do not simply conclude the minute the merger deal is concluded. The complexity of this process has seen the collapse of many mergers in the present global business environment. However, every month there is at least one company that is concluding or starting a merger process as merger remain an attractive option for most companies in an increasingly competitive and globalized business environment. At times such dealing may be successful or at times fail (DePamphilis 2008). The takeover of Cadbury by Kraft seems to be a success since the company is able to control the high brand recognition of their existing products with the existing Cadbury supply and distribution networks in the developing and already established markets (Gaughan 2007). The takeover seemed to be the greatest cross border deal and based on it Kraft became the first dealer in relation to the confectionery products. Also through the merger Kraft was able to establish itself in the chewing gum sector. The merger of the two companies seems to be a complimentary and strategic fit, since it boasts a portfolio of almost 40 confectionery products and each of them have the ability to yield considerable annual sales. An ultimate combination of Cadbury products and Kraft products would lead to considerable pre-tax cost savings in relation to the annual organizational costs of development and research, branding, advertising and procurement. Also there would be a considerable level of synergy in terms of revenue and this would lead to higher earnings for every share of the merged company (Child, Faulkner & Pitkethly 2001). Also through the takeover Kraft food would be able to compete favourably with its core competitors such as Nestle in terms of the confectionery products through the increase of its market shares in areas such as Britain and at the same time Kraft food would be able to enjoy the accrued benefits of strong geographical networking of Cadbury in Asia. Kraft also seems to enjoy growth prospects due to the new brands and products and mostly those in the confectionery sector coupled with the new supply and distribution networks for those products which are marketed and sold outside the US. These also comprise of the markets in certain developing countries in the globe such as in China, Africa and in India. Based on the case of Kraft acquisition of Cadbury, Kraft foods have been able to integrate effectively the acquired company which is Cadbury. Cadbury would also profit from the extensive distribution network of Kraft all over the globe. Cadbury seemed to be so vulnerable to take over from the time when it emerged its United States soft drink business. Through the merging of the two companies there would be an expanded global reach for both companies and also the creation of synergies (Carey 2000). Conclusion and recommendations Based on the above discussion, it is clearly evident that Cadbury was taken over the Kraft food despite great public resistance to the takeover. When these kinds of takeovers take place, two large and multinational companies operate under one brand name as it is the case here. Kraft is largely burdened due to the debt it incurred in buying off Cadbury and thus the likeliness of h business collapsing due to the conflicts in regard to operational strategies. Thus before any merger and acquisitions people ought to look at both the positive and negative consequences of the deal. A number of aspects are as considered as being the motives or reasons behind the takeover and they include but are not limited to economies of scale, diversification, increases capabilities, increase in market share, gaining a competitive advantage over one's competitors and for other financial reasons. Organizations therefore ought to consider their motives clearly so as to ensure the success of the merger and acquisitions. It is also evident that Cadbury had limited and few opportunities when it came to issues related to value creation, and thus the agreement that was arrived to give in to the takeover was a wise decision for the company. Thus in relation to these individuals must be able to the fact that a monopoly may be created in the industry and be aware of the costs that are associated with one company being a monopoly. Mergers and acquisitions mainly come in all sizes and shapes and thus investors and shareholders need to consider all the complex issues that may be involved in Mergers and acquisitions for them to be able to reap the benefits. References BBC News 2009, Cadbury rejects hostile Kraft bid, Viewed 31 October 2013, http://news.bbc.co.uk/2/hi/business/8349832.stm Betton, S & Eckbo, B 2000, Toeholds, Bid Jumps, and Expected Payoffs in Takeovers, The Review of Financial Studies Vol. 13, pp. 841-882. Carey, D 2000, CEO roundtables on making mergers succeeds. Harvard Business Review vol. 78, pp. 154. Child, J., Faulkner, D & Pitkethly, R 2001, The Management of International Acquisitions, Oxford University Press, Oxford. DePamphilis, D 2008, Mergers, Acquisitions, and Other Restructuring Activities, Elsevier Academic Press, Burlington, MA, USA. Dong M, Hirschleifer D, Richardson S, Teoh S 2006, Does Investor Misevaluation Drive the Takeover Market? , Journal of Finance Vol. 61, pp. 725-762. Fee, C & Thomas, S 2004, Sources of gains in horizontal mergers: evidence from customer, supplier, and rival firms. Journal of Financial Economics Vol. 74, pp. 423-460. Gaughan, P 2007, Mergers, Acquisitions and Corporate Restructurings. John Wiley and Sons, New Jersey. Geringer, J., Tallman, S & Olsen, D 2000, Product and International Diversification among Japanese Multinational Firms, Strategic Management Journal, Vol. 21, pp. 51-80. Grüsgen, S., Kyriakides, S & Venizelou, C 2011, Mergers & Acquisitions - Success or Failure, Germany, GRIN Verlag. Gugler, K, Mueller, D, Yurtoglu, B & Zulehner, C 2003, The Effects of Mergers: An International Comparison. International Journal of Industrial Organization, Vol. 21, pp. 625-653. Harvard Business Press 2001, Harvard Business Review on Mergers & Acquisitions, Harvard Business Press, UK. Kraft Foods 2013, Kraft official website, Viewed 31 October 2013, http://www.kraftfoodsgroup.com/About/index.aspx Merced, M & Nicholson, C 2010, Kraft to acquire Cadbury in a deal worth $ 19 billion, Viewed 31 October 2013, http://www.nytimes.com/2010/01/20/business/global/20kraft.html?_r=0 Srinivasan, R & Mishra, B. P 2007, Why Do Firms Merge/Acquire: An Analysis of Strategic Intent in Recent M&A Activity among Indian Firms , IIMB Management Review , vol. 19, no. 4, pp. 388-402. Read More