Kraft-Cadbury Takeover and Glencore-Xstrata Merger - Case Study Example

Compare and Contrast:

Kraft-Cadbury takeover and Glencore-Xstrata merger

Table of Contents

1.0 Kraft-Cadbury takeover vs. Glencore-Xstrata merger3

1.1 Potential Motives3

1.2 Financing methods3

1.3 Other Perspectives5

2.0 Post Bid Defences6

3.0 Evaluation of the Bid Defences employed by the two companies6

4.0 Post-Acquisition Analysis7

Reference List10

• 1.0 Kraft-Cadbury takeover vs. Glencore-Xstrata merger
  • 1.1 Potential Motives

Kraft-Cadbury

The main strategy of Kraft was to expand their business into fast growing product market like chocolates and confectionary and also to position their brand into developing and emerging markets. The fastest and easiest way to implement this strategy and achieve their goals was by acquiring an already established company with a portfolio of diversified products like Cadbury. By acquiring Cadbury, it could enter into such markets and implement their strategy in a short period of time (Blake, 2016).

Glencore-Xstrata

Before the merger, Glencore was valued at about $45 billion, while Xstrata was valued at $50 billion. It was estimated that the merger deal would create the world’s fourth largest miner with annual revenue of almost billion (The New York Times, 2013). Glencore had been dominantly trading a huge range of commodities and it was difficult for them to estimate in which section they could grow, but the merger brought them an opportunity to expand and grow fast in the mining industry (CNN, 2012). For Xstrata, the main motive for the merger was to accumulate underperforming assets of Glencore and restructure them with their mining skills (The Student Lawyer, 2013).

Hence, the similarities between the takeover motive of Kraft and Glencore was to grow and expand their business into the international emerging markets and to gain a competitive advantage position in their respective industries. The only difference in their motive is that Kraft completely wanted to take over the brand name of Cadbury, while for Glencore, it was almost like a merger as Glencore incorporated the brand name of Xstrata in the newly formed company.

• • 1.2 Financing methods

Kraft-Cadbury

The takeover bid by Kraft was a combination of both cash and share offer. This means that the shareholders of Cadbury would receive some cash as well as some shares of Kraft, which would be paid against the shares that they hold for Cadbury (The Telegraph, 2010). The total valuation of the shareholders of Cadbury were dependent on the amount of cash that they would receive (in GBP), the present share price of Kraft and the exchange rate for converting the Kraft shares into GBP (The Telegraph, 2010).

However, in the course of negotiation, Kraft had to increase their cash offer to 500 pence per share in cash and 0.1874 Kraft stock for each share of Cadbury. In total, this valued Cadbury at 840 pence per share and an extra 10 pence dividend were paid to the shareholders (The Telegraph, 2010).

Glencore-Xstrata

In case of Glencore-Xstrata, it was an all-share merger deal (S&P Global Platts, 2012). Glencore initially offered 2.8 new shares for each share of Xstrata, which valued Xstrata at 1290.10 pence per share representing a premium of 15.2% over its closing share price. However, the offer was raised to 3.05 shares of Glencore for each share of Xstrata. This raised the premium amount to 17.6% valuing Xstrata at 1014 pence per share (Guardian News and Media Limited, 2012a).

The similarity between the two financing methods is that both Kraft and Glencore wanted to acquire their target companies at a cheap price by undervaluing them. However, both the companies had to eventually raise the offer price in order to complete the acquisition. The difference is that while Kraft offered both cash and shares to the shareholders of Cadbury for the acquisition, Glencore only offered shares to the shareholders of Xstrata. Hence, it can be determined that the financial strategy of Kraft was to gain full control over the equity and assets of Cadbury, while Glencore’s financial strategy was to consolidate their assets and equity with those of Xstrata to create synergy.

• • 1.3 Other Perspectives

Kraft-Cadbury

When the first bid was placed by Kraft, only 1.5% of the shareholders accepted the offer, while the majority of the shareholders rejected the offer interpreting that Cadbury is being undervalued. However, after a long negotiation and increase in the offer price, the shareholders finally allowed the takeover (HT Media Ltd., 2010).

On the other hand, Cadbury’s workers and employees gathered together and protested the takeover by Kraft. They walked on the streets wearing Cadbury chocolate wrappers and shouted “Keep Cadbury British, Don’t Sell Us Out”. This depicts that most of the employees of Cadbury were against the takeover due to fear of losing jobs and love for the company (Guardian News and Media Limited, 2010c).

One positive impact of the takeover is that before the acquisition, Kraft had no presence in the Indian market and had a very small presence in the South African markets. These two are very fast emerging markets in the world. Cadbury was already a well-established company in India accessing 92% of its population through India’s largest retail chains. Hence, by acquiring Cadbury, Kraft got a direct access into the Indian market (Blake, 2016).

Glencore-Xstrata

In the case of Glencore-Xstrata merger, many analysts studied that the potential hurdle in the merger process would be the price or the premium that would be offered to the Xstrata shareholders. However, the shareholders of Xstrata signalled that they wanted the growth of the company and if it was through a friendly merger, they would easily approve the deal. Hence, there was not much opposition from the shareholders and with an increase in offer value from 2.8 shares of Glencore to 3.05 shares, they accepted the merger proposal (The Economist Newspaper Limited, 2012).

The merged company could become the number one producer of coal and zinc. The European Union is estimating the merged company would become so powerful that its trading policies could influence the prices of the basic metals (Bloomberg, 2012). Moreover, this new entity under the control of Glencore’s CEO, Ivan Glasenberg, mentioned that the company will seek a greater share of profits from the developing countries with the extraction of their natural resources. He also indicated that the mining industry is forming groups against such huge mergers (Guardian News and Media Limited, 2012b).

• 2.0 Post Bid Defences

When an acquiring firm places a hostile bid to the shareholders of the target firm, certain defensive strategies are issued by the target company in various reasons. A defence strategy also called as a “shark repellent tactics” or “anti-takeover measure” is implemented with the intention of making the acquisition more costly or more time consuming, so that the hostile firm loses interest in acquiring the target firm (Yang and Zarin, 2011). The three most popular Bid Defence strategies are as follows (Yang and Zarin, 2011):

i) Poison Pills- This refers to the situation when the target firm issues preferred stocks at a much lower price than the market value, which makes it unfeasible for the acquiring company to purchase sufficient stocks in the target firm and become a major shareholder.

ii) Golden Parachute- This strategy is mostly implemented in case of a hostile takeover, where the board of directors and other executives of the target company are provided with lump sum amount of incentives. This makes the firm more valuable and costly.

iii) Crown Jewel- This strategy gives the target company the right to sell its most valuable assets when it faces a hostile bid. This reduces the attractiveness of the target company for the hostile firm to takeover.

iv) Lobster trap- This strategy is implemented in order to prevent the convertible security holders to transfer those securities into voting stocks. This will reduce the number of shareholders having the voting right to facilitate the takeover.

• 3.0 Evaluation of the Bid Defences employed by the two companies

Kraft-Cadbury

With the first hostile bid from Kraft, Cadbury released a defence document interpreting its rejection for the offer and showing the investors that it would prefer to stay as an independent business (Guardian News and Media Limited, 2010a). Few days after the bid, Cadbury released unaudited figures that provided the investors an estimation of its profits and sales in 2009. It also revealed their new financial targets to reach annual revenue growth between 5% and 7% and increase profit margins from 16% to 18% by 2013 (Guardian News and Media Limited, 2010b). This strategy was implemented in order to make the company more costly and valuable for Kraft to acquire.

Hence, it can be said that Cadbury’s defence strategies were successful to a certain extent as because due to its continuous rejection and negotiation, Kraft had to pay a huge premium for acquiring Cadbury. On the other hand, it is also true that Cadbury finally got sold to Kraft which could have been restricted if some more strong defence strategy like Poison Pills or Golden Parachutes were being implemented.

Glencore-Xstrata

After the merger offer was announced by Glencore, Xstrata’s board chairman, John Bond said that he would resign if the takeover takes place (The New York Times, 2012). This kind of bid defence is called “people pill” where the management of the target company threatens to resign after the hostile company takes over the target company. The company also opposed the deal due to low value of the bid. However, Glencore raised the offer by 9% from 2.8 shares to 3.05 shares (The New York Times, 2012).

Xstrata also applied the “Golden Parachute” technique of defence by offering huge bonus to the shareholders and the managers, but the shareholders rejected the bonuses and 80 per cent of the eligible shareholders of Xstrata voted in favour of the merger. Hence, it can be determined that Xstrata were not successful in implementing proper bid defence technique.

• 4.0 Post-Acquisition Analysis

Kraft-Cadbury

Few months after the takeover, Kraft revealed that its first-quarter net profits increased by 1.8% as it was charging higher prices and also its sales grew in the developing markets. Kraft earned $813 million (46 cents per share) in the first quarter of 2010 and by the end of the year, net income was $799 million (45 cents per share). Kraft’s net revenue for the first quarter increased 4% to $13.1 billion, which was $12.57 billion last year before the takeover (Telegraph Media Group Limited, 2012). However, from beginning of 2011, Kraft’s net profit dropped by 24% to $540 million, basically due to the high costs of the ingredients and costs involved in production (BBC News, 2011).

In 2012, Kraft officially got spilt into two companies; Kraft Foods Group which produces grocery products in the North American market and Mondelez International which focuses on international confectionary and snack business. Cadbury is now a subsidiary of Mondelez International (William Reed Business Media SAS, 2012).

Glencore-Xstrata

The newly formed entity Glencore Xstrata revealed that it made a net profit of US$ 1.72 billion in the first half of 2014. However, in 2013, the company incurred huge loss of around $US 9.39 billion, mainly due to the failure to integrate the merger. Since then, the company had been involved in cost-cutting which finally resulted in its growth (Sourceable, 2014). Recently Ivan Glasnberg, Glencore’s CEO said that the company has found $2.4 billion integrated synergies from the Xstrata merger. He also mentioned that there is a huge scope in cost savings in the new company and it had identified about $2.4 billion of savings since the merger (The New York Times, 2012).

In August 2014, the company’s earnings increased by 8% after the sale of its Peruvian Las Bambas copper mine at a price of US$ 7 billion (City AM, 2015). Since last two years Glencore Xstrata has been facing huge fluctuations in its stock prices due to rise and fall in the price of copper. The company is aiming next to acquire Rio Tinto, one of the world’s largest mining companies. The successful takeover of this company would create the world’s biggest miner (City AM, 2015).

Hence, from these two cases, it can be evaluated that the main motive of Kraft and Glencore was to grow their business and reach a leading position in their respective industries. The target companies Cadbury and Xstrata tried to defend the takeover, but after a certain level they failed and ultimately got acquired. However, after the acquisition process many acquiring firm fails to integrate their corporate financial strategy with that of the target firm. The same thing has occurred with the Kraft-Cadbury case. Kraft failed to integrate with the high cost of production for the Cadbury products and incurred huge loss in the next year post-acquisition. On the other hand, Glencore Xstrata also failed to integrate the merger and incurred loss in the next year post-merger, but gradually they discovered cost-efficiencies by cost-cutting, which helped the new company in creating synergy.

• Reference List

BBC News, 2011. Kraft Foods' profits hit by Cadbury costs. [online] Available at: <http://www.bbc.com/news/business-12427830> [Accessed 17 June 2016]

Blake, D., 2016. Multinational Company Acquisition - Kraft/Cadbury Case Study. [pdf] Available at: <http://course.sdu.edu.cn/G2S/eWebEditor/uploadfile/20131230181114585.pdf> [Accessed 16 June 2016]

Bloomberg, 2012. Glencore to Buy Xstrata in Biggest Mining Merger. [online] Available at: <http://www.bloomberg.com/news/articles/2012-02-07/glencore-xstrata-agree-on-90-billion-merger-of-equals-> [Accessed 16 June 2016]

City AM, 2015. Glencore share price history: A timeline of what went wrong from record drops to credit rating outlook fears. [online] Available at: <http://www.cityam.com/225292/glencore-share-price-nightmare-what-went-wrong-selloff-accelerated-recently> [Accessed 17 June 2016]

CNN, 2012. Glencore, Xstrata tie-up would create $90 billion giant. [online] Available at: <http://money.cnn.com/2012/02/07/markets/glencore_xstrata_merger/> [Accessed 16 June 2016]

Guardian News and Media Limited, 2010a. Cadbury poised to unveil defence strategy. [online] Available at: <https://www.theguardian.com/business/2010/jan/11/cadburyschweppes-mergers-and-acquisitions> [Accessed 16 June 2016]

Guardian News and Media Limited, 2010b. Cadbury prepares final defence against Kraft takeover. [online] Available at: <https://www.theguardian.com/business/2010/jan/10/cadbury-prepares-kraft-defence> [Accessed 16 June 2016]

Guardian News and Media Limited, 2010c. Cadbury workers protest against takeover. [online] Available at: <https://www.theguardian.com/business/2010/jan/27/cadbury-workers-takeover-protest> [Accessed 17 June 2016]

Guardian News and Media Limited, 2012a. Glencore increases Xstrata mega-merger offer. [online] Available at: <https://www.theguardian.com/business/2012/sep/07/glencore-delay-xstrata-merger-vote> [Accessed 17 June 2016]

Guardian News and Media Limited, 2012b. Five reasons Glencore/Xstrata mega-merger is important. [online] Available at: <http://www.theguardian.com/commentisfree/2012/sep/10/glencore-xstrata-mega-merger> [Accessed 17 June 2016]

HT Media Ltd., 2010. Kraft reveals takeover snub by Cadbury shareholders. [online] Available at: <http://www.livemint.com/Companies/7mHPaT5lQOzayUH89tfCIJ/Kraft-reveals-takeover-snub-by-Cadbury-shareholders.html> [Accessed 17 June 2016]

S&P Global Platts, 2012. Glencore, Xstrata agree terms of all-share merger. [online] Available at: <http://www.platts.com/latest-news/metals/london/glencore-xstrata-agree-terms-of-all-share-merger-7160150> [Accessed 17 June 2016]

Sourceable, 2014. Glencore Xstrata Returns to Profit. [online] Available at: <https://sourceable.net/glencore-xstrata-returns-profit/> [Accessed 17 June 2016]

Telegraph Media Group Limited, 2012. Cadbury-owner Kraft sees profits rise after raising prices. [online] Available at: <http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9244755/Cadbury-owner-Kraft-sees-profits-rise-after-raising-prices.html> [Accessed 17 June 2016]

The Economist Newspaper Limited, 2012. Glencore and Xstrata- Merger of equals. [online] Available at: <http://www.economist.com/blogs/schumpeter/2012/02/glencore-and-xstrata> [Accessed 16 June 2016]

The New York Times, 2012. Xstrata’s Investors Approve a Takeover by Glencore. [online] Available at: <http://dealbook.nytimes.com/2012/11/20/shareholders-vote-to-approve-glencores-merger-with-xstrata/> [Accessed 17 June 2016]

The New York Times, 2013. Glencore Completes Deal for Xstrata. [online] Available at: <http://dealbook.nytimes.com/2013/05/02/glencore-completes-deal-for-xstrata/?_r=0> [Accessed 16 June 2016]

The Student Lawyer, 2013. An Overview of the Glencore–Xstrata Merger. [online] Available at: <http://thestudentlawyer.com/2013/02/14/an-overview-of-the-glencore-xstrata-merger/> [Accessed 16 June 2016]

The Telegraph, 2010. Kraft buys Cadbury for £11.9bn: a Q&A. [online] Available at: <http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/7027042/Kraft-buys-Cadbury-for-11.9bn-a-QandA.html> [Accessed 16 June 2016]

William Reed Business Media SAS, 2012. Vernon leads charge at ‘New Kraft’ as old Kraft officially splits into two. [online] Available at: <http://www.foodnavigator-usa.com/People/Vernon-leads-charge-at-New-Kraft-as-old-Kraft-officially-splits-into-two?utm_source=copyright&utm_medium=OnSite&utm_campaign=copyright> [Accessed 17 June 2016]

Yang, E. and Zarin, S., 2011, Mergers & Acquisitions: Hostile takeovers and defense strategies against them. [pdf] Available at: <https://gupea.ub.gu.se/bitstream/2077/28242/1/gupea_2077_28242_1.pdf> [Accessed 16 June 2016]