Merger and Acquisition - Analysis of Glencore-Xstrata and Kraft-Cadbury Takeovers - Case Study Example

Question 1: Kraft - Cadbury Takeover and the Glencore - Xstrata Merger Comparison

Potential Motives

Global presence was the primary motive for the mergers and acquisitions in Glencore-Xstrata and Kraft-Cadbury cases. Kraft sought a good value for the deal to become global confectionery leaders. Wiggins and Saigol (2010) established that the merger aimed at using a portfolio of more than 40 confectionery brands to establish a strong and complementary strategic fit in developing economies such as China, Brazil, and India. Conversely, the Glencore-Xstrata merger sought leadership in the independent copper production in the world (Preston, 2012). The companies aimed to use their high market values to negotiate a position in the manufacturing of natural resources worldwide.

The motive to eliminate competition was clear in both cases of mergers and acquisitions. According to Preston (2012), Glencore and Xstrata were selling essential commodities that commanded a significant market presence across UK and the world. The Glenstrata merger would increase performance and the overall prospects of driving rivals out of the market, which became a concern for the authorities in the European Commission. On the other hand, Cadbury and Kraft understood that their good value would reduce the influence of competitors such as Hershey in the market upon successful consideration of a counter-offer.

However, remuneration and eventual aim of the mergers showed companies with different motives. Kraft-Cadbury sought proper remuneration for the shareholders as well as employees by negotiating a favourable return on investment (Farrell, Wiggins, and Parker, 2010). Contrariwise, Glencore and Xstrata aimed at increasing dividends for the shareholders as well as the remuneration of the key personnel in the higher management level. Evidently, Kraft and Cadbury focused on protecting employment rights while Glenstrata intended to motivate executives at the expense of the workers. Remarkably, the acquirers’ financial strategies were evident in both cases.

Financing Methods

Equity was the primary financing method in both cases of mergers and acquisitions. Financing takeovers through equity increase investors’ confidence because it boosts stock value and the market price of the existing shares. The £11.6 deal for Kraft and Cadbury aimed to offer 850p a share where the shares rose by 3.3% by the end of London trading following the completion of the deal (Farrell, Wiggins, and Parker, 2010). While Cadbury rejected opening bids from Kraft, the deal would increase share earnings for the two companies. On the other hand, Glencore and Xstrata valued their shares at a minimum of 3.25 to gain profits by over $500million within the first year after completion of the deal (Preston, 2012).

Cash was an equally effective financing method in the two cases. The Glencore and Xstrata deal generated £209 billion when the companies combined their revenues (Preston, 2012). The firms generated a proxy of profits before interest, amortization, and depreciation. Similarly, Kraft offered 360p in cash for Cadbury shares in 2010 to sweeten the deal after the rejection of the opening bids.

The companies aimed at maximizing the market value. The financing method that increases market values prompts managers to act on behalf of all shareholders. The strategic decisions made in Cadbury-Kraft and Glencore-Xstrata cases showed financial strategies that anticipated high prospects of return on investment. The companies aimed to influence competition and potential payments for the bidders. Other important issues emerging from the case entailed shareholders, managers, employees, customers, competition issues, and regulatory implications.

Other Important Issues from the M&A Cases

The companies considered the long-term shareholder relations given their sizeable stakes in the respective firms. Kraft and Cadbury's bids encompassed increasing shareholding value where each individual would get a 10p dividend (Wiggins and Saigol, 2010). Preston (2012) indicates that Glencore-Xstrata made an appeal to the shareholders due to the possible $500million profits from the merger within the first year. On the other hand, the welfare of the employees and managers was part of the deal that elicited reactions from various authorities. Kraft-Cadbury merger sought to protect contractual agreements and employment rights whereas Glencore-Xstrata focused on the remuneration of the key personnel at the expense of the workers.

Additionally, customers would lose the heritage and identity of Kraft and Cadbury upon successful completion of the takeover. The loss of identity would reduce confidence in the confectionery products as well as individual brands (Farrell, Wiggins, and Parker, 2010). While Glencore-Xstrata takeover intended to boost sale, European Commission expressed its fears about low confidence among customers due to projected high prices on the products.

However, the takeovers and mergers in both instances focused on edging out the competition. Mergers and acquisitions increase competition by giving the firms a higher market value than rival groups (Lebedev et al., 2015). Glencore-Xstrata takeover aimed at using its independent value to command the global production of natural resources while Cadbury-Kraft merger focused on creating a leading brand in the confectionary industry.

The financial and strategic impact of the M&A transactions shapes ultimate regulations and legal actions (Gole and Morris, 2007). Regulatory authorities in the UK aimed at maintaining contractual agreements and employment rights to ensure the Cadbury-Kraft operations operated within the legal framework. On the other hand, the concern of the regulatory authorities from the European Commission was the possible effect of Glencore-Xstrata takeover on market prices. According to Preston (2012), shareholders and executives would benefit at the expense of customers as well as manufacturers.

Question 2: Various Post Bid Defences That a Target Company Can Employ To Repel a Bid

Target companies can employ various post bid defences to repel bids particularly during hostile takeovers. Some of the post bid defences include staggered board, white knight, and shareholders rights plan. A staggered board is a proactive defence measure that guarantees the target company significant representation on the board. An acquirer must attain representation and voting power from the board of directors, which reinforces influence over other directors in the consideration of the bid (Faulkner, Teerikangas, and Joseph, 2012). The primary purpose of using a staggered board is to increase positive response and stance towards the takeover, which in turn boosts acceptance from the shareholders. Gorzala (2010) argues that the biggest challenge is for a company to convene a shareholders’ meeting to seek approval for the creation of a staggered board. While the process of staggering a board of directors is costly and time-consuming, it helps the target company to gain significant influence and control.

A target firm can exploit white knight as a post bid defence. Companies seek a strategic partner to increase market capitalization and reinforce overall value. The merger benefits the shareholders in short-term and long-term (Gorzala, 2010). However, the companies must have comprehensive strategic fit to repel the influence of the bidder. The primary objective of the merger is to protect the welfare of the shareholders by creating a platform where the companies have synergies and efficiencies in terms of profits, pre-tax cost savings, and dividends within the first as well as subsequent years.

Conversely, attack on the logic of the bid may influence shareholders to reconsider their stance on the takeovers. The board of the directors persuades the shareholders by stating detrimental outcomes on the companies and stock prices (Faulkner, Teerikangas, and Joseph, 2012). The directors term the bids low in comparison to the real value of the companies. Discounting the logic of the bids prevents undesirable outcomes particularly due to changing stock prices.

Alternatively, firms can opt for shareholders rights plan to repel a possible bid. The shareholders rights plan may be a common form of defence in the takeover, which guarantees acquirer significant influence after the announcement of the takeover intention (Gorzala, 2010). The process provides shareholders with discounted stock prices, which makes it difficult for the raiders to attain the overall control. Existing shareholders assume rights that dilute the influence of the acquirers’ ownership percentage.

Question 3: Successfulness of the Bid Defences

The Glencore-Xstrata and Cadbury-Kraft takeovers demonstrated a successful application of post defence bids. The attack on the logic of the bids, white knight, staggered board, and shareholders rights plan are evident in both cases. Attacking the logic of the bid was the main defence in Kraft- Cadbury hostile takeover. Farrell, Wiggins, and Parker (2010) revealed that Warren Buffet was among the stakeholders discounting the proposition given by Kraft. The board of directors in Cadbury had to deal with pressure from Liberal Democrats in London to help in a funding bid for Cadbury. The board of directors and regulatory authorities reiterated possible denial of employment rights as well as contractual agreements. The defence was successful that was guided by the 850p proposal after the rejection of the first bid by the directors and investors.

White Knight was evident in Kraft-Cadbury hostile takeover. The companies consolidated their bid positions to make a successful bid to block U.S confectioner, Hershey. On the other hand, Glencore-Xstrata focused on preventing BHP Billiton from making a better proposition to the manufacturing deal. Preston (2012) acknowledged that a ‘Glenstrata’ would stifle competition. Remarkably, $500 million profits lured the company into the merger deal.

Shareholders rights plans was a successful defence method employed in the two cases. Kraft-Cadbury aimed at using 850p share prices to persuade the shareholders. The terms of the agreement would see a successful consideration of shareholders’ long-term view of their stakes (Farrell, Wiggins, and Parker, 2010). Glencore and Xstrata concentrated on the influence of shareholder despite having possible effects on the employees as well as other manufacturers. Shareholders embraced the deal that presented a possible $500 million profits within the first year.

Staggering the board of directors was highly successful in Glencore-Xstrata takeover. The companies established appropriate remuneration arrangements for the top executives (Preston, 2012). While focusing on winning the influence of the management structure could damage customers and manufacturers prospects, it gave the companies a negotiating power in the deal. The only staggering influence the Kraft-Cadbury merger was evident is when the Cadbury’s board rejected the first bid.

Question 4: Analysis of Post-Acquisition

Cadbury-Kraft Takeover

Cadbury became a part of Kraft Food, which enjoys a wider corporate and economic platform (Morris, 2014). While the shareholders and employees focused their intention on the target company, Cadbury retained its influential role relating to how foreign firms undertake takeovers. Kraft has become a reference point in the new era of takeover codes in U.S and U.K. The target company must provide comprehensive information on purchase intentions after the bidding process. According to Morris, (2014), Kraft continues to express its commitment to employment and contract rights after the takeover.

Kraft’s corporate financial strategy was effective guided by the share prices before and after the deal. A cycle of growth started despite that Kraft’s shares performed well under 834.5p compared to Cadbury’s performance in London trading. Currently, the company shares have increased to $88.19 in NASDAQ accompanied by soaring revenues of 16.2% in emerging markets (Kraft Foods Group Inc., 2013). Over time, Cadbury generated £257million in 2012, which was a year after the takeover (Kraft Foods Group Inc., 2013). The sales depict an excellent progress when compared to the projected $100 million during the first year.

Glencore-Xstrata Acquisition

Glencore and Xstrata revived investor’s progress after the takeover. Retaining a profound influence in the market against BHP Billiton depicts companies whose strategic fit provided a good foundation for improvement (Riseborough and Kayakiran, 2013). The $46 billion takeover reduced mining costs and the marketing operations for each firm. Glencore considers Xstrata as the largest portfolio of mines and projects aimed to topple competition in emerging markets such as China. The primary intent of the takeover was to improve the original value irrespective of growth in emerging and industrializing economies. The focus was more on organic growth than engaging in transformational deals, which could result in dominance in the mining and manufacturing industries.

The success of corporate financial strategy by Glencore indicates a long-term movement of shares, which have a generated at least $2.4 billion in synergies since 2010 (Glencore, 2015). Epic profits have generated 5% dividends and a steady $0.165 increase in the share prices across the globe. The financial performance indicates significant progress in comparison to the $500 million goal from the first year of the merger. An all-share transaction of big companies provides great prospects for the individual as well as collective shares in the stock exchange market. A 3.25p bid for each Xstrata shares provided a foundation for successful financial performance in the mining industry.

Reference List

Farrell, G., Wiggins, J., and Parker, G., 2010. Buffett hits at Kraft’s ‘bad’ Cadbury deal. [online] Next.ft.com. Available at: <https://next.ft.com/content/de9cbfec-05d3-11df-88ee-00144feabdc0>.

Faulkner, D., Teerikangas, S. and Joseph, R., 2012. The handbook of mergers and acquisitions. Oxford: Oxford University Press.

Glencore, 2015. Glencore Annual Report 2014. [online] Baar, Switzerland: Radley Yeldar, pp.1-204. Available at: <http://www.glencore.com/assets/investors/doc/reports_and_results/2014/GLEN-2014-Annual-Report.pdf>.

Gole, W. and Morris, J., 2007. Mergers and acquisitions. Hoboken, N.J.: John Wiley & Sons.

Gorzala, J., 2010. The art of hostile takeover defence. Hamburg: IGEL Verlag.

Kraft Foods Group Inc, 2013. Kraft Foods Group Inc. Form 10-K. [online] New York: U.S Securities and Exchange Commission. Available at: <http://files.shareholder.com/downloads/ABEA-3QV6OO/0x0xS1193125-13-118824/1545158/filing.pdf>.

Lebedev, S., Peng, M., Xie, E. and Stevens, C., 2015. Mergers and acquisitions in and out of emerging economies. Journal of World Business, 50(4), pp.651-662.

Morris, B., 2014. The Cadbury deal: How it changed takeovers. [online] BBC News. Available at: <http://www.bbc.com/news/business-27258143>.

Preston, R., 2012. Glencore and Xstrata: a merger of egos. [online] BBC News. Available at: <http://www.bbc.com/news/business-16924009>.

Riseborough, J. and Kayakiran, F., 2013. Glencore to Buy Xstrata in Biggest Mining Merger. [online] Bloomberg.com. Available at: <http://www.bloomberg.com/news/articles/2012-02-07/glencore-xstrata-agree-on-90-billion-merger-of-equals->.

Tsagas, G., 2014. A Long-Term Vision for UK Firms? Revisiting the Target Director's Advisory Role since the Takeover of Cadbury's plc. Journal of Corporate Law Studies, 14(1), pp.241-275.

Wiggins, J. and Saigol, L., 2010. Cadbury and Kraft agree £11.6bn deal. [online] Financial Times. Available at: <https://next.ft.com/content/f3970f88-0475-11df-8603-00144feabdc0>.