Transnational Mergers and Acquisitions - Case Study Example

Introduction In February Kraft unveiled the details about its proposed takeover of the British company Cadbury. Kraft is an American company with diversified interests however; Cadbury has been an independent company with rich history of over 180 years serving mostly British and other markets. Valued at £11.5 B, this takeover of Cadbury is believed to have good impacts on the manufacturing jobs in the country. This takeover is also believe to be one of the most explosive combinations in quick meals, snacks as well as confectionary industry as both the firms believed to have their own strategic strengths to capitalize on. Despite this, there are controversies about this proposed takeover as the employees of the Cadbury have lined up in London to protest against this takeover owing to the job losses that they may incur. Similarly, Kraft’s shareholders specially its largest shareholder Warren Buffet is worried about the mounting debt that the firm has taken in order to materialize this deal. Thus the issue is not just limited to the takeover of one international firm by another but it also carries with it the different ethical consequences. Apart from this there will also be issues regarding the culture as well as global marketing theory which need to be understood and analyzed in order to properly evaluate this proposed merger. This paper will therefore attempt to provide an objective analysis of the takeover by providing detailed analysis of the markets where both the firms are operating currently, relative advantages of the takeover to both the firms as well as implications for the stakeholders of the firm besides dwelling upon some of the ethical issues. Mergers and Acquisitions Organizations enter into mergers and acquisitions for variety of reasons however, strategic reasons for takeovers are considered as most critical. Gaining entry into new markets, achieving synergy as well as diversification are some of the most important reasons that may be behind the takeovers of the firms.(Kummer,2008). Thus takeovers can either be strategic in nature or they can be financial in nature too. Financial takeovers are often done in order to gain quick gains due to market in-corrections and as such organizations engage themselves into such takeovers in order to gain monetary benefits rather than gaining strategic advantage over their competitors. It is also critical to note that the cross border takeovers and acquisitions are often made in order to overcome the entry barriers that may restrict the firms to gain an entry into a new market on its own.(Hitt, Ireland & Hosikisson,2008). It is however, critical to note that the cross border takeovers may often result into significant political as well as social issues that need to be addressed before making any formal decision. Thus the proposed takeover of the Cadbury of the Kraft may be providing an easy access to UK market besides expanding its market base. This also means that the proposed takeover of the Cadbury therefore may also provide the relative degree of diversification to the Kraft also as Cadbury has a definite market advantage in confectionary market in UK. Markets for Kraft and Cadbury Kraft has a rich history of success of over 100 years during which expanded itself into more than 70 countries. The principal activity of the firm is the manufacturing Kraft is the second largest business after Nestle in Food, confectionary and beverages. It is the largest firm offering the food and allied products in the US market. The major brands include Maxwell House Coffee, Post, Oscar Mayer as well as Kraft whereas these brands are manufactured and processed in more than 150 processing facilities all around the world. Similarly, Cadbury serves global confectionary market whereas its market share in overall global market is approximately 9%.1 It is also important to note that Cadbury enjoys top position in the candy business whereas it is lagging behind at Number 2 in gum business. Three major brands of the firm include Cadbury Milk, Halls and Trident which are duly supported by the innovative approaches adapted by the firm to market and advertise them in global market. Above discussion therefore indicate that both the firms have established themselves as the market leaders in two different segments of the market. By acquiring Cadbury, Kraft will probably be able to expand into new markets as well as achieving the desired level of diversification. Following sections will discuss the takeover in greater details with special reference to theoretical foundations behind the proposed takeover and what benefits can be achieved by Kraft through this proposed takeover. Why Kraft may be interested in taking over Cadbury? As discussed above that there may be various reasons as to why a firm may be interested in taking over another firm. Strategic reasons for takeovers include expansion into the new markets, diversification as well as gaining an entry into a new market.(Scheraeder & Self,2003). Horizontal integration may be one of the chief reasons as to why Kraft may be interested in overtaking the Cadbury. Horizontal integration allows a firm to offer a complete solution to all the needs of the customers by offering them a complete range of solutions under one brand name. (Hill & Jones, 2009). Horizontal integration with Cadbury therefore will allow Kraft to cross sell the products which it may not offer under its own brand name owing to lack of market power and competitiveness in that particular product range.(Firstbrook,2007). Thus the takeover of the Cadbury by Kraft will allow it to become relatively more powerful in terms of gaining market share in chocolate as well as candy business not only in UK but also in those markets where Cadbury has strong hold. Secondly, the takeover of the Cadbury may certainly add value to the Kraft’s shareholders because an increased market share will increase the revenue and market share for the firm hence the overall value delivered to the stakeholders will be higher if the proposed takeover is successful and Kraft is able to achieve its intended objectives by taking over Cadbury and further consolidate its market position. Lastly, creation of synergy is another important reason as to why the Kraft may be interested in overtaking Cadbury. Creation of synergies often result into improved internal competencies of the firms and firm may develop and further consolidate their core competencies by taking over a firm which can significantly add value to the existing competencies of the firm.(Papadakis,2007). Advantages and Disadvantages to both the parties Organizations enter into the acquisition and takeover transactions in order to gain certain advantage. Some of the advantages to both the firms may be as follows: 1. Addition to the firm value is probably the biggest advantage that Kraft can enjoy if the takeover is successful. As discussed above that the Cadbury is a leading confectionary item producers in the world and by horizontally integrating itself with the it, Kraft can effectively achieve better value proposition for its stakeholders. 2. Kraft can achieve better bargaining power over its suppliers by taking over the Cadbury because this takeover will increase the absolute size of the firm and its market share. Higher market share is assumed to provide better negotiation and bargaining power to the firms.(Vu, Shi & Hanby,2009). 3. Kraft may be able to share its risk by taking over the Cadbury as well as it can achieve economies of scale as well as take benefits of the transfer of knowledge.(Cartwright, Cartwright & Cooper,1996). 4. Cadbury can also benefit from this transaction because it will allow it to take benefits of the synergy resulting from the takeover. Disadvantages 1. Kraft has taken huge debt to finance the proposed transaction which may not serve the required purpose specially in such economic conditions wherein consumer demand is volatile. This may therefore result into increase in cost as well as reduction in profitability. 2. Cadbury may lose its own brand name and its employees may also lose jobs due to this takeover. (Lynch & Lind, 2002). Implications for Stakeholders The proposed takeover may result into different implications for the stakeholders of both the firms. Firstly, this takeover is increasingly being viewed in much larger context wherein the loss of one of the most cherished brands of UK to a foreign power is believed to be carrying certain “ emotional reactions”.(Howley & Meidema,2010). Thus this takeover has both the social as well as political implications for the stakeholders of both the firms and it seems that Kraft may have failed to properly assess the social and political factors before making its formal bid for the takeover. Further, it is also believed that a more successful UK based company is sold to a foreign firm potentially under suspicious circumstances and without taking into consideration the various implications for all the stakeholders of the Cadbury including British Government. Further, it is also critical to note that Kraft is a highly leveraged firm and it further increased its leverage in order to finance the proposed takeover of the Cadbury. It was probably because of this reason that Warren Buffett, the largest shareholder of Kraft, disapproved this takeover owing to the reasons that Kraft sold its frozen Pizza business to Nestle in a bid to raise the cash for this takeover. It is argued by the Warren Buffett that this may have been done in most tax-inefficient manner and therefore the stakeholders may lose value rather than gaining from this transaction.(Wearden,2010). The role of the stakeholders therefore play significant role in the takeovers as evidence indicate that the stakeholders may not be fully satisfied with the deal. The potential value of loss for the stakeholders of Kraft as well as significant political pressures by the stakeholders of Cadbury may result into the failure of the takeover in future. Ethical Issues It is believed that human issues get less emphasis when analyzing the impact of mergers and acquisitions of the firms. Ethical issues therefore mostly arise in terms of employee relations as employees increasingly feel threatened due to the change in management of the organization. Thus most of the takeovers that fail to yield the results are those that fail to incorporate the human side of the transaction and do not take into account the role that may be played by the human resource of the acquiring firm.(Vinten,1993). As discussed above that the takeover of the Cadbury has also became a political issue wherein Kraft has also been questioned by the MPs of the country to explain different aspects of the deal. Thus ethically, it therefore becomes relatively more profound for the Cadbury’s existing stakeholders to accept the deal.(McRae,2010). Another critical issue that may arise during the process of takeover is the relative role of the shareholders or rather stakeholders. (Werhane,1988). In this case, the stakeholders of both the firms have potentially disapproved the takeover owing to various reasons. This potential clash of the interests between the two groups of the stakeholders therefore may result into the significant ethical issues for both the firms. Conclusion Cross border takeovers and acquisitions are often done in order to achieve the entry into new markets besides transcending the potential barriers to the entry. The potential takeover by the Kraft of Cadbury is considered as one of the biggest takeovers in the confectionary industry as both the firms are the leading market players in the industry. Potential benefits that may be taken by the Kraft include horizontal integration as well as achievement of synergy to create further value for its shareholders. Horizontal integration allows a firm to offer a much comprehensive product offering by acquiring firms working in the same industry. This increase in the potential value generating capacity of the firm therefore leads to the creation of further value for both the firms. However, the takeover of the Cadbury has also become politicized as employees of Cadbury are becoming more worried about their employment. Apart from this, the stakeholders of both the firms are of the opinion that the takeover may not click due to the fact that Kraft is already a debt laden firm and increased leverage may put further pressures on it. References 1. 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