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Kraft-Cadbary Merger: Organizational Background


Mergers have been a prime strategy for Kraft, as they themselves were a product of mergers between itself and smaller international manufacturers. As such, this strategy for expansion was in the ‘DNA’ of the company. The company history is marked by continued acquisitions as a means of entry into new markets and growing market share; it was this strategy that allowed Kraft to quickly grow into one of the largest consumer food conglomerates in the world. Over the previous decades, Kraft and Cadbury had maintained an intense rivalry, as both sought to expand within their domestic and international markets. Kraft has competed heavily against Cadbury within the confectionary market, but the organization was facing lackluster results due to its previous heavy focus on developed markets. As such, Kraft has notoriously had a low presence in developing markets such as India and Brazil, as these areas were already dominated by other brands such as Cadbury.

One of the primary motivations behind the merger was the appointment of Irene Rosenfeld as the CEO of Kraft Foods. Rosenfeld developed a three-year turnaround program that was designed to heavily increase growth within the company and ‘jumpstart’ its expansion into international markets. As Cadbury was one of its primary competitors in the confectionary market within these countries, it was seen as highly disadvantageous to attempt to dethrone an already dominant company, as this would lead to significant costs without any guarantee of results. Due to this reality, it was decided by the board that the best methodology for expansion into these markets, and to compete against a growing presence of Nestle and Hershey, was to acquire Cadbury as a means of pre-empting any competitor movements onto the company. The deal was accelerated after the details of the Mars/Wrigley acquisition in 2008. Kraft believed that the industry was quickly consolidating itself into large-scale conglomerates of brands, and as such, believed it would be in the company’s best interest to quickly seize Cadbury in order to prevent it being ‘locked out’ of key emerging markets.

Developing markets had come a target for the confectionary industry, as the rising incomes within these nations led to significant growth within consumer demand; in contrast, developed markets have already been rather saturated, with growth potential significantly curtailed by the lack of potential for dramatic increases in consumer spending and demand. This was particularly affected by a shift in consumer attitudes within the confectionary market, as the health trends within the developed markets (EU, US, etc) had led to declines in overall sales. As a result, the best means of obtaining continued sales increases was to target developing countries and economies, as the growth projections within these regions will continue to outpace those of developed nations for the coming decades.

The Kraft strategy was not as obvious as it appeared from the outside, as the company had bigger plans for Cadbury than initially anticipated. Although it was at first believed that the company was needed to increase Kraft distribution within developing markets, the strategy outlined by Rosenfeld was much more comprehensive. Cadbury was the final acquisition needed in order to split the firm into two main businesses: a grocery business under the Mondelez International brand and a snacks company under the original Kraft Food label. This was done in order to address concerns by investors that the organization would be worth more split into two separate publicly traded companies, as the combined management of separate industries was weighing down on the ability of each market focus.

The challenge for Kraft in terms of the acquisition was the resistance of Cadbury management, as not only was the company not for sale, but measures were taken to actively resist the takeover. In response, the Chairman Sir Roger Carr, was adamant about developing an advisory team and made public announcements that the initial 7.45 pence-per-share offer was significantly undervaluing the worth of the company. Furthermore, Cadbury made it clear that it would prefer nearly any other competitor as a merging partner, as they did not believe that Kraft would be a fit in terms of company culture and business methods. This was further reinforced by the insistence of UK business secretary, Lord Mandelson, that the government would strongly oppose any acquisition by a company that did not “respect” the historic company.

Furthermore, Kraft was challenged by successful efforts on Cadbury’s part to boost its quarterly results. These significantly increased the company’s worth, as it gave Cadbury a much stronger negotiating position within the deal. The initial offer by Kraft in September of 2009 increased the value of the company by nearly 40%. This significantly increased the costs of the deal to Kraft, as their own machinations had forced them to pay a premium on their original price. Kraft was forced to divest from certain retail markets in order to come up with the necessary cash for the transaction, as cash on hand offers were increased by $3.7 billion in order to incentivize the deal to shareholders.

Cadbury was particularly sensitive to the Kraft business model, as upper management believed that the company would stagnate due to the conglomerate model employed. Conglomerate companies tend to underperform in the long-term, as they are unable to fully allocate the resources needed to fund continued expansion; the lack of direct attention to a single business can have a particularly dire effect, as this tends to encourage a ‘maintenance’ strategy instead of one focused on growth. Cadbury’s own legal defense documents focused on this issue, as it recommended to shareholders that an offer by Kraft would not be directly beneficial to shareholder value and lead to a degradation of the privileged position that the company has currently positioned itself within.

Rather than being wholly against mergers of any kind, Cadbury was interested in an acquisition; it was simply not interested in being acquired by Kraft. Although corporate communications during this period were strongly anti-merger, Cadbury had been positioning itself for sale since early 2007, as an investment by Trian Fund Management under the guise of widely known investor Nelson Peltz signified a significant corporate restructuring. The Trian investment is particularly telling, as such investment typically go to poorly performing and undervalued companies. As such, Peltz influenced was important in transforming Cadbury Schweppes into Cadbury, as his influence was key in spinning of the Schweppes beverage business, as it was seen as ‘dead-end’ by investors. This was meant to develop the company as a sole-focused organization that would be a perfect acquisition for any major confectionary giant such as Kraft, Hershey, or Nestle.

However, Cadbury overestimated its appeal to its rivals and the willingness of Kraft to overpay for the transaction. As such, the negotiations merely forced Kraft to pay a higher price rather than give up the merger as a whole. The initial 745 pence-per-share offer was shifted in favor of 840 pence-per-share as well as a 10 pence per share dividend. Cadbury determined that the majority of shareholders would be willing to sell off the company at any price past 830 per share. Aggressive negotiation on part of Kraft and the willingness of Cadbury shareholders allowed the deal to reach a satisfactory conclusion, as otherwise it would not have gone through. Although Kraft succeeded in its acquisition, the transaction did not go without additional costs. The merger of an adored public icon with an multinational American conglomerate was not well-received by the British public, with much of the news coverage of the event during the proceeds being wholly negative of the transaction. While no regulatory or competitive issues were uncovered during the due diligence of the merger, the image of both parties was placed under pressure by unusually intense public scrutiny of the transaction.

As a whole, regulators were uncomfortable with the ease that a UK company was acquired by a foreign firm, and the widespread news of the transaction forced a review of the regulatory structure for mergers and acquisitions within the country. This was forced upon regulators, as questionable conduct on part of Kraft during the Cadbury negotiations on the Somerdale factory placed the company into disrepute with regulators and the general public. During the merging process, Kraft had promised that it would maintain a Cadbury plant in Somerdale; this was quickly recanted after the completion of the merger, with Kraft claiming that further information uncovered after the transaction made keeping the plant open unfeasible. In the immediate aftermath of the sale, Kraft shut down the factory and outsourced much of the labor to Poland. The 2011 changes in the wake of the Cadbury merger made it much more difficult to weasel out of commitments made to regulators after the transaction.

 

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