MERGER AND ACQUISITION OF

CADBURY BY KRAFT FOODS

TOPIC: MERGER AND ACQUISITION OF CADBURY BY KRAFT FOODS

SYNOPSIS

ABSTRACT:

Acquisition : The battle between Kraft and Cadbury ▬ The process of M&A▬ Kraft goals▬ Why Cadbury?▬ Risks and stakes involved

Structure of the deal Acquisition outcomes

▬ Challenges for the acquisition▬ Impact and consequences▬ Conclusions

OBJECTIVE:

To study Cadbury and Kraft foods individually. To understand the process of merger and acquisition between

Cadbury & Kraft. Implications of Kraft and Cadbury takeover. To understand the terms of the agreement. To understand the before and after deal challenges, impact and

consequences.

APPLICATION:

To expand our understanding and knowledge of mergers and acquisitions in terms of strategic planning and the issues surrounding the process.

To understand risks and consequences in an acquisition deal.

To analyse the after deal effects such as work culture and environment shocks, strategies, planning and working of two companies.

To study the operating performance of acquiring companies and comparing their performances before and after merger.

METHODOLOGY:

A qualitative research approach was adopted in this study. Use of secondary data available on internet.

Presented by:

Yamini Soni

A1802010281

Neha Jindal

A1802010333

ABSTRACT

Kraft Foods sealed a deal for Cadbury as the famed British chocolate maker accepted a sweetened bid worth some US$19 billion creating a world leader in confections. Ending a bruising months-long hostiletakeover battle, Cadbury's board agreed to an improved offer valuing the British group at 11.5 billion pounds (US$18.9 billion), or 840 pence per share, the companies said in a statement. Under the agreement, Cadbury shareholders will also receive 10 pence per share via a special dividend, lifting Kraft's offer to 11.9 billion pounds (US$19.5 billion). The deal would make US-based Kraft, the world's second-biggest food company, one of the biggest global players in chocolate and confections, giving theUS group the brands of Dairy Milk and Creme Egg to go along with Kraft's Toblerone, Milka, Suchard and Cote d'Or, among others. Investors welcomed Tuesday's news, sending Cadbury's US-listed shares up 6.14 per cent to US$55.09. Kraft shares fell 0.57 per cent to US$29.41.

Commenting on the Offer, Irene Rosenfeld, Chairman and CEO of Kraft Foods, said:

"We have great respect for Cadbury’s brands, heritage and people. We believe they will thrive as part of Kraft Foods. This recommended offer represents a compelling opportunity for Cadbury Shareholders, providing both immediate value certainty and upside potential in the combinedcompany. For Kraft Foods Shareholders it transforms the portfolio, accelerates long-term growth and delivers highly attractive returns, while maintaining financial discipline."

Commenting on the Offer, Roger Carr, Chairman of Cadbury, said:

"We believe the offer represents good value for Cadbury shareholders and are pleased with the commitment that Kraft Foods has made to our heritage, values and people throughout the world. We will now work with the Kraft Foods' management to ensure the continued success and growth of the business for the benefit of our customers, consumers and employees."

Cadbury is a British confectionery company, the industry's second-largest globally after the Mars-Wrigley. Headquartered in Cadbury House in the Uxbridge Business Park in Uxbridge, London, England and formerly listed on the London Stock Exchange, Cadbury was acquired by Kraft Foods in February 2010.

The firm was known as "Cadbury Schweppes plc" from 1969 until a May 2008 demerger, which saw the separation of its global confectionery business from its U.S. beverage unit.

TYPE : subsidiary of Kraft foods

INDUSTRY : confectionery

FOUNDED : 1824

REVENUE : $50 billion

PARENT COUNTRY : united Kingdom

HISTORY

In 1824, John Cadbury began vending tea, coffee, and drinking chocolate, which he produced himself, at Bull Street in Birmingham, England. John Cadbury later moved into the production of a variety of Cocoas and Drinking Chocolates being manufactured from a factory in Bridge Street, supplying mainly to the wealthy due to the high cost of manufacture at this time. During this time a partnership was struck between John Cadbury and his brother Benjamin. At this time the company was known as 'Cadbury Brothers of Birmingham'.

The two brothers opened an office in London and in 1854 received the Royal Warrant as manufacturers of chocolate and cocoa to Queen Victoria.

In 1861, John Cadbury’s sons Richard and George took over the business.

In 1905, Cadbury's launched its Dairy Milk bar, and it becomes the company's best selling product by 1913. By this point, Cadbury's was the brand leader in the United Kingdom.

In 1918, Cadbury opened their first overseas factory in Hobart, Tasmania and in 1919 undertook a merger with J. S. Fry & Sons, another chocolate manufacturer which saw the integration of well-known brands such as Fry's Chocolate Cream and Fry's Turkish delight.

FINANCIAL EXPANSION

MERGERS

Cadbury merged with drinks company Schweppes to form Cadbury Schweppes in 1969.

Cadbury Schweppes went on to acquire Sunkist, Canada Dry, Typhoo Tea and more. In the US, Schweppes Beverages was created and the manufactures of Cadbury confectionery brands were licensed to Hershey's.

Snapple, Mistic and Stewart's were sold by Triarc to Cadbury Schweppes in 2000 for $1.45 billion. In October of that same year, Cadbury Schweppes purchased Royal Crown from Triarc.

In February 2010 Cadbury was acquired by Kraft foods.

DEMERGERS

In March 2007, it was revealed that Cadbury Schweppes was planning to split its business into two separate entities one focusing on its main chocolate and confectionery market and the other on its US drinks business.

The demerger took effect on 2 May 2008, with the drinks business becoming Dr. Pepper Snapple Group Inc.

In December 2008 it was announced that Cadbury was to sell its Australian beverage unit to Asahi Breweries.

KRAFT FOODS

Kraft Foods, Inc. (NYSE: KFT) is the largest confectionery, food, and beverage corporation headquartered in the United States and the second-largest in the world. It markets many brands in more than 155 countries. The company is headquartered in Northfield, Illinois, a Chicago suburb. A public company, it is listed on the New York Stock Exchange and became a component of the Dow Jones Industrial Average on September 22, 2008, replacing the American International Group.

Type                              Public (NYSE: KFT)Founded                     Chicago, Illinois (1903)Headquarters             Northfield, IllinoisKey people                 Irene Rosenfeld, Chief Executive OfficerIndustry                      Food Processing FinanceRevenue                    ▲  US$42.2 billion (2008)Operating income     ▼  US$3.8 billion (2008)Net income              ▲  US$2.9 billion (2008)Employees                98,000 (2008)Website                   www.kraftfoodscompany.com

HISTORY        The firm today known as Kraft Foods was formed on 10 December 1923 by Thomas H. McInnerney with financing provided by Goldman Sachs, Lehman Brothers and Tobey & Kirk. The firm was initially set up to execute on a roll up strategy in the then fragmented United States ice cream industry. Through acquisitions it expanded into a full range of dairy products. By 1930, eight years after it was founded, it was the largest dairy company in the United States and the world, exceeding Borden.McInnerney operated the Hydrox Corporation, an ice cream company located in Chicago, Illinois. In 1923 he went to Wall Street to convince investment bankers there to finance his scheme for consolidating the United States ice cream industry. He initially found "hard sledding" with one banker saying the dairy industry "lacked dignity." He persevered and convinced a consortium including Goldman Sachs and Lehman Brothers to

finance a roll-up strategy. As a result of his efforts, National Dairy Products Corporation was formed in 1923 in a merger of McInnerney's Hydrox with Rieck McJunkin Dairy Co of Pittsburgh, Pennsylvania the resulting firm was then listed on the New York Stock Exchange with the offer of 125,000 shares having been oversubscribed. The firm grew quickly through a large number of acquisitions. As is typical in a roll-up strategy, acquisitions were primarily for stock in National rather than cash. Examples of firms acquired include: (list is not complete - National acquired more than 55 firms between 1923 and 1931).

  

Year

Firm Sector Location

1924 W.E. Hoffman Ice cream Pennsylvania

1924 Dunkin Ice Cream Ice cream Illinios

1925 Sheffield FarmsFluid milk, ice cream, other

New York

1926 Breyer's Ice Cream Ice cream Pennsylvania

1928 Breakstone Brothers Fluid milk, cheese New York

1928 General Ice Cream Ice creamNew York, East Coast

1929 Hiland Dairy Fluid milk, other Kentucky

1930 Kraft-Phenix Cheese, other US, international

1931Consolidated Dairy Products

Ice cream, other dairyNew York, New Jersey

In 1930, National Dairy Products acquired the Kraft Phenix Cheese Corporation.

FINANCIAL EXPANSION:

In 2000, Philip Morris (renamed Altria in 2003) acquired Nabisco Holdings for $18.9 billion and merged the company with Kraft Foods the same year.[8] In 2001, Philip Morris sold 280 million Kraft shares via the third-largest IPO of all time, retaining an 88.1% stake in the company.In 2004, it sold its sugar confectionery division to Wrigley, while doing minor divestitures - including its hot cereals division in 2007, its pet snacks division in 2006, juice drinks and functional water in 2007 and some grocery brands in 2006.              Altria announced on January 31, 2007, that it would spin off all the remaining Kraft Foods shares to Altria's shareholders; each will be given approximately 0.7 share of Kraft for every Altria share they own. Investor Nelson Peltz bought a three-percent stake at Kraft Foods and is talking with the executives on revitalizing the business,[15] with options such as buying Wendy's fast food chain or selling off Post cereals and Maxwell House coffee. On January 31, 2007, after months of speculation, the company announced that its 88.1% stake would be spun off to Altria shareholders at the end of March 2007. Kraft is now an independent publicly held company.In July 2007, the company bought Groupe Danone's biscuit (cookie) and cereal division for $7.2 billion, including iconic French biscuit brand Lefebvre-Utile.[15][16] While two years earlier firestorms of protest had arisen over plans for American PepsiCo's hostile takeover of the French company, Kraft's announcement was not met with the same protests, in part because Kraft agreed not to close French factories and keep the new merged divisions headquarters near Paris for at least three years.   

   

ACQUISITION: THE BATTLE BETWEEN KRAFT AND CADBURY

AUG 28 – Initial Bid at 755 pence per Cadbury Share

SEPT 7 - Kraft goes public with the bid. Cadbury promptly rejects the bid.

SEPT 12 - Cadbury's Management rejects the bid saying it was an "unappealing prospect" being absorbed into Kraft's "low growth conglomerate business".

SEPT 16 - Warren Buffett, the world's second richest man and a leading shareholder in Kraft with a 9.4 percent stake, warned the U.S. food group not to overpay for Cadbury.

SEPT 21 - Cadbury contacts the UK Takeover Panel to request a "put up or shut up" request be sent to Kraft, which would give a time frame for Kraft to come up with a formal bid.

SEPT 25 - Cadbury's CEO says he does not believe Kraft's offer for his company made strategic or financial sense

SEPT 30 - UK Takeover Panel rules that Kraft has until 1700 GMT on Nov 9 to make a formal offer for Cadbury or walk away for six months.

OCT 21 - Cadbury posts upbeat third-quarter trading with underlying sales up 7 percent as it raise its 2009 target for sales and profit margin growth. The shares fail to react as a counter bidder for Kraft is seen increasingly unlikely.

OCT 22 - Nestle and Hershey report third-quarter results but neither mention a speculated joint bid for Cadbury with Nestlé's focus on increasing its share buyback.

NOV 3 - Kraft's third-quarter results disappoint investors with weaker-than-expected revenue and as it cut its 2009 sales forecast. CEO Rosenfeld says she will not overpay for Cadbury.

NOV 9 - Kraft formalises its bid at the same terms for Cadbury as the

original approach -- 300p in cash and 0.2589 new Kraft share for each Cadbury share -- valued at 717p.

NOV 18 - Both Italy's Ferrero and Hershey said separately they were reviewing a possible bid for Cadbury but gave no assurance that either would make an offer.

NOV 23 - Cadbury shares hits all-time high of 819-1/2 pence on speculation of a battle between Kraft and rivals for the British chocolate maker.

DEC 4 - Kraft posts its offer document to Cadbury shareholders starting off a two-month fight for the British group under UK takeover rules. Kraft says its bid is now worth 713 pence a share or 10.1 billion pounds.

DEC 14 - Cadbury issues its official defence document promising bigger dividends and strong growth as Cadbury reminds its shareholders that Hershey and Ferrero may bid.

DEC 18 - Cadbury CEO Todd Stitzer tells Reuters in an interview that a significant number of its major shareholders do not believe Kraft's bid reflects Cadbury stand-alone value.

JAN 5 - Kraft sweetens bid with 60p more cash but cuts shares on offer to keep offer price unchanged.

JAN 12 - Cadbury gives its final official defence against Kraft bid reporting robust trading and rejecting the bid on valuation. Ferrero pulls out, say sources close to the deal.

JAN 14 - Cadbury fires last words in its defence as media reports say that Hershey is looking at mounting a solo bid, but many analysts doubt whether Hershey can come up finance

JAN 19 – Cadbury accepts Kraft’s offer of GB£11.7 Billion ending months of Corporate battle valuing each Cadbury share at 840 Pence.

FEB 05- Kraft had secured over75% of the shares thus finalizing the deal.MAR 08 -Cadbury shares was de-listed.

WINNERS & LOSERS

Winner 1: Cadbury’s Shareholders Sep 7, 2009 the market value of Cadbury increased by 40% to £10.2 billion, because of announcement by Kraft of its intention to acquire Cadbury.

Winner 2 : M&A advisors Most M&A advisors earn between half a percent and two percent of the deal’s values.(between £5 million and £20 million pounds).

Winner 3 : Stock market speculators They employ a merger arbitrage were they take two positions simultaneously for example a short position on Kraft’s shares and long position on Cadbury’s shares and the difference between these two positions represents their merger arbitrage 

Winner 4: Senior managers of Cadbury If the deal goes ahead they are going to get a bumper exit packages. If the acquisition does not materialise then they will keep their jobs plus they will also get bonus for fighting Kraft’s takeover. 

Winner 5 : Senior managers of Kraft i) Increase in their salaries because salaries are positively correlated to size of the firm ii) Non quantifiable benefits for example increase in pride, job security 

Losers: Kraft‘s shareholdersThey have paid over the odds because they are paying a 40% premium to the pre-September 2009 share price level.

KRAFT STRATEGIES

Kraft foods offered a cash cum stock deal to make it lucrative to the share holders and also it announced a 10 pence bonus dividend to shareholders to lure them to accept the deal.

After the initial rejections by Cadbury Management, Kraft made its proposals directly to Cadbury's shareholders over the heads of its board.

Kraft sold its Pizza brands including DiGiorno and Tombstone to Nestle and use proceeds from the $3.7 billion deal to boost the cash component of its Cadbury bid. 

It got approval from EU Antitrust committee by divesting its Polish and Romanian chocolate businesses. This was done to maintain competition in the market.

It sweetened the deal by offering more cash and reducing the shares offered. This will be more useful for the shareholders given that the share price of the Kraft would be more volatile due to fresh issue of Kraft shares.

CADBURY’S DEFENSIVE STRATEGIES

Cadbury moved the UK Takeover panel to pressurize Kraft.Cadbury discussed a rival offer with Pennysylvian company named Hershey (White Knight).

Cadbury was successful in boosting its 3rd Quarter results which made the company more valuable. (This could have also been Window Dressing)

Cadbury had a very significant proportion of long-term investors interested and involved in the stock, and were able to force Kraft to come to the UK and talk to the investors. This forced Kraft to negotiate instead of just rolling out an offer.

A big part of Cadbury’s defence strategy rested on limiting the impact of hedge funds in determining the deal. This prohibited Kraft to further lower the deal value by the use of hedge funds.

Corporate communication played an important part in Cadbury’s defence. The CEO and board were vocal about the lack of strategic purpose in the deal.

Cadbury constantly monitored their top 50 to 75 investors who might be contacted by Kraft them. It was a very tactical engagement to build people’s expectations of what value Cadbury could deliver in the face of Kraft’s offer.

Cadbury published documents in defence against the hostile strategy of Kraft on January 12 2010.

POST MERGER EVENTS:

Workforce management & Tax avoidance

Strong focus on Post –Merger Integration plans especially among employees due to initial bitter batter in the corporate communications

Ensure key talent is retained due to the weak relationships among the management and the stakeholder warnings such as Warren Buffets

Debt loaded on Kraft foods due to the merger makes workforce optimisation imminent for the success of the deal. Optimal timing of this exercise is crucial

Communication synchronization – Somerdale factory eventKraft Foods announced in December 2010 to move Cadbury's Headquarters and transfer Cadbury's to holding-company based in Switzerland in an attempt to avoid paying millions of pounds of tax to the UK Government.

On Jan 8th the Indian Tax Authorities are seeking clarifications from Kraft regarding the deal to check for tax-evasion allegations

PLANS AFTER TAKEOVER

KRAFT is the world’s largest confectionery company. Kraft believes combining KFT&CBY can be justified by the following value propositions:The combined company could target long-term organic revenue growth in excess of 5% and sustainable long-term EPS growth of 9 to 11%, whereas Kraft targets long-term organic revenue growth of 4% and EPS growth of 7 to 9% on a standalone basis.The higher long-term growth rates in revenues and bottom lines will be driven by revenue synergies and $625 million identified annual cost savings.Cadbury is highly complementary to Kraft’s geographical footprint and will increase developing markets’ contribution to Kraft’s net revenue from about 20% to about 25%. In recent years Kraft ran a large project to implement the SAP ERP 6.0 system, which SAP billed as one of its largest global ERP implementations

KRAFT-CADBURY – TODAY

13 % rise in the income – suggests the synergy of the deal in action and integration plan 90 % of the income rise contributed by Cadbury division – right judgement from Kraft for geographical diversification of poor American market 34.1% boost in European revenues – new market entry for product portfolio Entry of Kraft productions into India and Latin America through Cadbury channels with joint custom product development

It will slash $550 million (£379 million) directly from operational costs after its £11.5 billion acquisition of CADBURY last year

Out of $675 million (£430 million) total savings from the merger, including marketing and sales savings, some $300 million will come from day to day operations. An additional $250 million costs will be cut from “general and administrative” expenses.

In recent years Kraft ran a large project to implement the SAP ERP 6.0 system, which SAP billed as one of its largest global ERP implementations.

The project began in Europe and then was extended to Kraft's home market, the US. In 2008, Kraft also began using SAP NetWeaver master data management to integrate information from a range of legacy systems into the new SAP ERP system

Cadbury has a more chequered history with SAP . In 2007, before a demerger from drinks company Schweppes, Cadbury admitted that a troubled SAP implementation over the previous two years had held back its financial performance, contributing to a £12 million deficit on its balance sheet and leading in part to large job cuts.

Cadbury is now running SAP ERP, linking in to the data of over 12,000 users. It also runs an SAP human resources platform. Separately, Cadbury outsources its datacentres to HP.

There is alot of cultural changes in both the companies so it is difficult for the companies to cope up with these changes. Both companies have participative and helping in nature. Both companies have employee performance effective and hard working

But the kraft’s employe e are rewarded on achievement to encourage and destroy competition and even inside the company employees are not much friendly as like Cadbury and there is a competive nature among employees . so it is difficult to survive for cadbury’s

LESSON FROM KRAFT’S CADBURY TAKEOVER

The Keynsham plant near Bristol will close, despite the fact that Kraft promised to keep it open (that was actually a bit weird, as Cadbury itself had announced that Keynsham would be closed at some stage in the future).And the fear, of course, as much in the mind of Peter Mandelson as in the minds of all Cadbury’s workers, is that this is just the first of many cuts that will be brought forward during the next few years.

. Apart from the odd sardonic chuckle as the process unfolded (with that arch-globalise Mandelson shedding a few crocodile tears at another ‘great British company’ being gobbled up by ‘predators’ like Kraft – or Warren Buffet (who owns about 9% of Kraft) complaining that it’s areally bad deal for Kraft shareholders, however good a deal it might be for Cadbury shareholders), it’s been too bloody miserable.

The optimists would have curmudgeons like me cheer up a little. They point to the pledges made by Kraft to stick by Cadbury’s ethical and Fair-trade commitments. Just before the Cadbury’s Board accepted the bid it announced that Green & Black’s would be moving its entire range toFair-trade by the end of 2011, which elicited the following emollient words from Kraft:

“We strongly support certification as a way to improve sustainability in cocoa farming, so we welcome this step by Green & Black’s. Cadbury and Green & Black’s have proud histories in ethical sourcing, and if our offer is successful, we look forward to maintaining this heritage.”

Just so long as you ignore the unmistakable sound of grinding teeth behind the reassuring words perhaps that really is something to be optimistic about. But it is still a wretched outcome. And surely a complete failure on the part of Cadbury’s shareholders to tell the difference between ‘a good price’ and ‘lasting value’.

The interesting thing is that employee-owned companies regularly outperform those in the FTSE All-Share Index. Over the last 17 years, employee-owned companies have outperformed FTSE All-Share companies each year by an average of 10%. In the third quarter of 2009, for instance, employee-owned companies’ share prices were up 27.6% compared to FTSE All-Share companies share prices, which were up 21.3% over the quarter. But we are still so stuck in our wretchedlyunsustainable ways when it comes to ownership structures within the capitalist economy.

CONCLUSION

This announcement contains forward-looking statements regarding Kraft Foods' combination with Cadbury. Such statements include, but are not limited to, statements about the benefits of the combination and other such statements that are not historical facts, which are or may be based on Kraft Foods' plans, estimates and projections. These forward-looking statements are subject to a number of risks and uncertainties, many of

which are beyond Kraft Foods' control, that could cause Kraft Foods' actual results to differ materially from those indicated in any such forward looking statements. Such factors include, but are not limited to, the risk factors, as they may be amended from time to time, set forth in Kraft Foods' filings with the US Securities and Exchange Commission ("SEC"), including the registration statement on Form S-4, as amended from time to time, filed by Kraft Foods in connection with the offer, Kraft Foods' most recently filed Annual Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. Kraft Foods disclaims and does not undertake any obligation to update or revise any forward-looking statement in this announcement, except as required by applicable law or regulation.

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