SWEET

REVENGE

A group

4Initiative.

THE BACKGROUND

In 2009, US food company Kraft Foods launched a hostile bid for Cadbury, the UK-listed chocolate maker. As became clear almost exactly two years later in August 2011, Cadbury was the final acquisition necessary to allow Kraft to be restructured and indeed split into two companies by the end of 2012: a grocery business worth approximately $16bn; and a $32bn global snacks business. Kraft needed Cadbury to provide scale for the snacks business, especially in emerging markets such as India. The challenge for Kraft was how to buy Cadbury when it was not for sale.

Kraft itself was the product of acquisitions that started in 1916 with the purchase of a Canadian cheese company. By the time of the offer for Cadbury, it was the world’s second-largest food conglomerate, with seven brands that each generated annual revenues of more than $1bn. It was a part of Phillip Morris till 2001.

Cadbury, founded by John Cadbury in 1824 in Birmingham, England, had also grown through mergers and demergers. It too had recently embarked on a strategy that was just beginning to show results. Ownership of the company was 49 per cent from the US, despite its UK listing and headquarters. Only 5 per cent of its shares were owned by short-term traders at the time of the Kraft bid.

THE RATIONALE.

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The Cadbury purchase was part of the long-term strategy of Irene Rosenfeld, CEO and Kraft Chairman since March 2007, who developed a three-year turnaround plan designed to drive the profitable growth of Kraft Foods. It was assumed that the purchase of Cadbury would help Kraft products develop in new markets such as Brazil and India because of Cadbury’s current strong presence in those markets.[

”It is the logical next step in our transformation toward a high-

growth, higher-margin company.”

~Irene RosenfeldCEO and Chairman(Kraft)

Kraft believed the Cadbury purchase was also necessary because of the likelihood of Nestle and Hershey joining together. Kraft also believed it could squeeze savings of at least $675m annually by the end of the third year.

THE CHALLENGE.

Not only was Cadbury not for sale, but it actively resisted the Kraft takeover.

Sir Roger Carr, the chairman of Cadbury, was experienced in takeover defences and immediately put together a strong defensive advisory team. The team made clear that even if the company had to succumb to an unwanted takeover, almost any other confectionery company (Nestlé, Ferrero and Hershey were all mentioned) would be preferred as the buyer. In addition, Lord Mandelson, then the UK’s business secretary, publicly declared that the government would oppose any buyer who failed to “respect” the historic confectioner.

Cadbury’s own defence documents stated that shareholders should reject Kraft’s offer because the chocolate company would be “absorbed into Kraft’s low growth conglomerate business model – an unappealing prospect that sharply contrasts with the Cadbury strategy of a pure play confectionery company”.

It was not only the management that was opposing the move but also the other stakeholders which included majorly the trade union who feared a loss of jobs along with the government of UK who feared a loss of heritage. They together launched the “Keep Cadbury independent campaign”.

To add to the problems Warren Buffet, the biggest individual shareholder in Kraft did not want them to overprice the takeover and opposed the all out attack on Cadbury.

THE PROCEDURE

2009

• Aug 28- Initial bid at 755 pence per cadbury share.

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

• Sep 12-Cadbury calls the bid unappealing due to the low growth conglomerate business model of Kraft.

• Sep 16-Warren Buffet warns Kraft not to overpay Cadbury.

• Sep 21-Cadbury contacts the UK takeover panel to request a, “ put up or shut up” request be sent to Kraft which would force them to give a formal bid in a given time frame

• Sep 30- The UK Takeover panel rules that Kraft has until 1700 GMT on nov 9 to put up a formal bid.

• Oct 21- Cadbury posts an upbeat quarter result ,indicates increase in sales and profit margin above expectation. The street fails to react as a counter bidder for Kraft seems unlikely.

• Oct 22- Nestle and Hershey’s also put up good quarter results but neither speculates on a joint bid for cadbury.

• Nov 3- Kraft’s results disappoint posting less than expected revenue.

• 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 say separately that they are reviewing a bid for cadbury but give no assurance.

• Nov 23- Cadbury’s share hit an all time high of 819p on speculation of a bidding war between Kraft and competitors.

• Dec 4 – Kraft posts its offer document to cadbury shareholders starting off a two months fight under the UK take over laws. Kraft says its bid is now worth 713p a share or 10.1 billion pounds.

• Dec 14- Cadbury issues its official defence document promising bigger dividends and stronger growth and reminding that Hershey and Ferrero may bid

• Jan 5- Cadbury sweetens its bid with 60p more cash but reduces the shares offered keeping the total bid unchanged.

• Jan 12- Cadbury gives its final official defence against Kraft bid reporting robust trading and rejecting the bid on valuation. Ferrero pulls out.

• Jan 14-Cadbury fires last bid as media reports say that Hershey is mounting a solo bid but analysts doubt it as they don’t think it has the finances.

• Jan 19- Cadbury accepts Kraft’s offer of GB 11.7 billion pounds ending months of corporate battle valuing each cadbury share at 840p.

• Feb 05- Kraft acquires 75% of cadbury shares thus finalizing the deal.

• Mar 08- Cadbury shares are de-listed.

THE AFTERMATH

Both Kraft and Cadbury have a lot at stake to make this deal work. Statistically, deals this complex have a high rate of failure. In fact, research conducted by RHR International found that 70% of acquisitions fail to deliver the expected results. Despite the discouraging data, there is much the leadership teams at both Kraft and Cadbury can do to put the odds in their favor.

The task at hand is immense and there are some of the immediate challenges:-

Perceived dominance

Cadbury executives might assume that Kraft will adopt a dominant approach. Kraft will have to make their intentions with Cadbury clear as soon as possible to avoid unnecessary speculation.

There is a learning curve.Kraft purchased Cadbury to break into emerging markets, and it will take Kraft

some time to learn the nuances of working in those markets.

iconic brands

Corporate and national pride behind both companies is strong. For Cadbury, coming to terms with the fact that it may have to merge some of its identity with Kraft could be especially difficult. (Let's face it—Cadbury is nearly as important to British culture as the Beatles.)

Tough decisions are inevitable.

Because Kraft borrowed heavily to buy Cadbury, it may be focused on revenue in the short term. Some difficult decisions could be on the horizon. Layoffs are on the cards as Kraft’s 98000 and Cadbury’s 70000 employees come together.

1) Kraft people values more multi-culturism, while Cadbury prefer the more exclusive British heritage. It is aligned consistently with what Kraft or Cadbury has done along the history.

2) Kraft is fine to destroy its competition by acquiring them; it would force Kraft to accept many different cultures. In contrast, Cadbury was not familiar with such approach to compete; therefore Cadbury was still relatively unchanged.

3) In terms of social atmosphere, Cadbury is more family-feel than Kraft. One another thing is flexibility to work in the company.

4) Kraft is far more bureaucratic than Cadbury.

Based on all elaboration so far, to be strict, separation model is the best model to adopt for Kraft-Cadbury acculturation.

MERGING THE CULTURES.

Drivers for change Drivers against change.

• To be successful, Kraft needs to have an open and honest dialogue with Cadbury. This will give people a realistic understanding of what is going to happen, allowing them to make informed decisions about future prospects.

• As the acquirer, Kraft also has the responsibility to provide a detailed road map for integration. This will ensure that everyone understands the process for joining. the companies, which will free up the leadership team to address hidden issues.

• Finally, Kraft will have to unite the two companies under one vision. Communications programs that support the new vision must be planned, initiated, and sustained, and employees that support the vision should be rewarded.

THE CONCLUSIONS.

Kraft investors will have to wait a bit longer than the time it takes to rip the foil off a Cadbury’s crème egg to discover whether the high-profile takeover battle was worth it.

CREDITS

• PRITHVI GHAG -35

• ADITYA TIWARY – 1

• MOHIT BHANDARI – 20

• MOHIT BOHRA – 21

• PRIYANSHI VERMA- 53

• PRASHAKHA SAXENA – 30

• SWATI DARUKA-48