The Kraft Heinz Company: A Merger Gone Wrong?
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Case Code: BSTR595 Case Length: 19 Pages Period: 2015-2019 Pub Date: 2020 Teaching Note: Available |
Price: Rs.500 Organization: Kraft Heinz Company Industry: Food & Beverage Countries: United States, Canada, India Themes: M&A, Operational Synergy, Bankruptcy & Turnaround Management |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
The Rationale for the Merger
As of 2000, mergers and acquisitions were a growing trend in the global packaged food industry. Many top companies had been choosing to merge in order to tactically improve market share or profitability. Changing consumer tastes had forced most of the leading companies to spread their product portfolios. Analysts felt that one of the fastest ways to expand the product portfolios was through mergers and acquisitions. Other reasons for mergers included killing the competition, entering new geographic regions, and reducing fixed costs as it was believed that the new merged entity would have lower average costs. It was a well-known fact that operating economies were one of the major synergy benefits of mergers......
The Merger and its Fallout
After complying with all regulations and framing objectives of the proposed merger, Heinz and Kraft agreed to enter into a definitive merger agreement in March 2015 that they claimed would create the third largest F&B company in North America, with reports at the time indicating a deal value of nearly US$ 50 billion. It also became the 5th largest F&B company in the world. The merged company was named The Kraft Heinz Company and was co-headquartered in Pittsburgh and Chicago. The shares of the merged entity were traded on The NASDAQ Stock Market with the ticker symbol KHC and it had market capitalization of US$ 88,291 million....
Problems Crop Up
In the initial stage, the strategy of raising profits based on cost cutting seemed to be working for Kraft Heinz. From 2016 to 2017, the total of cost of goods sold and general overhead or Selling, General and Administrative Expenses, (SG&A, which included marketing) dropped by US$ 886 million, or 4.4%, to US$ 19.46 billion. Most of the improvement came from reducing SG&A by US$ 514 million, a reduction of 15%. R&D expenditures shrank from US$ 120 million in 2016 to US$ 93 million in 2017. During the first 15 months of the merger, the employee count went from 46,600 to 41,000 and overhead costs went down from 18.1% to 11.1%...
What were the Real Problems?
Some analysts believed that most of Kraft Heinz’s problems rose due to 3G’s approach to business that was brutal and revolved around cost-cutting. The situation in Kraft Heinz was such that every employee needed to defend their existence every day. The promotions were fast and merit-based, and non-performers were sacked at the same speed. Zero based budgets were evaluated every year, or sometimes even more frequently. Expenses were removed if they were no longer considered deserving......
The Road Ahead
In February 2019, Kraft Heinz’s market cap dropped by US$ 15.9 billion. With its value falling by around one-quarter, investors were expecting future profits to be 75% of the level the markets were forecasting. That was consistent with the company’s annual loss of about US$ 1.2 billion in net earnings. Buffett acknowledged to TV network CNBC that he had “overpaid” for Kraft Heinz. In 2019, Kraft Heinz even cut its quarterly dividend to 40 cents a share per quarter from 62½ cents in 2018. That was expected to be unpalatable to dividend-seeking owners, who looked forward to getting paid every three months...
Exhibits
Exhibit I: Selected Kraft Heinz Brands
Exhibit II: The Kraft Heinz Company: Condensed Consolidated Statements of Income
Exhibit III: Selected Financial Data – Five Year Review
Exhibit IV: H. J. Heinz Company Income Statement -Annual
Exhibit V: Products Sold by the Kraft Heinz Company after Merger
Exhibit VI: The Kraft Heinz Company Q2 Revenue Surprise
Exhibit VII:Companies Information
Exhibit VIII:The Kraft Heinz Company Key Financials Analysis (2015-2018)
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