Acquisition of Cadbury by Kraft: How Sweet is this Deal?

            
 
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Case Details:

Case Code : FINC076
Case Length : 18 pages
Period : 2010-2011
Pub. Date : 2012
Teaching Note : Available
Organization : Kraft Foods, Inc.; Cadbury Plc.
Industry : Food
Countries : Global; US; Europe

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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Excerpts

Strategies to Win the Deal

For the year ending 2007, Kraft's cash balance was US$567 million on the balance sheet and it reached US$1244 million in 2009 with a growth rate of 119.4%. This encouraged the company to think in terms of acquiring Cadbury. Christopher Growe, a food company analyst of financial services firm Stifel Nicolaus, commented, "Rosenfeld has done a great job transforming this company and bringing Kraft to a point where they could build this bigger business and I don't think Kraft was ready for a transaction of this size a year ago." For Rosenfeld, the idea behind buying Cadbury was to expand the Kraft business worldwide. She worked consistently to value the firm at all points and made her first offer for Cadbury to Carr on August 28, 2009...

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

Synergies of the Deal

Kraft's management was expecting the merger to enhance the company's revenue as well as its global position. The market share of Kraft after Cadbury's acquisition would reach 14.9% in the global confectionery market, pushing Mars-Wrigley , with a market share of 14.5%, to second position. This would enable the company to offer Kraft brands such as Oreo biscuits and Maxwell House Coffee with Cadbury's Dairy Milk chocolate and Trident chewing gum. After the deal, Rosenfeld commented, "The combined company has a phenomenal future, and I firmly believe it will deliver outstanding returns to our shareholders."...

Major Problems

The Cadbury takeover, considered to be one of the biggest corporate deals in 2010, was not without conflicts. "This deal is ultimately bad for everyone: shareholders don't get a full value, bank holders will likely suffer a downgrade, and employees will lose their jobs in large number," said Robin Geffen, Managing Director, Neptune Investment Management. Kraft's takeover of Cadbury was also criticized by British trade unions who felt that the merger would destabilize the company and affect future returns to shareholders. The takeover also prompted a wave of protests from Cadbury workers who expressed their fears about possible job losses...

The Road Ahead

For the first quarter ended March 2011, Kraft reported strong performance as the company's net revenues were at US$12.6 billion. However, earning growth declined due to higher financial cost and higher outstanding of shares. Operating income increased US$1.6 billion. David Brearton, Executive Vice President of Operations, said, "We're confident we'll deliver organic net revenue growth of at least 4% to 5% in 2011." Earlier, Kraft revised its estimation of total cost saving of US$ 750 million from US$625 million per year...

Exhibits

Exhibit I: Share Prices Graph of Cadbury Plc from 2008 to 2010
Exhibit II: Monthly FTSE 100 and Cadbury Plc Closing Price from Jan 2005 to Jan 2010
Exhibit III: Monthly DOW Kraft Foods Closing Price from Jan 2005 to Jan 2010
Exhibit IV: Currency Exchange Rate and Risk Free Rate
Exhibit V: Global Market Shares of Major Players: Globally
Exhibit VI: Cadbury's Profit And Loss Account for years 2005 to 2009
Exhibit VII: Cadbury's Balance Sheet for years 2005 to 2009
Exhibit VIII: Cadbury's Capital Expenditure, Depreciation and Effective Tax Rate for Years 2005 to 2009
Exhibit IX: Kraft Foods' Income Statement from 2005 to 2010
Exhibit X: Kraft Foods' Balance Sheet from 2005 to 2010
Exhibit XI: Kraft Food's Capital Expenditure, Depreciation and Effective Tax Rate for Years 2005 to 2010
Exhibit XII: Presence and Revenue of Kraft and Cadbury in Emerging Markets
Exhibit XIII: UK GDP, Consumer Goods Growth Rate and US GDP Rate from 2004 to 2010


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