THE ACQUISITION OF CADBURY PLC BY KRAFT FOOD CORPORATION
Literature Review on Mergers and Acquisitions
Mergers and Acquisitions entail the joining of independent firms to form a single entity (DePamphilis, 2011). According to Calandro (2009), Mergers and/or acquisitions can be hostile or friendly depending on the type of outcome. For instance, mergers can involve firms of equal sizes while at times, one firm may dominate its equivalent. Mergers can be differentiated from acquisitions in the sense that mergers are thought of being the amalgamation between firms of equally the same resources or size. Similarly, the amalgamation between firms of different sizes i.e. one firm being smaller than the other leads to the acquisition because it often results to the smaller firm being acquired by the larger firm. George and Jones (2005) argues that many studies have been conducted on mergers and acquisitions , and the majority of these studies have focused on several aspects that include organizational congruity, performance effects, reasons for synergy, and issues regarding the management.
Analysis of the literature reveals that several key factors are responsible for causing mergers and acquisitions. Lucash, and Updegrove (2008) have identified similarity of production lines and products, potential for synergy of assets, common management cultures, and practices as being the major factors that lead to the merger. According to scholars such as Jacobides (2007)., Mylonakis (2006) and Smith, and Lajoux, (2011) causative factors relating to the similarity of management practices and organizational cultures can be categorized into factors that will lead to organization compatibility or fit whereas factors that will lead to strengthened synergy can be categorized under reasons of strategic fitness. Other factors relating into M&A that have generated increased attention from many a researcher revolve around evaluating the survival or longevity of the organization, and the economies of scale (Jacobides, 2007).
Mergers and acquisitions can occur in industries such as banking, telecommunications, software, and the retail industry among others (Mylonakis, 2006). Popular mergers and acquisitions that have dominated the banking industry include the formation of J.P. Morgan & Chase after the successful merger between J.P. Morgan & Company and Chase Manhattan Corporation. Another prominent merger in the banking industry is the merger between Citigroup Inc. and Golden State Bancorp. Other companies that were formed from merging include U.S. Bancorp, Bank of America Card Services, CFC Stanbic, and Royal Bank of Scotland.
The merger between Kraft Plc. and Cadbury Plc.
Cadbury was up for sale and had received several offers an example being Hershey Corporation which is the largest chocolate manufacturer in North America. However, the Kraft Company won after long months of hostility from the board of directors from Cadbury. Their main argument was that they wanted to keep the company British as well as independent since they had enjoyed two hundred years of it (Great Britain Parliament, 2010). They also argued that the offer made was unusually low and they were undervaluing the company. The reason why this merger was deemed beneficial was that the Kraft Company was an influential force in the United States ad had an excellent market in stores and its products were popular. On the other hand, Cadbury was a major producer of candy and gum and its market was spread in places that Kraft would take years to root its market like Latin America, India and Asia.
The initial offer was 755pence per Cadbury share on august 28, 2009 (Great Britain Parliament, 2010). This offer was immediately rejected by Cadbury saying that it was unappealing prospect and would result to low growth (Condon, and Levy, 2010). In September 16, Warren Buffett who had shares at Kraft warned the Kraft from overpaying for the British company. Cadbury then contacted the UK takeover panel in appeal for Kraft to put a formal offer or leave. On December 4, Kraft released a document to Cadbury stating that it was initializing a fight on a bid of 713 pence per share even lower than the initial offer (Great Britain Parliament, 2010). Ten days later, Cadbury then issued a defense statement to its shareholders promising that it would still be enable to grow on its own and even promising them more dividends. This however did not make a difference when Kraft approached the shareholders and even added 60 pence and reducing the amount of shares it would buy. This offer appealed to the shareholders letting Kraft secure 75% at 840 pence a share. On February 5, the deal was finalized and a month later the Cadbury shares were delisted (Great Britain Parliament, 2010).
This merger had stakeholders who benefited more while others lost. The shareholders at Cadbury were the greatest winners since its market value increased (Smith, 2010). The mergers and acquisition advisors also benefited from gaining two percent of the deal’s value. This was estimated to be between five to twenty million pounds. The stock market speculators were also winners since they took two positions at the same time. The managers at Cadbury also got hefty exit packages and senior managers at Kraft increased their salary packages as well as job security. The only loser was the Kraft shareholders since they paid more than they had initially offered.
Criteria of Payment
The merger was financed by cash and offering shares as a typical acquisition would take place. The Kraft Company offered five hundred pence in cash and a 0.187 share in the Kraft Company for every Cadbury share. It was also stated that for every Cadbury ADS, its shareholders would as well receive two thousand pence and 0.7496 shares in the craft company. The shareholders also received ten pence per share as dividends. This offer put eight hundred and forty pence per Cadbury as noted earlier, and 3360 pence per ADS in relation to a Kraft share value of roughly thirty dollars and a rate of exchange of 1.63 dollars to the pound (Kleinman, 2009).
The total value of Cadbury was set at roughly twelve billion pounds. The company’s Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) was put thirteen times more (Benoliel, 2011). This deal also reduced the number of acceptance requirement in the Kraft Company from 90 to 50 and one Cadbury shareholder. This ensured that the final offer would not require the approval of Kraft shareholders. The finality of this merger resulted in the issuance of nearly 300 million new shares in the Kraft Corporation. This led to the increase of its share capital. After all the transactions, Cadbury concluded that the merger was sound and even handed.
Reasons for Synergy
The main reason why these two companies merged was synergy. They had the common competitors that would be Nestle, and uniting the companies would increase their strong hold (Smith, and Lajoux, 2011). It would also increase its market share in that the areas that Kraft had a strong hold would open up for Cadbury products and likewise for the Kraft Corporation. This is noted due to the fact that Kraft had a stronghold Asia pacific and Latin America while Kraft had operations in more than 150 countries worldwide.
Talent accumulation in the workforce was imminent in personalities like warren buffet; the world second richest man was an added advantage to the Cadbury group. There was also the tax evasion since the conglomerate was viewed as one company thus increasing its profits (Rosenbaum, and Pearl, 2009). This was implemented by in December 2010 when it was announced that the Kraft foods were to move to Cadbury headquarters while Cadbury operations were to be transferred to Switzerland. This was a strategy to avoid paying millions in tax to the government. This resulted to Kraft foods being the world’s largest confectionary company, the targeted revenue also increased from 9 to 11%. The annual savings also was driven to 625 million dollars a year after the synergy (Rosenbaum, and Pearl, 2009). Finally, the net revenue of Kraft Company increased from 20% to 25% the following year.
This however comes at a price since Kraft is facing allegations in India about tax evasion and has to give clear definitions on the company’s relation. Kraft is also in debt due to the acquisition since it could not finance all the cash at once despite having sold its share of the frozen pizza to Nestle.
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