Cadburys Takeover by Kraft Foods - Case Study Example

INTRODUCTION This paper is about the recent takeover of the popular British Confectionary maker, Cadbury by its rival Kraft Foods. This business story caught the imagination of investors and stakeholders alike who watched every move that these rivals made with diligence and eagerly anticipated the counter moves made by the others. The proposed takeover attracted so much attention that Prime Minister Gordon Brown intervened to support Cadbury stating that the takeover was against the interests of the British economy. This shows the extent to which the battle between these two giants turned into a contentious issue that included business rivalry, questions over ethics, loss of jobs and nationalistic feelings, to boot. This paper examines the issue from the above mentioned angles and applies management theory to the case where relevant to establish linkages between theory and practice. The first and foremost issue that was raised by the proposed takeover is the fact of monopolistic tendencies arising out of a conglomeration of two business giants. The next issue is that of undervaluation and the correct pricing structure to be applied in such a case. Further, the interests of stakeholders have to be considered as well. Finally, the issue of job losses and nationalistic sentiment playing upon the emotions of the parties involved in the debate has to be considered as well. BRIEF OVERVIEW OFTHE CASE The proposed takeover and the aftermath of the proposal turned into a business saga replete with all the action and drama one would normally associate with a business thriller. When Kraft first approached Cadbury with an intention to purchase it at a valuation of $16.2 Billion in late 2009, the offer was rejected outright by Cadbury which claimed that at this price Cadbury was undervalued. Subsequently, the offer bid was revised and Kraft even went to the extent of mounting a hostile takeover bid. After a corporate battle that lasted well over two months, both parties announced in January this year that they have agreed to a merger between the two at a valuation for Cadbury at $18.9 Billion. As one of the trade journals put it, “The historic acquisition of Cadbury International by Kraft Foods Inc. of US has just been concluded. After a five-month siege, Kraft Foods on the 19th of January, 2009 won the highly-publicised battle for Cadbury, turning its hostile approach friendly and securing the support of the UK confectioner’s board in its takeover bid. As the dust settles, industry watchers are asking what this remarkable development holds for the global market and Nigeria in particular. Will it improve global distribution and create stronger market presence in Asia and African markets?” (M2 Online, 2010) MARKETS AFFECTED The markets affected by the deal span the entire world as Cadbury and Kraft are global players and hence, they operate globally without constraints of national boundaries. The fact that both Kraft and Cadbury have significant presence in Asian and Asia-Pacific rim markets makes the case complicated. In many of these markets, both the rivals are engaged in direct competition and through local subsidiaries. Hence the concept of “Glocalization” or adapting their global products to local sensibilities comes into the picture. (Friedman, 2003) Once the markets affected are delineated in these countries, it becomes easier for the merged entity to draw up plans for a combined market strategy. The issue of whether the local partnerships would continue or there would be a direct presence of the combined entity needs to be looked into. These are some of the issue arising out of the foreign market competition between the two confectionary majors. ADVANTAGES AND DISADVANTAGES The deal between Kraft and Cadbury has lot of implications for both the companies as well as the stakeholders. The advantages and disadvantages to the stakeholders have been discussed in the section related to the stakeholders. If we review the potential benefits from a “brand management” point of view, the following excerpt from a trade magazine about the merging of both the brands and its implications for the combined brand makes it clear that the deal is a winner. To quote from the magazine, “The Cadbury / Kraft brand architecture question is all the more interesting in that the two companies’ brand architecture styles represent the two ends of the spectrum. Cadbury has the “parent brand” brand architecture model- the Cadbury brand name is present, even if only in a minor role, in all the Cadbury chocolate product. Kraft, on the other hand, is a prime example of the “individual product brand” brand architecture model - where each brand, although possibly with a small brand family of their own, has no visible links in branding and communications with the parent or corporate brand.” (Marketing Week, 2010) The deal is being celebrated for the financial implications for Kraft (primarily) and Cadbury for its integration into the larger company. However, the fact that Kraft borrowed $7 Billion to fund the acquisition should not be lost on the reader. This means that the shareholders of Kraft have a lot on their hands and the deal may not be financially viable in the longer term. Further, the deal is being celebrated by the financial community of investment bankers and the CEO’s of both the companies. The fact that these are two different companies from two different “cultures” seems to be lost on them. Hence, there is some trepidation over the possible fallout from the deal. (BNET, 2010) The reason for the deal not going through initially was because of the differences in perception over the valuation of Cadbury. This raises the issue of valuation and correct pricing as a result of financial closure part of the deal. It is still open to debate whether Cadbury was undervalued or whether Kraft paid too much of a price. The fact that banking majors like Goldman Sachs and Morgan Stanley arbitrated the deal might point to the conclusion that the deal would have been advantageous from a financial point of view. However, the fact that Kraft raised $7 Billion in order to fund the deal raises issues that I shall discuss later. IMPLICATIONS FOR THE STAKEHOLDERS Whenever a merger between two giants in the same field happens or an acquisition of a company is done by its rival, it is often speculated on what effect it would have on the stakeholders affected by the deal. In this section, I look at the effect of the deal between Kraft and Cadbury on the stakeholders of both companies. First, to apply the theory to practice, Stakeholder theory concerns itself with identifying legitimate stakeholder of an organisation and addresses the issues of Legitimacy, Power and Urgency (Mitchell et al, 2008, 1-2). These issues are relevant for any discussion on stakeholder management and creating value for the stakeholders as well as the consumers. There has been much movement away from the traditional conception of stakeholders and the current theory emphasises anyone who has a viable stake in the success of the organisation (Kaler, 2006, 2-3). Hence, the stakeholders in this case are the stockholders, employees of both the companies, the suppliers and the retailers and finally the customers. Once we have identified the relevant stakeholders, the impact on each has to be studied. For instance the impact of the deal on the stockholders has been summarized by a leading trade publication as: “The acquisition may be premised on the fact that Cadbury International controls a brand portfolio which houses brands that command good brand visibility, awareness and market share in their various categories. This translates to a good bottom-line for stakeholders no doubt.” (M2 Online, 2010) However, what is good for the stockholders may not always be good for the customers and hence the fact that a “monopoly” is sought to be created this way might affect the customers by depriving them of legitimate and “real” choice in what kind of confectionaries they buy. Further, the deal is expected to put 30,000 jobs of Cadbury employees at risk and added to this the fact that the bankers to the deal like Goldman Sachs and Morgan Stanley have reportedly made a killing leas to the inescapable conclusion is that the “Bankers have won big” and this may have come at the expense of the employees and the stockholders. (Business-Insider, 2010) The above paragraph makes it clear that the deal may not be “so sweet” after all and there might be a “bitter pill” to swallow for the employees whose jobs are on the line. Hence, the implications for different stakeholders are different and this leads us to the issue about whose interests are paramount in this age of unfettered markets and global capitalism. Finally, the issue has to be considered from a cultural point of view as well as the people of Britain have every right to feel that the British companies are being taken over by foreigners in a hostile manner leading to loss of national prestige (as I shall discuss in the next section). ETHICAL ISSUES The takeover of Cadbury by Kraft has raised the age old question of whether “big is bad” or “big is beautiful”. This has been necessitated because the combined size of the merged entity would be “too big” and as the recent financial crisis has shown, once business entities reach a size more than what is desirable, they become “too big to fail” and hence any unethical behaviour by these entities may not invite regulatory action because of the risk they pose due to their size. This is the so-called “moral hazard” at work that works against market competition. Apart from monopolistic tendencies, there are other ethical issues like treatment of employees of Cadbury, possible job losses and the whole issue of a quintessentially British company falling prey to a marauding American conqueror. The following extract from an ethics watchdog puts the matter in perspective: “When the world’s second largest food company, Kraft Foods, mounted a hostile takeover bid for the 200-year-old British confectioner Cadbury, it triggered a passionate opposition campaign. The campaign was led by the chief executive of Cadbury, Todd Stitzer, and has joined by politicians, unions, and a sympathetic media. It was aimed at saving the “independence” of an iconic British brand from becoming part of a US conglomerate. Some saw the Kraft bid as another example of a large ruthless company snapping up a smaller, good company. Cadbury’s management argued that the price offered by Kraft undervalued the chocolate maker’s real worth. The company also highlighted its sustainability performance, attributing its past, present and future success to “Cadbury’s unique culture and values” (Ethical Corp, 2010) Though the issue of nationalistic sentiments does not exactly fall under ethical considerations, nonetheless the fact that PM Brown had to personally intervene to support Cadbury before the deal was finalized shows the high stakes involved. This is another instance of a global economic machine subsuming nationalistic sentiments and the “one market under god” principle operates where individual and local sensibilities are to be sacrificed at the altar of the “mighty market”. (Frank, 2009) CONCLUSION This paper has considered the takeover of Cadbury by Kraft from a variety of angles. The analysis has concentrated on the financial implications, benefits or otherwise to stakeholders, merging of two different brands etc as part of the study. It remains to be seen as to how the combined entity would fare in terms of profitability a year or two down the line. In these recessionary times, it is difficult for players in all sectors to remain profitable. Hence, one reason for the merger may have been considerations of financial and operating profitability. In conclusion, the deal definitely kicked up a lot of heat and dust during the time it was being negotiated and the long winding battle has resulted in some sort of a merged entity to show for. Once the dust settles, it would be time for the entity to tackle some of the issues pointed out in this paper. It is hoped that all the stakeholders would indeed get their money’s worth in the process. References Bones, Chris. 2010. Kraft’s Takeover: A case of Choc and Cheese. BNET UK [Online] Available from: http://blogs.bnet.co.uk/sterling-performance/2010/01/21/krafts-takeover-a-case-of-choc-and-cheese/ [Accessed Mar 25 2010] Burden, Sue. 2010. Contrasting Brand Architecture Styles Meet. Marketing Week [Online] Available from: http://www.marketingweek.co.uk/opinion/contrasting-brand-architecture-styles-meet/3010163.article [Accessed Mar 25 2010] Ethical Corp. 2010. Corporate Takeovers – Surviving being swallowed. Ethical Corp [Online] Available from: http://www.ethicalcorp.com/content.asp?ContentID=6800 [Accessed Mar 25 2010] Frank, Thomas. 2009. One Market under God. New York, Simon and Schuster. Friedman, Thomas. 2003. The World is Flat. London, Allen Lane. Kaler, J. 2006. Evaluating Stakeholder Theory. Journal of Business Ethics. 69:249–268 Kotler, Philip. 2009. Principles of Marketing. 6th Edition. London, McGraw-Hill Magness, Vanessa. 2008. Who are the Stakeholders now? Journal of Business Ethics. 83:177–192. Tathagata, Ralph. 2010. Acquisition by Kraft: What does the Market hold for Cadbury? M2 Online [Online] Available from: http://m2weekly.com/cover-cover/acquisition-by-kraft-what-does-the-market-hold-for-cadbury/ [Accessed Mar 25 2010] Wiesenthal, Joe .2009. Goldman Sachs, Morgan Stanley Win Big in Kraft-Cadburys, The Business Insider [Online] Available from: http://www.businessinsider.com/goldman-sachs-morgan-stanley-win-big-in-kraft-cadburys-2009-9 [Accessed 25 Mar 2010] Read More