Case Study: Cadbury and Kraft: A Bittersweet Moment

Case Study: Cadbury and Kraft: A Bittersweet Moment

Question One

There were few competitive landscape changes in the confectionary industry before 2009. However, a move by Cadbury’s closest competitor, Mars, changed the atmosphere. Formation of a merger between Wrigley and Mars in 2008 formed the world’s leading confectionary company, a move that pushed Cadbury to second place (Mak 153). After a while, the firm’s confectionary was separated from the beverage business. Although the strategy sought to enhance revenue growth and increase profit margins and returns for stockholders, it triggered stiff competition. Thus, the landscape became competitive as the potential for takeovers improved.

The confectionery industry was attractive and favorable for already existing entities. Companies such as Cadbury, Mars, and Nestle had identified their niche markets, rivals, and business partners. Thus, before 2009, there were minimal threats posed by new entrants or substitute products entering the market. Besides, firms in the confectionary industry had experienced success over the years. Therefore, they had developed the capacity to contend with or regulate the influence of suppliers or buyers on pricing. Hence, the leading companies held a special position in the industry.

Question Two

Demerging the confectionary and beverage businesses exposed Cadbury to takeovers by interested companies. Kraft Foods Inc., the second largest confectionery food and beverage corporation in the world, placed its takeover bid on 7 September 2009. It offered $ 16.7 billion. Kraft hoped to create a synergy worth $ 625 million (Mak 153). The initial offer, termed as an undervaluation of Cadbury, was rejected. By engaging the UK Takeover Panel, Cadbury sought to compel the corporation to draft a final proposal within a specified timeline.

With a set deadline, Kraft made a second bid amidst of resistance and opposition from various organizations. The offer had a lower valuation than the initial one. Gradually, Cadbury drew the interest of other companies (Mak 158). It established a strong defense against the $ 16.3 billion offer. Thus, Kraft Foods Inc. resorted to selling its pizza business to Nestle $3.9 billion to fund its Cadbury takeover bid. Kraft acquired Cadbury on 2 February 2010 at a valuation of $ 18.9 billion (Mak 159). Thus, despite the initial resistance, the merger took place.

Question Three

Different categories of stakeholders will benefit from the takeover. Groups that owned shares in the company would gain from an exciting offer of 840p a share. Hedge and mutual funds that bought over 25% of Cadbury’s shares would earn a significant amount of profit (Mak 159). Individual shareholders would also benefit from the acquisition. The takeover process created a bidding war as other companies showed interest in merging with Cadbury. As a result, the share prices rose in value. Therefore, investors who wanted to get rid of their stakes at the high market value would reap profits.

The government would also benefit from the taxes paid during the acquisition process. Businesses pay taxes on the value of the capital, stock or assets acquired. Therefore, the transaction would qualify as an injection into the nation’s revenue pool. The amount levied can help to meet various financial needs in other sectors. For customers of either company, the merger represents an opportunity at increased access to goods as well as improved diversity. Together, the combined firms would own 40 confectionary brands (Mak 152). Thus, as the world’s largest candy maker, they will have the capacity to avail more products and diversified tastes to their clients.

Question Four

  1. Cadbury’s board viewed Kraft’s initial $16.7 billion offer as a “derisory.” They claimed that Kraft Foods Inc. had attempted to “buy Cadbury on the cheap” (Mak 154). Therefore, the management empathically turned down the offer.
  2. The board made this decision following the results of analysts that suggested the offer significantly undervalued the company. Kraft estimated the value of Cadbury at less than 15 times EBITDA. The leadership, however, viewed its value as more than 19.5 times EBITDA (Mak 154). Thus, the takeover offer did not reflect the real value of Cadbury.
  3. It is plausible to agree with the decision made by the board to reject the initial offer. By persistently defending the firm, the Cadbury board managed to secure a better offer than the initial one. Their knowledge and believe in the value of the company enabled them to stand their ground for a while. Thus, it compelled Kraft to make a better offer in the long run.
  4. There is a likelihood that the board is functioning as expected. When Kraft made its first two offers, it met stiff resistance from the board. However, upon reevaluating, it came up with a higher offer that received “unanimous” recommendation from the committee (Mak 152). Therefore, the board had to unite before agreeing to sell. Since they reached a consensus, it is likely that they are working towards the merger’s success.

Question Five

A hostile takeover is the acquisition of a target company. It is a move that involves making a direct appeal to a firm’s stakeholders or the acquiring firm fighting to attain approval. The process, termed as an essential corporate governance mechanism, is useful in addressing managerial shortcomings. It is an effective tool for replacing the management of an organization. For instance, a company has the potential to increase its earnings by serving more people. The acquiring firm sees the opportunity and wishes to seize it. When met with resistance, it can resort to initiating a hostile takeover. Thus, the threat of a takeover bid can compel the target company to defend itself by performing better and raising acquisition costs.



Work Cited

Mak, Yuen Teen., editor. Cadbury and Kraft: A Bittersweet Moment. CPA Australia, 2011.