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Case Study: Kraft’s Takeover of Cadbury

Cadbury’s origins date back to almost two centuries when it was founded by John Cadbury who started the business by selling cocoa and tea in Birmingham, UK. Later he expanded by starting a line of beverages after a merger with Indian Schweppes changing the company name to Cadbury Schweppes. Successful product developments and launches have enabled Cadbury to boast of an extensive confectionery line consisting of Cocoa Essence, Easter Eggs, Milk Chocolate, Cadbury Fingers, Dairy Milk, Bourneville Chocolate, Milk Tray, Flake Creme Egg, Crunchie, Picnic, Curly windy, Wispa boost, Twirl and Time Out.

Kraft, on the other hand, is a US company about a century old, which started off as a door to door cheese business but expanded into other confectionery items through many takeovers previously such as Ritz Crackers, Nabisco (Oreos) and Phenix Cheese Corporation (Philadelphia Cheese) to achieve success. It is second in terms of sales and popularity in the confectionery industry with annual revenues of $42 billion, operating in more than 150 countries.

Cadbury and Kraft are both multinational operations with activities in both developed and developing countries. Cadbury is however the market leader in UK and Ireland’s confectionery where consumers have a liking for British chocolate containing vegetable oil having a richer taste in milk and also sweeter as opposed to continental chocolate having cocoa fat content; hence Kraft has a low share in such markets. Also, Cadbury’s strong standing in the Indian (Schweppes) and North American Markets was cleverly identified by Kraft who wanted to tap it and exploit under its own name now to add to its success story.

Inside Story of Cadbury and Kraft before Takeover

Cadbury has faced many ups and downs throughout its journey especially under the visionary leadership of Todd Stitzer. Todd Stitzer working successfully for 20 years for Cadbury Schweppes has played a key role as a master mind behind the acquisitions of soft drinks industries made by Cadbury in US. He was later appointed as the chief strategy officer by John Sunderland to the confectionery side to achieve the similar success. The then competitors in the chocolates and sweets industry were the international companies Nestle, Mars, Kraft, Wrigley, Ferrero and Hershey. Stitzer said that acquisitions alone would not solve the problems of Cadbury. He said that the revenue growth model has to be revitalized to gain in the financial performance . Stitzer had developed many strategies, took some visionary steps and led Cadbury gain the business world with his strategic thinking . Stitzer and his management team aimed at the global domination in the Confectionery world, while the stakeholders were much worried about the financial performance. Overall with all his visionary leadership abilities and strategic decision making capabilities , Cadbury Schweppes split into pure confectionery leader Cadbury. Nelson Peltz, founder of the hedge fund Trian Fund Management also had his own role in the business of Cadbury.

Irene Rosenfield, CEO, Kraft Food Industries Inc. had a keen interest in the confectionery business and proposed an offer to buy Cadbury to Carr, Chairman of Cadbury after Sunderland. Carr without consulting the stakeholders had refused the offer but Peltz who still owned the shares in the Cadbury with discussion and negotiation with Kraft finally made Cadbury lose its independence in January 2010.

The Idea of a Takeover

Due to recessionary times following fall in sales, many companies in the confectionery industry recognized the potential of merging with their competitors to become competitive and enjoy economies of scale . Cadbury had continued to be a strong performer in the confectionery industry and shown steady performance and growth in light of the turbulent economic times. Much of Cadbury’s growth was due to its presence in emerging global markets . Kraft was attracted to Cadbury due its strong performance during the economic crisis . This led to Kraft’s proposal to Cadbury of a takeover.

The initial offering of $16.3 billion or 740 pence per share by Kraft to Cadbury was outright rejected as derisory and an attempt by Kraft to take over Cadbury for cheap. Cadbury has had strong brands whose icons are etched in the minds all over the world, an impressive category line and extensive worldwide consumer base. Successful financial overview and steady business model reinforced Cadbury’s belief that it should be an independent company. Kraft’s bid did not come remotely close to reflecting the company’s true worth .

Kraft proposed another bid shortly. This comprised of an offer of £10.1 billion ($17 billion, same terms as the first bid in September-300 pence in cash and 0.2589 Kraft shares per Cadbury shares. The closing price of 9th November reflected the bid valuation of Cadbury at 710 pence which was lower than the share price of 761p on that day.

Kraft’s share price: $26.53; Exchange rate (as agreed): $1.66 / GBP. Ratio: 0.2589 Kraft shares per every Cadbury share (26.53/1.66 * 0.2589 = £ 4.133 + 4.13 = £ 7.13). This was less than the price of Cadbury on that day and even the initial level of £ 7.45.

Cadbury rejected the offer on the basis of undervalued Cadbury which was now of a lesser value. It was in fact even lower than the current Cadbury share price. The Cadbury chairman said: “Under your proposal, Cadbury would be absorbed into Kraft’s low growth, conglomerate business model , an unappealing prospect which contrasts sharply with our strategy to be a pure play confectionery company.”

The hype created by rumors of takeover figures led to exciting speculations. Media reported Ferrero to be considering a rival bid. Hershey’s confirmed its own interest for same purpose. There were not only speculations of a joint bid but also of Kohlberg Kravis Roberts & Co. joining the bidding race. All this favored Cadbury whose share price witnessed new highs. Hershey’s and Ferrero would struggle to bid alone and only their combined offer could beat Kraft’s offer.

On January 18, Kraft finally managed to take over one of the world’s second largest confectionery manufacturer in a hostile bid of an enormous 11.5billion (US$19.5billion). This deal will be remembered in history as one of the largest transnational deals, especially in the aftermath of credit crunch. After four months of continuous resistance, Cadbury shareholders agreed to Kraft’s offering of $19.5 billion, (840 pence per share). This was agreed upon with the spirit of creating the world’s largest confectioner. This consisted of 500 pence in cash per share and the remaining amount paid to Cadbury shareholder in the form of Kraft shares. The shareholders had the power to decide the mix of amount they wanted in cash and shares.   According to estimations, the finals offer presented a multiple of 13 times Cadbury’s earnings in 2009 (after interest, taxes and debt were paid).

The high bid price overruled the threat of Hershey’s or Unilever offering a price for the same strategy, that is take over. The only rival left   was Nestle which too was reduced significantly when Cadbury’s Director signed the agreement that if Cadbury were to change its mind about the takeover, it would pay a handsome penalty for it, hence such a situation arising became highly unlikely. The Kraft management, led by Irene Rosenfeld also assured that Kraft had a great respect for Cadbury’s brands, employees and reputable history and therefore the employees of Cadbury would     do well in the new environment. Also, she verbally assured that under the new agreement the previous contractual rights of the employees would remain the same as before.

Advantages of the Takeover for Kraft

It was the biggest cross-border acquisition of that year. Such a deal clearly pushed Kraft as number 1 dealer in confectionery. A merger allowed Kraft to gain a footing in the fast growing chewing gum category.

Kraft management believes that the combination of the two companies is both a strategic as well as complimentary fit, boasting a portfolio of over 40 confectionery brands each having the ability to yield annual sales of over $100 million. A combination of Kraft products like Toblerone, Oreos and Ritz crackers with Trident gum and Dairy Milk chocolates from Cadbury would result in $625 million annual pretax cost savings on annual company costs of research and development, advertising, branding and procurement. There would also be a significant level of revenue synergy ($50 billion annually) that would subsequently result in higher earnings per share. After the takeover, Kraft would have a greater ability to compete with the giant Nestle on confectionery grounds by increasing its market share in Britain and enjoying the benefits of Cadbury’s strong geographical networking in Asia.

Kraft’s growth prospects would brighten through access to new brands particularly in the confectionary department along with new distribution channels for the existing products which are outside US. These constitute about one third of the market in developing countries such as Africa, China and India.

Advantages of the Takeover for Cadbury

Cadbury would profit from Kraft’s extensive distribution network around the globe. Cadbury had been vulnerable to a takeover ever since it demerged its US soft drinks business. This high takeover bid was an attractive opportunity to do away with such a fear. A combined Kraft and Cadbury would significantly expand the global reach of both businesses and create synergies worth in the region of $625m. Since a stand-alone Cadbury had limited opportunities for value creation , agreement to the contract for takeover seemed like a wise decision.

Negatives of the Takeover

Along with the obvious benefits come the many challenges and ethical issues. These are primarily high debt issues and employee layoffs.   The high debt position of Kraft has further worsened with the takeover as funds were borrowed to pay the Cadbury shareholders a higher yield. Kraft also sold off its frozen Pizza line in order to make the takeover happen.

The unions are worried that the jobs of hundreds would be at stake (estimated 9000 plus) as Kraft would try to reduce costs to operate efficiently and pay back its debts. The company has also not given any formal assurance that it would protect 4500 UK jobs. Also it is a known fact that when a company needs to cut costs, jobs and job conditions suffer.

The British Government also opposes takeovers of British companies by foreign giants as it nearly always leads to job losses. This takeover too was met with resistance including Gordon Brown’s advice and insistence against its happening but the shareholders overruled it and still went ahead with the deal. According to a Union head, “This is a very sad day for U.K. manufacturing. A successful, iconic, independent U.K. brand will now be owned by a giant company with massive debt.”

In the face of such a scenario, even if employees are laid off it will not affect those who are rich and/ or are major shareholders in the company.   For example, if the chairman, Roger Carr gets axed, he would still walk away with $30 million! This proves that it is the low level managers and employees who feel the vulnerability of such an action. According to David Bailey, professor at Coventry University Business School; “Serious questions need to be asked about Kraft’s intentions… Kraft already has a track record of cutting production and moving production abroad… There’s no guarantee that they’ll keep production in the UK in the long run.”

When employees of both companies were interviewed to ask about their view points, most expressed fear and uncertainty. They were resistant to the idea of such a large company where their positions and titles might be reduced or lost due to the massive structure. They are also despondent of their lack of involvement in this decision. According to one employee, “nobody really knows what is going to happen, but it is definitely not going to be pleasant.”

A disadvantage for Kraft’s shareholders of the takeover is that they now mentally feel less financially strong as assets were being sold and the entire pizza production plant worth $3.7 billion was sold to raise money for the takeover.

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- Kraft Heinz Company's mission statement

Companies take various steps to achieve their business aims and objectives . In doing so, they can take over other firms.

A takeover occurs when one company purchases another company. It is simply an acquisition of another company.

An example of such can be the Kraft Cadbury takeover.

Introduction to Kraft and Cadbury

Kraft Foods is a division and brand of the current Kraft Heinz Company. The Kraft Heinz Company is an American company that is the third-largest food and beverage manufacturer in North America and the fifth-largest food and beverage manufacturer in the world. Kraft Foods was formed in 2015 by a merger of Kraft Foods Group and HJ Heinz Holding Corporation. At the time of the takeover, Kraft Foods was the second largest food conglomerate in the world. The company had seven brands, each generating annual revenues of more than 1 billion dollars.

Cadbury is a British multinational confectionery company. It was founded in 1824 by John Cadbury who opened a grocery shop in Birmingham, England. Among other things in the shop, there was also cocoa and hot chocolate which were prepared by the founder himself, using a pestle and mortar. Currently, Cadbury offers many chocolates and drinks such as Cadbury Eggs, Cadbury Dairy Milk chocolates, Flake, Wispa, Twirl and Eclairs chocolates, and Cadbury Bournville drinking chocolate. Cadbury is now available in more than 30 countries and its top three markets are the United States, Australia and India.

Despite its UK listing and headquarters, at the time of the Kraft bid, the company was owned 49 per cent by the USA. Moreover, only 5 per cent of its shares were owned by short term traders. Having said that , Cadbury's shareholders, including those from the United States, had a lot of impact on the company's decisions. In doing so, they were able to influence the company in a way that would not necessarily be favorable to the management and to the long-term objectives of the company.

Story of the takeover

In 2019 Kraft Foods launched a hostile bid for Cadbury.

A hostile takeover is when the acquiring company tries to takeover a target company without the approval of management .

A hostile bid is a type of bid that bidders present directly to the target company's shareholders because the management is not in favor of the deal.

However, not only was Cadbury not for sale but the company also resisted the Kraft takeover . The chairman of Cadbury, Roger Carr, put together a strong defensive advisory team that branded the 745 pence per share offer “unattractive” and said that it:

Fundamentally undervalued the company.

Moreover, the team made it clear that if Cadbury was to accept an unwanted takeover, they would have preferred almost any other confectionery company such as Nestle, Ferrero or Hershey. Lastly, the UK's business secretary, Lord Mandelson, declared that any buyer who failed to “respect” the historic confectioner would be opposed by the government.

With such resistance, why would Kraft insist on taking Cadbury over? As it turned out almost two years later, Kraft was to be reconstructed and split into two companies: a grocery and snacks business. In doing so, Kraft needed Cadbury to provide scale for the snacks business. Therefore, Cadbury was the final acquisition that would have made it possible.

Final offer

The Cadbury team, unaware of Kraft's plans, stated that a majority of shareholders would sell at a price of roughly 830 pence a share. In January 2010, Kraft Foods made its final offer to buy Cadbury for around £11.9 billion which included an increased offer to 840 pence per share plus a special 10 pence per share dividend. 72% of Cadbury's shareholders approved the deal.

To learn more about shareholders and their voting rights, read our explanation about shareholders.

Analysis of the takeover

The Kraft Cadbury takeover had advantages and disadvantages for both companies.

For Kraft, the takeover was the biggest cross-border acquisition in 2010 that made the company a number one dealer in confectionery. The combination of Kraft products such as Toblerone and Oreo with Dairy Milk chocolates from Cadbury would also help to save money on annual company costs of research and development, advertising, branding and procurement . Moreover, Kraft and Cadbury together would generate more sales than the two companies separately which would result in higher earnings per share. The takeover would also allow Kraft to compete with companies such as Nestle, Ferrero and Hershey. Lastly, Kraft's growth opportunities would enable access to new brands and new distribution channels.

When it comes to Cadbury, the company would take advantage of Kraft's extensive distribution network worldwide. Besides that, the takeover would expand the global reach of both companies and create highly worthwhile synergies.

Synergy is the idea that the combined performance and value of two companies is higher than that of the two companies individually. It is often the reason for mergers and acquisitions.

Disadvantages

To begin with, Kraft borrowed funds to pay the Cadbury shareholders a higher yield which worked Kraft's already high debt. To pay off its debt, Kraft was trying to reduce costs. T his alarmed unions that were already worried about the jobs of hundreds of people and whom the company did not give any formal assurance that it would protect them. Moreover, the British Government, being generally against any takeovers of British companies which typically lead to job losses, was also worried about the situation. As it turned out, their worries were completely justifiable as the company started to lay employees off. Whereas people on the top of the company and shareholders had nothing to worry about, low-level managers and employees lost their jobs . Lastly, there was no guarantee that Kraft would keep the production in the UK in the long run. In fact, Kraft kept the production in the UK but closed some of the factories in the country.

The case of the Kraft Cadbury takeover shows that Cadbury's shareholders were not necessarily the long term traditional owners of the target company stock. Instead, they might have been very rational hedge funds who got easily convinced by the offer price and the quick time in which the deal could have been finalized. Basically, they cared about their own money rather than the company.

Despite the high debt of Kraft after the takeover, employee layoffs and closing some of its UK factories, the deal allowed Cadbury to expand. However, a brand that was once a proud tradition of ethical British businesses was not only transformed into a global corporate but also lost its British ownership.

Currently, Cadbury does not belong to Kraft anymore. It is fully owned by Mondelēz International which is one of the world's largest snacks companies.

Kraft Cadbury Takeover - Key takeaways

• Kraft Foods is a division and brand of Kraft Heinz Company, an American food and beverage manufacturer.
• Cadbury is a British multinational confectionery company.

The reason why Kraft needed Cadbury was to reconstruct and split into two companies: a grocery and snacks business where Cadbury would provide scale for the snacks business.

• Although Cadbury was actively resisting, it was taken over by Kraft in January 2010.
• Despite the high debt of Kraft after the takeover, employee layoffs and closing some of the UK factories, the deal allowed Cadbury to expand.
• However, a brand that was once of a proud tradition of ethical British businesses was not only transformed into a global corporate but also lost its British ownership.

https: // www. britica.com/topic/Kraft-Foods-Inc

https://www.kraftheinzcompany.com/

https://www.mondelezinternational.com/Our-Brands/Cadbury

https://www.ft.com/content/1cb06d30-332f-11e1-a51e-00144feabdc0

https://www.marketingweek.com/kraft-completes-takeover-of-cadbury/

https://www.ukessays.com/essays/marketing/takeover-of-cadbury.php

https://mission-statement.com/kraft-heinz/

https://blog.ipleaders.in/kraft-cadbury-takeover-restructuring-and-challenges/

https://www.bloomberg.com/graphics/2019-opinion-cadbury/

Frequently Asked Questions about Kraft Cadbury Takeover

--> who bought cadburys.

Kraft Foods bought Cadburys. Now it is fully owned by Mondelēz International. 

--> When did Kraft takeover Cadbury?

Cadbury was taken over by Kraft in January 2010.

--> Does Kraft still own Cadbury?

Currently, Cadbury does not belong to Kraft anymore. It is fully owned by Mondelēz International which is one of the world's largest snacks companies. 

--> Why was Cadbury taken over by Kraft?

--> was the kraft cadbury takeover successful.

It can be said that the Kraft Cadbury's takeover was successful despite its high debt of Kraft after the takeover, employee layoffs and the closing of some of its UK factories, the deal allowed Cadbury to expand into a global corporate. 

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When did Kraft buy Cadbury?

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What is Kraft Foods?

Kraft Foods is a division and brand of the current Kraft Heinz Company, an American food and beverage manufacturer.

What products does Cadbury offer?

Cadbury offers many chocolates and drinks such as Cadbury Egg, Cadbury Dairy Milk chocolates, Flake, Wispa, Twirl and Eclairs chocolates, and Cadbury Bournville drinking chocolate.

Provide a definition of a hostile bid.

A hostile bid is a type of takeover bid that bidders present directly to the target company's shareholders because the management is not in favour of the deal.

Why did Kraft want to buy Cadbury?

Kraft was to be reconstructed and split into two companies: a grocery and snacks business. In doing so, Kraft needed Cadbury to provide scale for the snacks business. Therefore, Cadbury was the final acquisition that would make it possible. 

How did Kraft convince Cadbury’s shareholders to accept the offer?

Kraft Foods made its final offer to buy Cadbury for around £11.9 billion which included an increased offer to 840 pence per share plus a special 10 pence per share dividend.

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Timeline: Kraft agrees Cadbury deal after 4-month fight

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Kraft Group (Part I): Cadbury Acquisition—Purchase Accounting

• First Online: 03 February 2021

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• Marco Ghitti 4  

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In February 2010, Kraft Foods, a US publicly listed company, announced it had acquired control of Cadbury, a leading confectionery company listed on the London Stock Exchange. The merger between the two companies created the second largest confectionery, food, and beverage company in the world. The purpose of this case is to introduce the reader to the basic elements of consolidation using the purchase method. Using financial information from both companies, we measure the deal consideration, the fair value of net assets acquired and goodwill; then, we produce a pro-forma consolidated balance sheet. We also discuss the differences between the full fair value and partial methods for goodwill and non-controlling interests and the effects of fair value adjustments on subsequent consolidated income.

This case study was originally written by Chemi Wieder and Hwangman Kim under the supervision of Professor Eli Amir, at London Business School, for class discussion in Eli Amir’s financial analysis course. Eli Amir and Marco Ghitti then revised the case for this book. All market data in this case study are as of the time of the deal. They might have changed since then.

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Amir, E., Ghitti, M. (2020). Kraft Group (Part I): Cadbury Acquisition—Purchase Accounting. In: Financial Analysis of Mergers and Acquisitions . Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-61769-1_10

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Impact case study

Contributing to post-cadbury rule changes for uk corporate takeovers.

  The Law and Financial Markets Project at LSE helped drive reform that strengthened the hand of UK companies targeted for takeover

Research by

Professor David Kershaw

Lse law school, what was the problem.

In May 2010 the American food giant Kraft completed a controversial takeover of venerable British confectioner Cadbury in a deal worth an estimated £11.5 billion.

The Kraft-Cadbury deal was seen as a watershed in UK corporate takeovers, only in part because it involved the foreign acquisition of one of the nation’s best-loved brands. Just a week after promising to keep Cadbury's Somerdale factory open, Kraft backtracked and said it would close the plant, which at the height of its operation employed more than 750 people. The plant was closed in 2011.

Kraft’s volte-face over the Somerdale factory sparked an outcry over the perceived imbalance of power in the UK corporate takeover process. UK regulators and industry wanted to ensure that takeovers were more transparent and that companies targeted for takeover in the future had stronger regulatory support.

What did we do?

The Law and Financial Markets Project, based in LSE’s Law Department, was established ‘to explore the interactions of law, regulation, financial markets and financial institutions, principally within the EU and the UK’. It also aimed to provide LSE academics with a platform to communicate the findings of their research and to discuss their ideas with regulators, practitioners and judges.

After the Kraft-Cadbury deal, the Takeover Panel, a statutory body regulating all UK mergers and acquisitions worth more than £10,000, opened a consultation and reform process. The Law and Financial Markets Project engaged in this process via a public seminar on the Panel’s consultation document. The seminar involved Panel presentations from the Deputy Director of the Takeover Panel; a partner from multinational law firm Herbert Smith; a chairman of a FTSE 100 company; and David Kershaw, LSE Professor of Law. Kershaw was a specialist in company law whose work on post-Enron regulation received the 2005 Modern Law Review Wedderburn Prize.

Kershaw also spoke on issues of takeover reform at an event on the Consultation process organised by Herbert Smith. This event included members of the Panel, and Kershaw’s presentations encouraged them to give serious consideration to the need for legal mechanisms that increased the difficulty in gaining control over UK companies.

What happened?

Following his presentations at the Herbert Smith event, Kershaw was encouraged by the Takeover Panel to submit a written response to their consultation document. As a result, Kershaw was asked to attend a meeting of senior civil servants at the Department of Business to discuss the ideas set forth in his response document.

Kershaw was asked to join the Government’s Corporate Strategy Review Group, which met in December 2010 to discuss issues relating to corporate governance and takeover regulation. He was also asked to comment on a draft of the Department of Business’s Consultation on the Review of Corporate Governance and Economic Short Termism, which also contributed to the Panel’s process.

The Takeover Panel’s subsequent reforms provided greater scrutiny for future takeover bids by requiring more information from bidders about their post-purchase intentions, particularly in areas like job cuts. These reforms were in effect during US pharmaceutical company Pfizer’s failed bid in 2014 for UK company AstraZeneca, a deal valued at £69 billion.

The Law and Financial Markets Project also informed discussions of reform of the European Commission’s Takeover Directive, which dealt with EU-wide standards for takeovers and mergers. Paul Davies, formerly LSE Professor of Law (now Emeritus Professor at Oxford University) and Edmund Schuster, LSE Assistant Professor of Law, together with Emilie van de Walle de Ghelcke, Principal Associate at the international law firm Freshfields, produced an empirical study on the impact of the Directive on the takeover laws of EU member states. This study was considered by the Commission as part of its 2012 review of the Takeover Directive.

Related to this issue, Kershaw along with Carsten Gerner-Beuerle, LSE Assistant Professor of Law, and Matteo Solinas, Senior Lecturer in Corporate and Financial Law at the University of Glasgow, published a paper critical of the Commission’s approach to board neutrality, which allowed board members of takeover target companies to remain neutral in a bidding process. The Law and Financial Markets Group, together with the Oxford Law Faculty, held a conference to debate the issues raised by this scholarship with the individuals responsible for the Takeover Directive review and reform process. 

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Multinational Company Acquisition - Kraft/ Cadbury Case Study

Author - Blake Downward

Kraft Foods INC. (U.S.A.) acquisition of Cadbury P.L.C. (U.K.)

The Kraft acquisition of Cadbury is a shining example of a Multinational Company (MNC) growing their international business through purchasing a foreign company. Both companies were already well-established MNC’s with a worldwide presence. Kraft recognised that their future growth would need to come from emerging and developing markets. Acquiring Cadbury would allow them to reach these markets and implement their strategy in the shortest possible time-frame.

In January 2010, Cadbury shareholders accepted an offer from Kraft to absorb the company. In this case study the author aims to highlight the main reasons for the takeover, the process of negotiations and finally, the outcome of the acquisition.

Kraft Foods INC. is a United States corporation founded in 1923. Prior to the acquisition of Cadbury, Kraft was the second largest food company in the world and had a presence in over 150 countries. A large proportion of Kraft’s worldwide revenues came from just 11, well-known, well-established brands – each brand drawing in over 1 billion US dollars in revenue each year. Most of these revenues came from developed markets in North America (USA and Canada) and from Europe. The problem with these developed markets, is that they are quite mature markets and that also means that their growth is very slow. Operating in such mature and competitive markets has slowly eaten away at Kraft’s profit margins. This has forced Kraft to shift their strategy away from developed markets, towards emerging markets, in order to find new sources of sustainable growth. At that time (pre-acquisition), Kraft had only a very small presence in the worlds’ strongest emerging markets (aside from China) – such as India, Mexico, Brazil and South Africa . Gaining access to these emerging markets, as well as moving towards the high growth snack foods market, were critical factors in our long-term strategy. As the author will demonstrate in this paper, acquiring Cadbury was the perfect move in implementing this strategy. Cadbury

Cadbury is a U.K. company with almost 200 years of heritage (founded in 1824). Unlike Kraft, Cadbury has maintained a disciplined approach to their business and remained in the realm of their core market. This focus on their core product market ( chocolate and confectionary), has enabled them to refine their business practices in order to produce a consistently high quality product, in a highly efficient and cost effective manner. As a result of these efficiencies, Cadbury is one of the best performers amongst their competitors, reporting gross margins of 45.6% (compare this with Kraft’s gross margin of 35%). Since Cadbury focused on doing one thing well (chocolate and confectionary), this gave them the ability to penetrate emerging markets effectively (44% of Cadbury’s revenue came from emerging markets).

So why the bid for Cadbury?

At Kraft, our strategy was to move into a high growth product market (chocolate and confectionary) and at the same time move our brand into high growth geographic markets (developing and emerging markets). The fastest and easiest way to achieve our goals (but maybe not the cheapest), was to acquire an already established company and their portfolio of brands. Along with Cadbury - Hershey’s, Mars and Nestle were earmarked as potential targets. Mars and Nestle were quickly screened out of the process due to their sheer size. Both companies are large, diversified conglomerates. Purchasing these companies would require extremely large amounts of capital, and would also be likely to attract the attention of anti-trust law. This left just Cadbury and Hershey’s as potential targets. Cadbury was selected over Hershey’s largely due to their presence in emerging markets. In particular, the two countries belonging to the Commonwealth – India and South Africa. Prior to the acquisition, Kraft had no presence in the Indian market and only a small presence in South Africa. India makes up a large proportion of the world’s population, and Cadbury was already well established there. Cadbury products were being sold by India’s largest retail chain which gave them access to 92% of India’s population. Acquiring Cadbury would mean a direct channel into India and other fast developing nations for Kraft products. A major factor in considering the takeover of a multinational target is the effect of exchange rates on cash-flows to the parent company. Aside from India and South Africa, Kraft and Cadbury have very similar exposure to foreign currencies, and both already engaged in hedging foreign currency positions. A combination of the two firms would lead to a reduction in the net cash flows in some foreign markets. Ultimately leading to a smaller foreign currency exposure and also less of a need to hedge the exposure in the forward or futures markets.

Given all of these factors a decision was made, and Kraft would prepare to buy Cadbury. The Bids

The process of negotiation was a fairly long and drawn-out one. It took four months from the initial offer until the final offer was accepted by the Cadbury board. In these four months, Cadbury was able to squeeze a much higher premium out of Kraft. Cadbury was in an ideal position for negotiations because their business was not distressed in any way. They were maintaining high levels of growth and profit, so they had every right to demand a high premium as compensation for selling their business.

For simplicity, I will only detail the first and final offers to buy Cadbury. (see the table below for full details)

On the 7th of September 2009, Kraft formally placed a bid to buy Cadbury at a 28% premium above their current share price. This offer was rejected by Cadbury and signalled the beginning of the negotiations. The final bid that was accepted by Cadbury was made the following year on January 19, 2010. Kraft had increased their cash offer, pushing the final price to represent a 44% premium on top of Cadbury’s September 2009 share price (£5.81).

Cash Number of Kraft Exchange Rate Total Bid Cadbury Premium portion Kraft Shares Price (USD/GBP) (GBP) Price (GBP) (GBP) (USD) 7/09/09 3.00 0.2589 28.1 0.611 7.44 5.81 28%

19/01/10 5.10 0.1874 29.58 0.6109 8.48 8.37 1%

The offers were made up of a cash portion and a share offer. This means Cadbury shareholders would receive some cash and some Kraft shares as payment for the Cadbury shares they held. The total value to Cadbury shareholders was dependent on how much cash was received (in GBP), the current value of Kraft shares and the current exchange rate (to convert the value of Kraft shares into GBP).

The cost for Kraft is quite different to the value Cadbury shareholders derive. The first major risk for Kraft depends on how much cash they must pay for each share. For example, if Cadbury shareholders were happy to receive only Kraft shares as payment, Kraft would not be exposed to any exchange rate fluctuations as they are only handing over shares. On the other hand, if Cadbury shareholders did not want any Kraft shares and wanted the full payment in cash, this would maximise Kraft’s exposure to exchange rate fluctuations.

Over the course of negotiations, Kraft was forced to increase their cash offer. In other words, Cadbury demanded that Kraft take on more exchange rate risk because Kraft was the party making the bid.

At Kraft we knew that exchange rate fluctuations could have a large negative effect on the final price we pay for Cadbury. Prior to our first offer, we calculated the project’s “value at risk” (VaR). Using ten years of monthly USD/GBP exchange rate prices we found the monthly standard deviation to be 2.21% (this is a fairly stable deviation for currencies, this is due to their high correlation - 0.6864). At a 95% confidence level, we determined the maximum one month loss to be as follows:

푉푎푅 = 0 − (1.65 ∗ 2.21)

푉푎푅 = −3.6465%

If we apply this to the cash portion (300 pence) of our initial bid, we find;

−3.6465% ∗ 300 = 10.94 푝푒푛푐푒

Which would increase the cost (to Kraft) of the offer by 1.5%, in a month. If Kraft were to increase their cash offer, this VaR would also increase.

Close inspection of Table 1 shows that the exchange rate at the time of the first offer was almost exactly the same as it was for the final offer.

Working together

After the acquisition comes the real test as to whether it was a success or not. It is still early days, but the initial results have been very pleasing to us at Kraft and we have since been able to continue moving forward with our long-term strategic goals. We have successfully been able to move into high growth emerging markets and at the same time we have been able to promote Cadbury sales from within our established distribution networks. Over one third of the global Kraft Executive Management team is from Cadbury and they have been critical in our attempts to move into new markets. Please see Table 2 for the most outstanding improvements in our business since the takeover. Great increases in both share price and revenues, whilst at the same time reducing our long-term debt obligations by almost 50%.

Overall, this has been a very successful takeover. Our expectation is that the 2013/2014 financial year will be an even greater improvement as this acquisition begins to mature within our company.

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