2.3 The Motives for Takeovers and Mergers and
How These Link with Corporate strategy
On the 19th January 2010, Cadbury
the confectionary company was taken over by US food giant Kraft for £11.9bn.
The acquisition was a hostile one, meaning that it was accomplished not by
coming to an agreement with the target company's management, but by going
directly to the company’s shareholders. There are many motives for takeovers
depending on firms’ objectives, however, a 1999 KPMG report from a sample
survey or mergers concluded that the two main aims of a merger are to maximise
shareholder value and to access new geographic markets.
Diversification- One motive for the takeover
is that it allowed Kraft to diversify by accessing new markets and products. The British confectioner offers Kraft greater
access to markets where it previously had little presence such as Britain, Kraft
has been able to overcome any barriers to entry such as import controls by
acquiring a business which already operates in the desired markets. Alternatively
it also allows the company to introduce Cadbury’s products to countries to
which it already had established business connections such as Scandinavia and
Brazil, where Cadbury had made few inroads.
Cadbury’s strong showing in chewing gum was
also particularly attractive to Kraft as it is an area where Kraft had little
expertise. Kraft, armed with Cadbury, would become number two in the
high-growth gum segment, and also adopt a wide range of other products. Large
businesses such as Kraft often wish to diversify and expand their product
portfolio in order to spread the risk associated with possessing a limited
product range, e.g. to ensure healthy cash flow a business should have various
products at different stages of their life cycle. The Boston Matrix shows that new
products can initially be ‘problem child/ question marks’ and will need ‘Cash
Cows’ to fund promotion for their growth.
However,
economic theory suggests that the potential gains of entering a new, profitable
markets or products may not be realised in the short term, this is because a
there is little understanding of the new business market or area and bedding in
time will have to be given for research and strategies to be devised.
Growth- The acquisition allowed Kraft to
achieve rapid external growth. As Kraft took over, they would have almost
instantly acquired Cadbury’s manufacturing capacity, a workforce, established
relationships and a loyal customer base. This would have been a motive to
Kraft, as to achieve this kind of expansion internally could take months or
years or may not even be successful at all. For example, early in 2010 Kraft
had been predicting revenue growth without acquisitions (“organic”) of only 4%,
this grew to 5% once Cadbury had been taken on. The US company said the deal
would also help growth in key developing markets including India, Mexico,
Brazil, China and Russia.
The expansion gained from market growth in
these emerging markets would mean Kraft would be able to gain market share and rival
large competitors such as Mars and PepsiCo. Reduction in competition would lead
to increased profits which could fund innovation and further expansion in the
new markets.
Although, Kraft’s organisational structure will also have to adapt to
the new size of the business, and restructuring can be costly. For example, despite the Cadbury takeover helping to boost sales by
30%, Kraft's net profit for the fourth quarter fell by 24% to due to costs
associated with integrating the UK business.
Synergy –Another advantage of the takeover to
Kraft is that is allows the business to cut its costs. Kraft is looking to cut
costs of $675m. Of this, around $300m will come from “efficiencies” such as
combining manufacturing, customer service, logistics and research and
development. Kraft will also be able to remove “duplicate” departments, the
business hopes to save around $250 by eliminating duplication in general
administration. There are also large savings to be made with bulk advertising,
as advertising campaigns could be used universally, it will cost less to target
each person and only one advert will have to be produced.
However,
these savings for the company will ultimately result in job losses through
removing duplicate departments. This could be bad for the company profile and
act as bad PR, especially when there has been a large amount of publicity
surrounding the deal.
Conclusion- The Kraft takeover of Cadbury was
mainly driven by investors, all of the motives discussed ultimately result in
greater profit which would allow Kraft to please their shareholders. However,
taking into account integration costs, the acquisition knocked about 33% off
Kraft's earnings per share so it did not fulfil this objective in the short
term. Another one of Kraft’s corporate objectives is to accelerate growth, by
acquiring Cadbury it has achieved this, however, it may be that profits will
only be realised in the long-term.
