2.3 First draft

2.3 The Motives for Takeovers and Mergers and How These Link with Corporate strategy

On the 19^th 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.