Currently, it is too early to speak of the recovery of American (and global) market of mergers and acquisitions (M&A). The volume of mergers and acquisitions fell by about 37% - to $ 1.75 trillion over the last year, and therefore fees of investment banks decreased (Zhang 2010). The deal between Kraft and Cadbury is the biggest one since March 2009, when Roche Holding completed the purchase of Genentech for U.S. $ 44 billion These transactions indicate the rehabilitation of selected major players and their optimistic assessment of their own investment prospects.
Cadbury appeared in 1824 in Birmingham and was initially an ordinary grocery store of Cadbury family. Now Cadbury employs 45 thousand people in 60 countries and is the second largest confectionery in the world after the Mars-Wrigley. Among its most popular items are chocolate bars Dairy Milk, Crunchie, Wispa, candy Halls. The company annually sells more than 250 million chocolate bars in 33 countries. Revenue in 2008 made £5,4 billion, net profit - £364 million. According to Euromonitor research company, the company's share in the global market of confectionery products is 10,3% ('Kraft Foods Inc. proposes combination with Cadbury Plc' 2009).
Kraft Foods is the second largest in the world producer of food and drinks after Nestle. It was established in 1903 by James Kraft, who sold wholesale cheese in Chicago. Kraft products are being sold in 150 countries. Its most famous chocolate products include Alpen Gold, Milka, Toblerone, cookies Oreo, cheese Dairylea. Nine brands, including Kraft, Jacobs, Maxwell House, and Milka, generate an annual revenue exceeding $1 billion. The company employs 98 thousand people around the world. Net sales in 2008 made $42 billion, net profit - $ 2.9 billion (Kraft Foods Inc. Business Background Report 2009). Euromonitor reports that the company's share in the global market of confectionery products is 4,6% ('Kraft Foods Inc. proposes combination with Cadbury Plc' 2009).
Earlier, Hershey and the Ferrero were going to join the struggle for Cadbury, considering the possibility of submitting a joint proposal to buy the British confectioner. However, on January 19, 2010 Cadbury ceded to Kraft Foods, after the American food and drink manufacturer raised the bid price up to $19.4 billion ('Cadbury agrees Kraft takeover bid' 2010).
The deal formed the world's largest confectionery manufacturer with the market share of 14,9% (Mars has 14,8%), annual sales of more than $50 billion, more than 40 brands (each with sales of more than $100 million per year) and leading positions in Brazil, China and Russia, where there is a significant presence of Kraft, as well as Mexico, India and South Africa, where Cadbury is more actively working. The companies expect that within three years after the merger the combined structure will reduce costs by $625 million per year ('Kraft Foods Inc. proposes combination with Cadbury Plc' 2009).
Kraft now offers 840 pence for each share of Cadbury, of which 500 pence in money plus 0.1874 shares of new Kraft Foods. The document signed by the parties in particular states that the board of directors unanimously recommends that shareholders accept an improved offer of Kraft, ensuring that this proposal is beneficial to Cadbury shareholders. Cadbury also confirmed that the company's shareholders will receive an additional dividend of 10 pence per share ('Cadbury shareholders accept Kraft offer' 2010).
On the part of Kraft shareholders, the proposal does not require additional approval. In the case of accepting the terms of the transaction, Kraft intends to issue 265 million new shares, or 18% of the existing ones. Stockbroker Andrew Wood believes that Kraft has every reason to pursue the acquisition of Cadbury, as this would allow the American company to expand its confectionery business to more effectively compete with Mars. On the other hand, the head of an investment holding company Berkshire Hathaway Warren Buffett, the largest shareholder of Kraft Foods, marked that he felt poor because of this purchase (Chu 2010). He considers the sum of $19.3 billion too high, and the whole deal unsuccessful.
Kraft Foods welcomed the entry of Cadbury staff into the family of employees of American companies. However, Cadbury workers do not expect anything well from this merger. In London trade union representatives held a protest against the acquisition that can lead to redundancies of British employees. Trade unions believe that the downsizing will be quite serious: Kraft's debt is estimated in £22 billion ('Cadbury agrees Kraft takeover bid' 2010).
British Prime Minister Gordon Brown pled for the British confectionery. It goes not only about possible job losses and transfer of production to other countries, but also in general about giving away the company, which for many British has become a national treasure (House of Common 2010).
Cadbury Board of Directors justifies its decision to accept the offer of Kraft claiming that the deal is the price of globalization. According to the head of the company, Roger Carr the reality is that all the companies are parts of global business.
Meanwhile, the British Legal & General Investment Management, the second largest shareholder in Cadbury, has expressed displeasure with the transaction. They believe that Kraft's improved and final offer did not fully reflect the long-term value of Cadbury. They expressed disappointment with the management's recommendation that shareholders approve the sale of this iconic and unique British company (Chu 2010).
The decision of the Board of Directors to accept the proposal of Kraft also caused indignation among Cadbury family members. Felicity Loudon, grand grand-granddaughter of John Cadbury, who founded the company 186 years ago, pleaded the shareholders not to accept the deal, believing that the company should not have been sold to American manufacturer, and that they should have fought for this exceptional British reality to the end. She points at the brands Britain has already lost and is still losing, claiming that brands of national importance, including Cadbury are being given away to the companies, which have nothing to do with the British (Chu 2010).
Prime Minister promised that the British government would do everything possible on its part to persuade Kraft not to transfer the production of chocolate and the management outside the UK and to protect the tradition of Cadbury. Gordon Brown also promised to get Kraft's guarantee that they would respect the brand itself and the quality of products manufactured in the UK, as well as the company's employees, and that the new owners would help 5,5 thousands of current Cadbury staff keep their jobs (House of Common 2010).
The US company has promised to treat the chocolate manufacturer with respect to the brand, heritage and people, but now says that job cuts are inevitable. Most likely, the downsizing will affect the company's headquarters in Uxbridge, near London.
At the same time, Kraft, which manufactures in the UK such brands as Kenco, Dairylea and Philadelphia, stated that the deal would allow saving Cadbury factory near Bristol which may in the next year lose 500 jobs, as well as change some of costs reduction measures which Cadbury had implemented at its facility near Birmingham ('Kraft Foods Inc. proposes combination with Cadbury Plc' 2009).
Peter Mandelson, British Minister of State for Business, considers the deal as the capture of the successful British company that for many has become a symbol by foreign predators for the sake of immediate benefit, which may cause long-term damage to the company (House of Commons 2010). However, the fact that British law has never assumed protection of companies and brands of national importance - unlike many other countries. UK adheres to the laws of free market that, on the one hand, attract investors, but on the other hand, often lead to loss of traditional British brands, such as automobile TVR, which perished in the hands of the Russian owner, or brand MG Rover - sold, resold, and as a result bankrupted (Berry 2010).
For the American Hershey Co., who also intended to buy Cadbury, the future looks quite complicated. Because of its indecision Hershey did not make an offer to Cadbury, and this led to internal divisions within the company. Hershey was considering the possibility to offer a higher price for Cadbury than Kraft's bid for two months. Representatives of the trust, which controls the company, had insisted on the transaction, but the CEO of Hershey, David West expressed concern about the amount of debt that would have appeared after the acquisition of Cadbury (Chu 2010).
Now that Hershey should formulate a strategy for development in the conditions of increased competition, the tensions between its executive management and the trust is likely to further complicate the situation and can lead to the change of leadership. Hershey is likely to face difficulties in the development at emerging markets, where Kraft and Cadbury alliance will take the leading position.
At the same time Mars dominates at the US market, which also complicates the Hershey's growth. The USA provides more than 85% of the company's profits. The sale increase of confectionary products in the domestic market is weak and generally depends on raising product prices or increasing the producer's share at the market compared to the competitors. The continuing weakness of the US economy made it difficult to raise product prices, and for Hershey it would be difficult to recapture market share from Mars, whose annual revenues of about $5 billion, exceed Hershey revenue by 8 times ('Kraft Foods Inc. proposes combination with Cadbury Plc' 2009).
In addition, Freeman & Co research firm predicts that Kraft's consultants in Cadbury deal, Lazard Ltd., Deutsche Bank AG, Citigroup Inc. and Centerview Partners LLC, may receive a commission of about $58 million. According to analysts, Cadbury will pay its advisers, Goldman Sachs Group Inc., Morgan Stanley and UBS, about $56 million (Chu 2010). In general, the transaction could theoretically be considered a successful deal, benefiting most of real and potential participants; however, the practical efficiency strongly depends of the policy of Kraft after the takeover.
From our viewpoint, the only possible way to study M&A in terms of creating value is to explore how both companies are working to create a certain set of common assets and capabilities, based on knowledge, after the conclusion of the transaction on mergers and acquisitions.
According to the results of studies, the degree of success achieved in creating this pool of assets and capabilities, determines whether the value of the company is increased after the transaction of takeover. Therefore, we propose to focus not on the traditional principles of value creation, but on searching for answers to the following questions (Morosini 2001):
conditions under which both companies are able to create common social environment, where their combined intellectual assets and capabilities can be easily converted into valuable, extremely competitive products and services;
how to assess the ability of the merging companies to create a set of certain common assets and capabilities based on knowledge, even before the conclusion of the transaction;
how to evaluate the success of the merging companies towards the creation of this set after the conclusion of the transaction.
Looking attentively at the companies that have been able to implement a successful merger or acquisition, we can assume that managers should pay more attention to the features that are common to all successful methods of implementing M&A after the transaction, rather than to the differences between these methods. For example, all the successful methods of implementing M&A focus primarily on the rapid establishment of a solid "connective tissue" between the merging companies (Kroener 2009).
This connective tissue can obviously be different depending on the motives of companies' leadership. For example, in the case of consolidation acquisitions, it may look more like the organizational structure of the acquirer; and in case of the merger of equals, it may represent a completely new corporate connective tissue. It is even more important that the basis of this special skill is likely a well-defined set of institutional arrangements, whose development has been gradual and therefore unnoticed for the outside observer (Kroener 2009; Morosini 2001).
The special role of managing the integration and exceptionally streamlined approach to managing the creation of the connective tissue between the merging companies; the introduction of clear, non-negotiable elements, such as the "politics of integrity" of the acquirer as a major component of connective tissue; emphasis on the establishment of direct communication mechanisms for the creation of connective tissue between the merging companies; openness, tolerance of the corporate culture of the acquirer, as well as the flexibility of both partners, providing support and participation of the employees of the merged object at an early stage or later - these are the major factors that should characterize the approach of Kraft Foods company to the integration of acquisitions.
The obvious factors of successful management of mergers and acquisitions include the acknowledgement that the acquisition of technology is performed by means of people, using one's own best corporate vision and common purpose as a tool to involve others (Zhang 2010). In addition, corporate culture promotes not just the accepting "merged" workers into the general staff, but also familiarizing them with Kraft's own culture.
The company's goal is to enlist the support of employees of acquired companies in a very short period of time. After the deal, the team working on the integration after the merger should immediately proceed to the following (Morosini 2001):
It should create a special package of documents, including the description of Kraft's structure, benefits for employees, a list of contact persons and justification of the significance of the merger.
Immediately after the announcement of the acquisition, Kraft's group of HR specialists should visit the Cadbury headquarters to meet with future employees, determine their expectations and answer questions.
Together with the leadership of the acquired company, the team working on post-merger integration should work on organization of a new economic object.
As a rule, two new independent business units are created for the management of product development and marketing operations, while selling and manufacturing functions are integrated into the Kraft Company.
Subsequently, the team working on post-merger integration should arrange special guide course for the new staff. Managers of the acquired company should be retrained according to Kraft leadership principles and recruitment characteristics. Sales specialists should learn about how to sell Kraft products, and engineers should explore the project management, adopted by the company. The whole process takes 30 days (Kroener 2009).
The company needs strong common unity to excel its competitors. The uniting companies should show a higher performance and create more value in comparison with what each of them could achieve alone. First, beginning to work on strategic mergers and acquisitions, companies need to critically assess their common unity.
In general, a single organizational structure designed from the very beginning will greatly simplify the development of sustained leadership of merging companies, which plays a crucial role in maintaining a sound common unity (a single, focused leadership; a set of common building blocks that make up the organization, commonness of interactions aimed at developing knowledge and information distribution; unified policy regulating the rotation of managers abroad and back) starting from the early phase and thereafter.
Kraft Foods and Cadbury merger can serve as a signal of the revival of the market of financing large M&A deals. In general, the policy of both the acquirer and the acquired is critical for the success of M&A transaction and its effects. Given the rapidly growing phenomenon of multinational companies, investors are lacking sound public policy based on recognition of the economic benefits of outbound foreign investments. Establishment of a strong common unity of the merged companies is the only way to create real value as a result of M&A. Moreover, after the M&A transaction the establishment of a common unity becomes the decisive factor of survival in a competitive environment.