Kraft Cadbury - Change Management Implications

by Stephen Warrilow

19.01.10

So Kraft have succeeded in their bid for UK based Cadbury. I'm not an investment banker or analyst - just a humble change management specialist - but I don't understand this one.

Here are the facts that I have ascertained:

CEO Irene Rosenfeld, brought in 3 years ago to revitalise a stagnant debt laden Kraft has up to this point based her strategy to increase profitability and sales by boosting innovation and marketing.

Cadbury on the other hand have been showing a 6% year on year sales growth and a Pre Tax Profit growth of 30% over the past 4 years. Clearly a very well run company.

Underperforming Kraft, already carrying large £22bn debt (a legacy of the infamous Nabisco deal I wonder?) increases that debt by a further £7bn to pay a premium of 20% in excess of the Cadbury share price over the past 5 years, and what amounts to a premium of 40% in excess of Cadbury's share price over the past 2 years.

That's a premium of between £1.9bn and £3.3bn. So what I want to know is how Rosenfeld plans to unlock Kraft shareholder value in excess of that?

As far as I can see, the "deal logic" is based on increasing Kraft's international presence, particularly in fast-growing emerging markets; and increasing market share in the confectionery sector which is reckoned to be one of the fastest growing segments of the entire food industry.

But I'd love someone to explain to me how paying over the odds to buy market share and penetration makes long term commercial sense?

Given that over 50% of these deals neutralise or destroy shareholder value the odds aren't good.

Apparently Kraft reckon they can strip out £400m to £600m in cost. But that hardly justifies the deal at that price and will surely depend on a rapid and successful integration and to some extent the cultural fit between the management and marketeers of the 2 companies?

From a change management perspective, given that the cultures of the 2 companies are so very different and given that the growth strategy of innovation and marketing is entirely dependent on the management and marketeers, the "people factor" and "cultural fit" will be a crucial element in this growth strategy working.

In my view: "Any proposed merger where directors have failed to identify and quantify the impact on those people most affected by it carries a high risk of failure.

The numbers may make sense but have the political and cultural factors been assessed?" For more on this: Merger failures, value destruction and cultural conflicts - And how to avoid them!

Cadbury shareholders must be delighted with the deal.

Professional advisors and investment bankers involved in this are having a very happy start to the New Year.

From a UK perspective its also fascinating to see RBS as one of those involved in putting up the debt finance.

It'll be very interesting to see if Kraft shareholders are also delighted over the next 2-3 years, and if this deal really does increase Kraft shareholder value?

However, Warren Buffet is a shareholder in Kraft, and presumably supported the bid, so he must know something we don't...


Cadbury bid could get sticky for Kraft's CEO



Kraft CEO's takeover bid has no room for error


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