Kraft Cadbury - Change Management Implications
by Stephen Warrilow
It is nearly 8 years since the hostile takeover of Cadbury by Kraft - see previous post below. It is interesting to see how it all played out:
There was the culture clash, then the power grab and now the last man standing has gone
Cadbury Takeover By Mondelez International Investigated Six Years On By 'Dispatches'
I used to work for Cadbury – this is what has really happened since the Kraft takeover | The Independent
Once a proud British company, Cadbury with its strong Quaker values and much loved products is now a degraded and derided brand in the portfolio of Mondelez International - a spin-off from Kraft Heinz.
In fairness to Kraft, Cadbury were a publicly listed company and as such had "taken the Kings's shilling", they were ripe for the picking, and Cadbury shareholders were handsomely rewarded, as always were the professional advisors:
"We believe the offer represents good value for Cadbury shareholders and are pleased with the commitment that Kraft Foods has made to our heritage, values and people throughout the world" said Cadbury chairman Roger Carr.
That commitment to heritage, values and people proved to be not worth the paper it was written on.
As I reported at the time, Kraft over-paid to acquire what it thought to be increased market share and penetration in emerging markets. It also thought it could achieve significant cost savings post integration.
The reality? Kraft spent $1.3 billion on integration to achieve an estimated $675 million in annual savings by the end of 2012.
Taking into account integration costs, the acquisition reduced Kraft's earnings per share by about 33% immediately after the Cadbury purchase.
As for Kraft CEO Irene Rosenfeld, who started out so sure that her acquisition would deliver the gold, she soon discovered - like the lady in the famous Led Zepplin song - that she was buying her stairway to heaven... and it's costly.
But I am sure the good lady will waste little time in reflection on all that as she heads off shortly into retirement with her gold-plated C-Suite pension.
History very nearly repeated itself recently with the proposed Kraft Heinz mega-merger - which has been dropped on grounds of culture clash:
Kraft Heinz Unilever: Culture and politics are the biggest hurdles for this deal, says Jim Armitage | London Evening Standard
Scuppered by a culture clash what we think of the Kraft Heinz and Unilever news - Insight - Addison Group
Kraft drops Unilever mega-merger bid
A hell of a culture clash: Why it's good that the Kraft Heinz merger with Unilever is dead
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.
Under-performing 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?