Impact Of Kraft-Cadbury Merger


Although mergers can have a significant benefit to both parties involved, there are numerous of examples of mergers that eroded organizational value and led to a decreased competitive position. This is due to the reality that rather than a mere purchase of a company, mergers involve the combination of the previously separate firms into a single unified whole. As such, both organizations can engage in significant misunderstand, confusion and conflict, since clashes of culture and organizational style can occur. Due to this, mergers are often not as successful as hoped, as the differing organizational styles and business methods can remove the ability of the combined organization to effectively compete within the market.

This was particularly important due to the bitter corporate struggle that the merger attempts forced within corporate communications. As a result, there was much animosity between both companies. Furthermore, relations between the management and new employees of the organization were rather poor, as there was significant concern on part of the UK staff that their salary and benefits would be affected by the American company. Talent retention in the immediate wake of the merger was important, as the transitionary period is one that includes significant reductions in staff in order to eliminate redundancies within organizational operations.

These concerns were alleviated within the new merged organization, as Kraft underwent a split of the organization into two separate parts. This was done in order to prevent the organization from being bogged down in the organizational inertia that can follow a deal of this size. As such, Cadbury allowed Kraft Foods to focus solely on the global snacks trade, while leaving its previous grocery business to Mondelez International. The merger greatly improved the competitive position of Kraft, as it was able to rapidly expand into becoming the largest confectionary company. The positioning of Cadbury within international markets was particularly beneficial, as its geographic distribution was highly complementary to its current market access. Cadbury allows Kraft instant access to developing markets in Russia, South America, and South Asia; all important markets for future expansion for the organization. This was projected to increase developing market’s share of net revenues from roughly 20% to 25% as a whole.

Much of the motivation for Kraft was to increase its competitive position and improve overall growth, as its previously heavy focus on developed markets has stymied the company’s expansion into rapidly-growing yet fragile emerging markets. As such, Kraft believed that the combined company would be able to achieve long-term organic revenue growth above 5%, as well as a sustainable earnings per share growth of anywhere from 9% to 11%. This was in comparison to the standalone company, as Kraft only expected revenue growth of 4% with an EPS in crease of 7-9%. Kraft also analyzed Cadbury operations for cost effectiveness and synergies, and as such believed that nearly $675 million in annual cost savings could be achieved by the organization.

While the company significantly benefited from the merger, Kraft shareholders did not necessarily win in the arrangement. The continued back and forth between Cadbury and Kraft had significantly increased the value of Cadbury, meaning that shareholders ended up paying a 40% premium on the pre-September 2009 share price for the firm. This signified a loss of value, at least in the short-term, for Kraft shareholders as the company had to increase debt levels and sell off certain product lines in order to finance the transaction. Such events led to a short-term decline in shareholder value, meaning that shareholders suffered the opportunity cost of the entire ordeal in the potential for future increases in value.

Kraft itself faced difficulties in the aftermath of the merger, as the upfront costs of managing the integration of the companies significantly weighing on its balance sheets. Although Cadbury posted positive sales growth in the quarters during the acquisition talks, sales went flat after the company was fully acquired by Kraft. Even though the Cadbury merger allowed an increase of 30% in revenue, net profit for Kraft in the 4th Quarter 2010 fell by 24% as the costs of the integration were much more significant than anticipated. The company was forced to undertake a one-time $1.3 billion charge for integration costs in exchange for a recurring savings of $675 per year by the end of 2012. As a whole, the merger significantly impacted the short-term operations of the company, as enough resources were undertaken that placed Kraft in a less-than-acceptable financial position. Kraft had to borrow in order to finance the acquisition, and as such, this lowered the short-term profitability of the company as a whole.

The long-term outlook for the organization is much more beneficial, as Cadbury allows the organization to more effectively target its key markets. In this aspect, Cadbury is particularly advantageous, as its market share and strategic partnerships in developing countries is the key for future growth of the Kraft Food brands. This merger has allowed Kraft to quickly expand within these markets with a low long-term cost, as they would otherwise have had to compete in the market against established organizations and attempt to seize market share with less knowledge and experience. There are significant differences between how business is done in the developed and developing world, and brands that do well in developed economies do not always translate their success to that in the developing world. In these instances, organizations frequently acquire smaller brands in order to use their presence as a means of expansion within such markets, as it limits the exposure that the organization would otherwise have. In cases such as these, it is often more cost effective for companies to acquire rather than obtain such market shares through traditional competitive measures, as this is less expensive in the long-term.

For Kraft, entry into new developing markets is a matter of organizational revelance, as these markets are projected to become the dominant engines of growth within the global economy. Global GDP estimates by PricewaterhouseCoopers predict that China, India, and Brazil will rise to be three of the five top economic powers in the year 2050. This follows a slew of other developing nations such as Mexico, Indonesia, Turkey, and Nigeria within the top fifteen. As such, these consumer markets will experience a growing and wealthier middle class that will be the direct beneficiary of economic growth. For well-developed brands such as Kraft, these markets will be key to continued relevance and expansion, as current Kraft markets in North America, Western Europe, and Oceania.

The existing Cadbury supply chain has been particularly effective in allowing the introduction of Kraft products within developing market at much cheaper prices. Previously, Oreo was unable to sell its products within India under $1 USD, as their supply chain and market access prevented any large-scale deployment of their products. However, Cadbury maintains an extensive relationship and trust with small retailers and mom-pop shops that maintain the majority of market share in the country, and as such, was able to negotiate higher volume distribution which allowed a significant drop in price. This allowed a reduction of 90% in the price of Oreo products and allowed them to be placed within 300,000 retail locations in India within six months of the merger. Similarly in Brazil, Kraft products were able to be quickly expanded into an additional 650,000 locations within the country.

Cadbury has also significantly benefited from the arrangement, as the use of a single global supply chain has allowed the introduction of Cadbury products into previously unavailable markets such as Ukraine. This synergy is beneficial to both organizations, as the cost-savings in terms of efficiencies are able to be reinvested into manufacturing, product development, and other key business practices that will ensure greater access to Kraft and Cadbury products, as well as maintain the competitiveness of both brands within the global snacks market. Largely, both brands benefit, as each was having difficulty in expanding outside of their core competencies in terms of markets. In this regard, rather than directly compete for market share within various developing and developed markets, products can be deployed in a way that is synergistic to both interests.

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