Analysis of Kraft’s Takeover of Cadbury

Analysis of Krafts Takeover of Cadbury Overview Of Both Companies Cadbury’s origins date back to almost two centuries when it was founded by John Cadbury who started the business by selling cocoa and tea in Birmingham, UK. Later he expanded by starting a line of beverages after a merger with Indian Schweppes changing the company name to Cadbury Schweppes (Chinn 1998). Successful product developments and launches have enabled Cadbury to boast of an extensive confectionary line consisting of Cocoa Essence, Easter Eggs,Milk Chocolate, Cadbury Fingers, Dairy Milk, BournevilleChocolate, Milk Tray, Flake Creme Egg, Crunchie, Picnic, Curly windy, Wispa boost, Twirl and Time Out (Cadbury 2010). Kraft, on the other hand, is a US company about a century old, which started off as a door to door cheese business but expanded into other confectionary items through many takeovers previously such as Ritz Crackers, Nabisco (Oreos) and Phenix Cheese Corporation (Philadelphia Cheese) to achieve success (Smith 2009). It is second in terms of sales and popularity in the confectionary industry with annual revenues of $42 billion, operating in more than 150 countries (Kraft 2008). The Idea Of A Takeover Due to recessionary times following fall in sales, many companies in the confectionary industry recognized the potential of merging with their competitors to become competitive and enjoy economies of scale (Mauboussin, 2010). Cadbury had continued to be a strong performer in the confectionary industry and shown steady performance and growth in light of the turbulent economic times. Much of Cadbury’s growth was due to its presence in emerging global markets. Kraft was attracted to Cadbury due its strong performance during the economic crisis. This led to Kraft’s proposal to Cadbury of a takeover. The initial offering of $16.3 billion or 740pence per share by Kraft to Cadbury was outright rejected as derisory and an attempt by Kraft to take over Cadbury for cheap. Cadbury has had strong brands whose ico ns are etched in the minds all over the world, an impressive category line and extensive worldwide consumer base. Successful financial overview and steady business model reinforced Cadbury’s belief that it should be an independent company. Kraft’s bid did not come remotely close to reflecting the company’s true worth. Kraft proposed another bid shortly: This comprised of an offer of  £10.1 billion ($17 billion, same terms as the first bid in September-300 pence in cash and 0.2589 Kraft shares per Cadbury shares. The closing price of 9th November reflected the bid valuation of Cadbury at 710 pence which was lower than the share price of 761p on that day. Kraft’s share price: $26.53; Exchange rate (as agreed): $1.66 / GBP. Ratio: 0.2589 Kraft shares per every Cadbury share (26.53/1.66 * 0.2589 =  £ 4.133 + 4.13 =  £ 7.13).This was less than the price of Cadbury on that day and even the initial level of  £ 7.45. Cadbury rejected the offer on the basi s of undervalued Cadbury which was now of a lesser value. It was in fact even lower than the current Cadbury share price. The Cadbury chairman said:â€Å"Under your proposal, Cadbury would be absorbed into Kraft’s low growth, conglomerate business model, an unappealing prospect which contrasts sharply with our strategy to be a pure play confectionery company.†