Kraft Foods Inc is expected to easily win support from Cadbury shareholders for its $18.73 billion (11.68 million pound) takeover of the iconic British chocolatier.
But after an acrimonious four-month takeover battle in which Kraft was painted as a slow-growing purveyor of plastic cheese, winning the hearts and minds of Cadbury workers and its UK consumers might be a tougher task.
All large takeovers have risks when it comes to integrating the two companies, analysts said. But before Cadbury’s board accepted a sweetened offer from Kraft on Jan. 19, Cadbury’s management, unions and even one of the members of Cadbury’s founding families fiercely battled against Kraft’s bid.
“Beyond melding disparate corporate cultures, Cadbury’s public dismissal of Kraft’s business model and management decisions in recent months increases the challenges of this integration,” Morningstar analyst Erin Swanson said.
As late as five days before accepting Kraft’s offer, Swanson noted, Cadbury Chairman Roger Carr was still “talking about how Kraft hadn’t been good at integrating deals, hadn’t been good at improving their own results over a several year history — and now they are part of that business model.”
Even after the deal was announced, influential investor Warren Buffett, whose Berkshire Hathaway is Kraft’s largest shareholder, called the move a “bad deal,” putting more pressure on Kraft Chief Executive Irene Rosenfeld to deliver the cost-saving and revenue growth she has promised.
“Every acquisition has this issue built into it,” Morton Pierce, chairman of law firm Dewey & LeBoeuf’s mergers and acquisitions group, said. “It’s a big deal with a lot of zeros after the price tag, but every acquisition faces pressure to prove the merits to shareholders.”
SAYING YES, BUT WITH REGRET
After acquiescing to Rosenfeld’s bid of 840 pence a share, plus a 10-pence special dividend, Carr still lamented having to sell.
“We have no weapons other than our shareholders’ belief in the value of the company,” Carr was quoted by the Daily Mail as saying. “It really hurts me that this is what’s happened to a brilliant company doing all the right things.”
The same story said Cadbury CEO Todd Stitzer was “in tears” when talking to Cadbury employees about the deal on Jan. 19.
Kraft shares have moved lower since the deal was announced, and based on a Kraft price of $27.96 on Friday morning, the deal was worth about 826.6 pence.
But that decline was not expected to prevent Kraft from obtaining the majority of Cadbury shares it needs for the deal go through, investors and analysts said.
“I don’t hear anyone objecting to the deal,” one top Cadbury investor said.
Kraft is even expected to be close to or exceed the 90 percent level that forces any remaining Cadbury shareholder to sell or else see their Cadbury shares become worthless.
Rosenfeld has promised $675 million of cost savings by the end of the third year after the deal closes, on top of ongoing cost-cutting already in place at Kraft and Cadbury.
A Kraft spokesman would not say what part of those cost savings would come from job cuts, though analysts expect some jobs to be lost when Kraft’s 97,000 employees are combined with Cadbury’s 45,000.
Kraft could take a page from the merger history books about missteps in hostile transactions. Hewlett-Packard’s acquisition of Compaq failed to prove wrong naysayers who felt the combined company would be an ungainly business with disparate brands that failed to mesh.
Yet, other hostile-turned-friendly deals quickly produced results such as Comcast Corp’s acquisition of AT&T Broadband, which helped the cable giant more quickly compete in the voice market.
A key for Kraft will be to really listen to Cadbury employees ideas when it comes to integrating the companies, Swanson said.
“They need to go in with an open mind of how to best integrate that business into your operations, rather than going in with a set plan,” she said.
Kraft has made many overseas acquisitions before, including the 2007 acquisition of the Lu biscuit business from Danone for $7.82 billion. In that deal, Kraft quickly integrated operations in some markets, including China, Indonesia, Malaysia and Russia, but that was an agreed-on transaction from the start and Kraft had a head start in looking at Lu’s operations.
A Kraft spokesman could not say how many jobs were cut in that combination.
“Kraft is well versed in making acquisitions. There may be a few local difficulties but it is not going to do anything to damage the Cadbury brand,” said an industry source with knowledge of the situation.