8/7/2019 Final Chal Raha
1/44
Merger & Acquisition
Merger & Acquisition
With Respect to Kraft & Cadbury deal
PREPARED BY
MOHAMMAD HAMDAN
BATCH - 2009-2011
UNDER THE GUIDANCE OF
DR. P.S.RAI CHAUDHRY
AS A PARTIAL FULFILLMENT OF MBA PROGRAMME OF
JAMIA HAMDARD, NEW DELHI
8/7/2019 Final Chal Raha
2/44
Merger & Acquisition
Certificate of Completion
This is to certify that dissertation report on MERGER & ACQUISITION WITH RESPECT
TO KRAFT & CADBURY DEAL prepared by "Mohammad Hamdan" of MBA 2009-11
batches is his genuine effort under my guidance and supervision.
Dr. P.S.Ray ChaudhryFaculty Guide
8/7/2019 Final Chal Raha
3/44
Merger & Acquisition
DECLARATION
I hereby declare that this Project on MERGER & ACQUISITION WITH RESPECT TOKRAFT & CADBURY DEAL has been written and prepared by me during the academic
year 2009-2011.This project was done under the able guidance and supervision of Dr.P.S.Ray
Chaudhry, Faculty in partial fulfillment of the requirement for the Master of Business
Administration Degree course of Jamia Hamdard.
I also declare that this project is the result of my own effort and has not been submitted to any
other institution for the award of any Degree or diploma.
MOHAMMAD HAMDAN
Enrl no: 2009-502-068
8/7/2019 Final Chal Raha
4/44
Merger & Acquisition
Acknowledgement
I would like to express deep sense of hearty and special gratitude to my faculty Guide Dr.P.S. Ray Chaudhry for his valuable suggestions and constant help and encouragement
throughout the advancement of this project report
I am deeply indebted to Dr. P.S. Ray Chaudhry without whose help, stimulating
suggestions and encouragement this project would not have seen the light at the end of the
tunnel.
Last but definitely not the least; I convey special thanks to all my colleagues for their morale
boosting and valuable ideas.
MOHAMMAD HAMDANMBA GEN 2009-11
2009-502-068
8/7/2019 Final Chal Raha
5/44
Merger & Acquisition
Table of Content
1. Executive summary
2. Introduction to the Topic
3. Company Profile
4. Chapter 1 Literature Review
Defining Merger & Acquisition
Distinction between Merger & Acquisition
Classification of Merger & Acquisition
Purpose of Merger & Acquisition
Issues in Merger & Acquisition
5. Chapter 2 Research Methodology
6. Chapter 3 Data Analysis
Valuation
SWOT Analysis
Porters 5 forces model
Brand Valuation
7. Chapter 4 - Conclusion & Recommendations
8. Annexure
9. Bibliography
8/7/2019 Final Chal Raha
6/44
Merger & Acquisition
INTRODUCTION
Background
Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate
finance world. Every day, investment bankers arrange M&A transactions, which bring
separate companies together to form larger ones. When they're not creating big companies
from smaller ones, corporate finance deals do the reverse and break up companies through
spin-offs, carve-outs or tracking stocks. Not surprisingly, these actions often make the news.
Deals can be worth hundreds of millions, or even billions, of dollars or rupees. They can
dictate the fortunes of the companies involved for years to come. For a CEO, leading an
M&A can represent the highlight of a whole career. And it is no wonder we hear about so
many of these transactions; they happen all the time. Next time you flip open the newspapers
business section, odds are good that at least one headline will announce some kind of M&A
transaction. Sure, M&A deals grab headlines, but what does this all mean to investors? Toanswer this question, this report discusses the forces that drive companies to buy or merge
with others, or to split-off or sell parts of their own businesses. Once you know the different
ways in which these deals are executed, you'll have a better idea of whether you should cheer
or weep when a company you own buys another company - or is bought by one. You will
also be aware of the tax consequences for companies and for investors
COMPANY PROFILE
CADBURY
Cadbury India is a fully owned subsidy of Kraft Foods Inc. The combination of Kraft Foodsand Cadbury creates a global powerhouse in snacks, confectionery and quick meals.
Cadbury was originally begun in 1824 by Wealthy Quaker John Cadbury in Birmingham andit was initially opened a shop selling coffee, tea and chocolate and cocoa drinks. Cadburysintroduced in 1860s Cocoa Essence, which was made with pure cocoa butter, was the
beginning of todays chocolate. Cadbury manufactured its first milk chocolate in 1897 andlater they moved all their manufacturing to Bourneville. The Bourneville factory employed
8/7/2019 Final Chal Raha
7/44
Merger & Acquisition
2,600 people and Cadbury was incorporated as a limited company. Cadbury introduced theirfamous brand Dairy Milk in 1905.
Later the company made its first major merger in 1921 with its rival JS Fry & Sons and it ledto another landmark with production of its first filled egg product in 1923. As Quakers, the
Cadbury family always cared about the well-being of its staff, setting new standards forworking and living conditions in Victorian Britain. By the mid-1930s, more than 100 acresaround the Bourneville factory were devoted to recreation.
In 1969, Cadbury merged with Schweppes, which was a well-known British brand thatmanufactured carbonated mineral water and soft drinks and formed Cadbury Schweppes.Later it became a powerful force in the global food industry by acquiring Sunkist, CanadaDry, Typhoo Tea and some others companies.
Cadbury Schweppes revealed in 2007 that it was planning to split its business into twoseparate entities: one focusing on its main chocolate and confectionery market; the other onits US drinks business. The demerger took effect in 2008, with the drinks business becomingDr. Pepper Snapple Group Inc. Cadburys main presence is in the sectors of chocolate, gumand candy and it earns its most of its revenue from chocolate.
In India, Cadbury began its operations in 1948 by importing chocolates. After 60 years ofexistence, it today has five company-owned manufacturing facilities at Thane, Induri (Pune)and Malanpur (Gwalior), Bangalore and Baddi (Himachal Pradesh) and 4 sales offices (NewDelhi, Mumbai, Kolkata and Chennai). The corporate office is in Mumbai. Currently,
Cadbury India operates in four categories viz. Chocolate Confectionery, Milk Food Drinks,Candy and Gum category. In the Chocolate Confectionery business, Cadbury has maintainedits undisputed leadership over the years. Some of the key brands in India are Cadbury DairyMilk, 5 Star, Perk, clairs and Celebrations.
Since Cadbury started in India more than 60 years ago, Cadbury is the largest confectioner inthe country, commanding 70% of India's chocolate market and 30% in sugar boiled
confectionery category. Cadburys famous brands in India are Dairy Milk, 5 Star, Perk,Eclairs and malted milk additive Bournvita. With annual revenues of approximately $50billion, the combined company is the world's second largest food company, making deliciousproducts for billions of consumers in more than 160 countries. The company employsapproximately 140,000 people and has operations in more than 70 countries.
KRAFT FOOD Inc.
8/7/2019 Final Chal Raha
8/44
Merger & Acquisition
Kraft Foods, Inc. was formed in 1989 and it has its origins from three American companies:1) Kraft, 2) General Foods, and 3) Oscar Mayer. Each of these companies had significantcontributions to the food processing sector in the America.
Kraft was originally founded in 1903 by J.L. Kraft in Chicago and their initial business waspurchasing and reselling cheese. The company began manufacturing processed cheese in1914, and the products were soon used by the U.S. armed services during 1st World War.Kraft merged with the Phenix Cheese Corporation in 1928 to become Kraft-Phenix CheeseCorporation.
Later in 1930, Kraft-Phoenix Cheese Corporation was bought by National Dairy ProductsCorporation, but the company continued as an independent subsidiary of National DairyProducts Corporation. The parent company changed its name to Kraft Corporation in 1969,then to Kraft, Inc. in 1976.
General Foods Corporation was originally formed by C.W. Post in 1985 under the name ofPostum Cereal Company. The Postum Cereal Company acquired the Jell-O Company in 1925and the allied companies went through various name changes and finally renamed as GeneralFoods Corporation. The General Foods Corporation was in the business of quick freezingfood, instant coffee and Tang breakfast beverage crystals.The company Oscar Mayer had its roots in the meat business since 1873 and was specialistsin processed meat such as sausages, and hams. The company had a very good reputation for
quality products and good customer satisfaction and remained as a pioneer in the processedmeat industry till it was bought by General Foods Corporation in 1981.
Later, General Foods Corporation and Kraft Inc ware acquired by the tobacco giant Philip
Morris Companies Inc and it has finally lead to Kraft General Foods, Inc in 1989. Now, the
Kraft Foods Inc is owned by Altria Group and it has emerged as the largest confectionery,
food, and Beverage Corporation headquartered in the United States and the second-largest in
the world after Nestl. In 2008 Kraft foods Inc has generated $ 42 billion in revenue, with
90,000 employees spread over 70 countries in the world
8/7/2019 Final Chal Raha
9/44
Merger & Acquisition
CHAPTER 1
LITERATURE REVIEW
8/7/2019 Final Chal Raha
10/44
Merger & Acquisition
Defining M&A
The Main Idea one plus one makes three: this equation is the special alchemy of a merger or
an acquisition. The key principle behind buying a company is to create shareholder value
over and above that of the sum of the two companies. Two companies together are more
valuable than two separate companies - at least, that's the reasoning behind M&A. This
rationale is particularly alluring to companies when times are tough. Strong companies willact to buy other companies to create a more competitive, cost-efficient company. The
companies will come together hoping to gain a greater market share or to achieve greater
efficiency. Because of these potential benefits, target companies will often agree to be
purchased when they know they cannot survive alone.
Acquisitions
An acquisition may be only slightly different from a merger. In fact, it may be different in
name only. Like mergers, acquisitions are actions through which companies seek economies
of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions
involve one firm purchasing another - there is no exchange of stock or consolidation as a new
company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other
times, acquisitions are more hostile. In an acquisition, as in some of the merger deals wediscuss above, a company can buy another company with cash, stock or a combination of the
two. Another possibility, which is common in smaller deals, is for one company to acquire all
the assets of another company. Company X buys all of Company Y's assets for cash, which
means that Company Y will have only cash (and debt, if they had debt before). Of course,
Company Y becomes merely a shell and will eventually liquidate or enter another area of
business. Another type of acquisition is a reverse merger, a deal that enables a private
company to get publicly-listed in a relatively short time period. A reverse merger occurswhen a private company that has strong prospects and is eager to raise financing buys a
8/7/2019 Final Chal Raha
11/44
Merger & Acquisition
publicly-listed shell company, usually one with no business and limited assets. The private
company reverse merges into the public company, and together they become an entirely new
public corporation with tradable shares. Regardless of their category or structure, all mergers
and acquisitions have one common goal: they are all meant to create synergy that makes the
value of the combined companies greater than the sum of the two parts. The success of a
merger or acquisition depends on whether this synergy is achieved.
Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things. When onecompany takes over another and clearly established itself as the new owner, the purchase is
called an acquisition. From a legal point of view, the target company ceases to exist, the
buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense
of the term, a merger happens when two firms, often of about the same size, agree to go
forward as a single new company rather than remain separately owned and operated. This
kind of action is more precisely referred to as a "merger of equals." Both companies' stocks
are surrendered and new company stock is issued in its place. For example, both Daimler-
Benz and Chrysler or Arcellor and Mittal ceased to exist when the two firms merged, and a
new company, DaimlerChrysler and Arcellor-Mittal, was created. In practice, however,
actual mergers of equals don't happen very often. Usually, one company will buy another
and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a
merger of equals, even if it's technically an acquisition. Being bought out often carries
negative connotations, therefore, by describing the deal as a merger, deal makers and top
managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together is in
the best interest of both of their companies. But when the deal is unfriendly - that is, when the
target company does not want to be purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the
purchase is friendly or hostile and how it is announced. In other words, the real difference lies
in how the purchase is communicated to and received by the target company's board of
directors, employees and shareholders.
8/7/2019 Final Chal Raha
12/44
Merger & Acquisition
CLASSIFICATIONS OF MERGERS & ACQUISITION
Horizontal Merger
They result in forming large firm which can give the benefit of economics of scaleand increased competitive power. Such merger may attract regulatory control because
of their potential negative effect on competition. In such timing plays crucial role. Ex:Merger of RPL with RIL in the year 2009.
Vertical Merger
In this kind of merger reliability of input availability is ensured and better
management of production and inventory is achieved. Common ownership ofdifferent activities of the value chain helps in reconciliation of conflicting interest andmotives. Opportunity is there to gain competitive power through controlling input
prices for own consumption and higher prices. Such merger have potential to increaseentry barrier and hence may perceived as anti competitive. Ex : Maersk Logistics &Damco merge on June 2009 .
Conglomerate Merger
Basically there can be 3 types of conglomerate mergers:-
Entry to related business through product extension,
Entry into new geographic market,
Entry into unrelated business activities.
8/7/2019 Final Chal Raha
13/44
Merger & Acquisition
Such mergers require special competence and skill to manage different function suchas R&D, Operation, Marketing, etc. pertaining to each diversified business. Synergyhelps gain competitiveness and cost advantage provided there are certain levels ofrelatedness, and assets and capabilities acquired are complementary to the existing
ones, even though product market scope of each business is different. Ex: Merger ofInfo vision and Serco Group on Nov 2008.
PURPOSE OF MERGER & ACQUISITION
Expend Market
o Reduce Competition
o Access New Product Diversification
o Strengthen Distribution Channel
o Get right of patent.
Strengthen production Facilities
o Economies of Scale
o Standardization of input and output
o Incorporate best manufacturing operates
Enhance financial Strength
o Improve liquidity
o Opportunity to dispose surplus land or asset
o Increase Borrowing limit
o Take advantage Of Tax Benefit
o Improve EPS
8/7/2019 Final Chal Raha
14/44
Merger & Acquisition
Improve General Image
o Improve Image
o Attract managerial talent
ISSUES IN MERGER & ACQUISITION
Financial analysis of the target
The managers of acquiring should careful in assessing the target financial figures particularly with regards to the accounting policies underline each figure, theassumption made on revenue and capital expenditure, quality of asset indicated in the
balance sheet vis--vis those physically available as well as disclosed/undisclosed
legal encumbrances, provision made and finally level of performance againstdomestic and global benchmark.
Valuation of the target
Investors in a company that is aiming to take over another one must determinewhether the purchase will be beneficial to them. In order to do so, they must askthemselves how much the company being acquired is really worth.
Naturally, both sides of an M&A deal will have different ideas about the worth of a
target company: its seller will tend to value the company at as high of a price aspossible, while the buyer will try to get the lowest price that he can. There are,however, many legitimate ways to value companies. The most common method is tolook at comparable companies in an industry, but deal makers employ a variety ofother methods and tools when assessing a target company. Here are just a few ofthem: Comparative Ratios - The following are two examples of the many
comparative metrics on which acquiring companies may base their offers:
8/7/2019 Final Chal Raha
15/44
Merger & Acquisition
o Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring
company makes an offer that is a multiple of the earnings of the target
company. Looking at the P/E for all the stocks within the same industry
group will give the acquiring company good guidance for what the target'sP/E multiple should be.
o Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring
company makes an offer as a multiple of the revenues, again, while being
aware of the price-to-sales ratio of other companies in the industry.
Replacement Cost
In a few cases, acquisitions are based on the cost of replacing the target
company. For simplicity's sake, suppose the value of a company is simply the
sum of all its equipent and staffing costs. The acquiring company can literally
order the target to sell at that price, or it will create a competitor for the same
cost. Naturally, it takes a long time to assemble good management, acquire
property and get the right equipment. This method of establishing a price
certainly wouldn't make much sense in a service industry where the key assets
- people and ideas - are hard to value and develop.
Discounted Cash Flow (DCF)
A key valuation tool in M&A, discounted cash flow analysis determines a
company's current value according to its estimated future cash flows.
Forecasted free cash flows (operating profit + depreciation + amortization of
goodwill capital expenditures cash taxes - change in working capital) are
discounted to a present value using the company's weighted average costs of
capital (WACC). Admittedly, DCF is tricky to get right, but few tools can
rival this valuation method.
Basis of Exchange
8/7/2019 Final Chal Raha
16/44
Merger & Acquisition
There are 3 principal approaches to acquiring shares of another company:-
Cash for stock, in which the acquiring company acquires the shares of the
acquired company through payment of cash.
Debenture for stock, in which the acquiring company acquires the shares ofthe acquired company through issuing debenture.
Stock for stock, in which the acquiring company issue its own shares to buythe shares of the acquired company.
.
8/7/2019 Final Chal Raha
17/44
Merger & Acquisition
CHAPTER 2
RESEARCH
METHODOLOGY
8/7/2019 Final Chal Raha
18/44
Merger & Acquisition
CHAPTER 3
DATA ANALYSIS
8/7/2019 Final Chal Raha
19/44
Merger & Acquisition
Valuation of Merger and acquisition
A merger is a combination of two corporations in which only one corporation survives and
the merged corporation goes out of subsistence. Alternatively, in merger two corporations
Combine and share their resources in order to accomplish mutual objectives and both
companies bring their own shareholders, employees, customers and the community at large.
Acquisition takes place when one firm is purchasing the assets or shares of another company.
Mergers are often categorized as horizontal, vertical, or conglomerate. A horizontal merger is
one that takes place between two firms in the same line of business whereas vertical merger
involves companies at different stages of production. The buyer expands backwards in the
direction of the source of the raw material or forward in the direction of the customer. Thelast one, i.e., conglomerate merger involves companies in unrelated line of business. This
distinction is very much necessary to make and understand the reasons for the mergers.
The scale and the pace at which merger activities are coming up are remarkable. The recent
booms in merger and acquisitions suggest that the organizations are spending a significant
amount of time and money either searching for firms to acquire or worrying about whether
some other firm will acquire them. Also, mergers are regarded as one of the activities thepurpose of business expansion or a measure of external growth in contrast to internal
growths. The recent phenomenon booms in mergers and acquisitions would increase at a
much faster rate in near future because the world markets are becoming more integrated
because of open trade policies and hence more and more companies are adopting and forming
strategic alliances in order to compete in the competitive world and to maintain their market
shares.
Merger and acquisition decision is an investment decision. This is the most important
decision, which influences both the acquiring firm and the target firm, which is to be
acquired. An organization cannot make that crucial decision without incisive analysis by
financial planners and corporate managers. The acquiring firm must correctly value the firm
to be acquired and the acquired firm must get the returns for the goodwill they have created
over the years in the market. Growth through acquisition is occurring in an unprecedented
number of companies today as strategic acquisitions replace the once prevalent hostile
8/7/2019 Final Chal Raha
20/44
Merger & Acquisition
takeovers by corporate raiders. In the current business environment, it is vital to understand
how to blend strategic and financial concepts to evaluate potential acquisitions.
Motives
The findings from the theoretical material and the empirical investigation will be analyzedboth horizontally and vertically according to the following: -
There are two types of motives involved in merger and acquisition and these are Explicitand Implicit motives.
Explicit Motives
Synergy: Synergy means that the merged firm will have a greater value than thesum of its parts as a result of enhanced revenues and the cost base.
Economies of Scale: Economic of scale refer to the reduction in unit costachieved by producing a large volume of a product.Horizontal mergers aim at achieving economies of scale. This phenomenoncontinues while the firm grows to its optimal size, after which a firm experiencesdiseconomies of scale.
Economies of Vertical Integration: Economies of vertical integration areachieved in vertical mergers. It makes coordination of closely related operating
activities easier.
8/7/2019 Final Chal Raha
21/44
Merger & Acquisition
Entry to New Markets and Industries: A firm that wants to enter a new marketbut lacks the know-how can do so through the purchase of an existing player inthat product or geographical market. This makes the two firms worth moretogether than separately.
Advantages: Past losses of an acquired subsidiary can be used to minimizepresent profits of the parent company and thus lower tax bills. Thus, firms have areason to buy firms that have accumulated tax losses.
Diversification: One of the reasons for conglomerate mergers is diversification ofrisk. There are two types of risks associated with businesses- systematic andunsystematic risk. Systematic variability cannot be removed by diversification andhence mergers are not able to eliminate this risk. Though, unsystematic risk can bespread through mergers.
Managerial Motives: The management team of the acquiring firm tends tobenefit from the merger activity. The four most important managerial motives formerger are empire building, status, power and remuneration.
Implicit Motives
Hubris: It is like a maturity test for the owners and the company boards ofdirectors when they see the opportunity to form a new business cycle.
Excess of Money: When a company has excess of money, the question of what todo with it eventually comes up and this leads towards merger and acquisition.
Tax Considerations
An acquisition can be taxable or tax-free. In a taxable acquisition, shareholders of the selling
firm are treated for tax purposes as having sold their shares and are liable to pay tax on any
capital gains or losses. In a tax-free acquisition, the selling shareholders are viewed as
exchanged their old shares for similar ones, and they do not experience any capital gains or
losses. The taxes paid by the merged firm also depend on the tax-status of the acquisition.
There is no revaluation of assets in a tax-free acquisition, whereas, in a taxable acquisition,
the assets are devalued and any increase or decrease is treated as a taxable gain or loss
8/7/2019 Final Chal Raha
22/44
Merger & Acquisition
Valuation throughDCF
Projected
2004 2005 2006
2007
2008
2009 2010 2011 2012 2013
Free Cash flow 475 665 472 527 124 133.35
143.41
154.23
165.87
178.38
Present Value OfCash flow
0 0 0 0 0 121.23
118.52
115.88
113.29
110.76
Total Present Value 579.676Terminal Value 9632.3
6Pv Of Terminalvalue
5980.94
Enterprise Value 6560.62
Amt in poundmillion
Cadbury & Kraft Deal
After almost 1 year of twists and turns, Kraft has won the race to acquire Cadbury giantgroup. The bidding war between Kraft and British company Cadbury was riveting and endedin a rapid-fire auction. Initial reactions to the deal were highly diverse and retail investors
were completely puzzled by the market reaction.
Going by the stock market reaction, the acquisition was a big blunder. Usually it has beenseen in the past that the stock price of the acquired company are increased and of theacquiring company are decreased, but in this case it was vice a versa. It might be due toundervaluation of the acquired company. Prior of the deal the stock price of Cadbury wasshowing hardly any changes but within 3 month of deal the stock price of Cadbury has shownthe growth of around 3 %. Whereas the stock price of kraft ltd has shown the growth of 1.5 %on the deal date.
8/7/2019 Final Chal Raha
23/44
Merger & Acquisition
Investors were worried about the financial risks of such a costly deal. Media reaction to the
deal had been positive to the deal. Almost all the reports were adulatory while editorialspraised the coming of age of Indian industry. A prominent financial daily presented the dealalmost as revenge of the natives against the old colonial masters with a picture of Londoncovered in our national colours.
Expected growth & Synergy
Cadbury has more instant consumption channels like gas stations, corner shops which are
well penetrated by Cadbury products in many countries whereas Kraft is more concentratedon supermarket and groceries where margins are lower, so when they are together, overalldistribution will be higher for both and the margins will increase.
Cadbury has big business in some emerging markets like India, South Africa, Mexico andTurkey where Kraft is relatively weak or not existing; similarly Kraft also has strongemerging markets likes Brazil and China which will help the Cadbury products.
There are complementary products, when two companies bring together their portfolio, inmany markets they enjoy benefits of a larger and well balanced products. The tie up willgenerate the number one global confectionery player with 14.8% share slightly above of marswho has 14.6%.
The combined company target is long term organic revenue growth in excess of 5% andsustainable long term eps growth of 9 to 11%, whereas Kraft targets long term organicgrowth of 4% and EPS growth 7 to 9%.
Cadbruy is highly complementry to Krafts geographical tootprint and will increasedeveloping markets contribution to Krafts net revenue from about 20% to about 25%.
Cadbury stock price Kraft stock price
8/7/2019 Final Chal Raha
24/44
Merger & Acquisition
Kraft management has been banging the familiar synergy drum hard regarding thesignificance of the acquisition, and calm itself a disciplined buyer. While increasing exposureto developing markets does sound appealing and increasing top line growth by 1 % on a largerevenue base is worthy of applause. Based on the proposed price of 745 pence per ordinary
share or $50 per ADR, cadbury needs to deliver top line growth of 10 % and EBITDAmargins of 27 % each year from 2010 to 2014 to justify the purchase price. Historicaly,Cadbury,s originc top line growth has beent in the range of 4 to 6% and its EBITDA marginshave declined from 22 % in 2004 to 15 % in 2008.
Turning to kraft foods, on a standalone basis, if Kraft is able to deliver annualized top linegrowth of 4 %, grow EPS at the high end of its targeted 7-9% range, and achieve higher assetefficiencey via productivity gains as mangement has been promoising. Its shares could beworth as much as &32. In addition, kraft will likely use $8 billion new debt to finance abouthalf of the purchase, increasing its leverage to a higher level amidcontinous economic
uncertainities.
SWOT Analysis
SWOT analysis is a strategic planning tool to evaluate a companys Strengths, Weaknesses,Opportunities, and Threats involved in a project or in a business venture. It provides a goodoverview whether the companys overall situation is fundamentally healthy or unhealthy.Doing the SWOT analysis on Kraft-Cadbury group, will provide us information about its
strengths (what it can do, what are its core competencies) and weaknesses (what it cannot do,what are the missing capabilities) in addition to opportunities (potential favorable conditions,external market opportunities) and threats (potential unfavorable conditions, external threat to
profitability).
SWOT Analysis OF Cadbury & Kraft
Strengths Weaknesses
Cadburys strong brand name Different corporate culturesEstablished distribution network of Cadbury Previous failure of Kraft in IndiaKrafts broad product range
Opportunities Threats
Huge market potential CompetitionInnovation Of products Different local tastes, substitute products
Strengths
Cadburys strong brand name: Cadbury is a major player in Indian confectionarysegment. It gives a strong and complementary strategic fit in Indian market for the
8/7/2019 Final Chal Raha
25/44
Merger & Acquisition
combined group. Cadburys main source of revenue is from chocolate marketwhich is 70%. It captured the market with affordable prices.
1
Distribution networks: Cadbury is having a very strong distribution network. It ishaving tie-up with 1.2 million shops throughout India. This is an added advantageto Kraft, as it need not start from the scratch to form distribution networks.
Krafts broad product range: Kraft is having brands ranging from cheese, biscuitsto chocolates and its products are famous worldwide. So the combined group canoffer different and new variety of products to the Indian consumers.
Weaknesses
Different corporate cultures: Since the acquisition has happened recently, Kraftand Cadbury have a lot to work on integrating their cultures and work practices tocreate a strong synergy between both companies. Differences in managementstyles and operating procedures can be hard to resolve. So it will take some towork on the differences, which may not be very productive in their strategic
planning.
Previous failure of Kraft in India: In 2003, Kraft made a futile attempt to enterinto Indian market with the introduction of powered orange drink. Kraft cheeseand Toblerone chocolates are imported products and seen as high end products in
India. So the Kraft might be considered as expensive brand by many people inIndia.
Opportunities
Huge market potential: India is a fast developing country maintaining an averagegrowth rate 8-10% even in the economic slowdown. Both biscuit and snacksectors are experiencing a huge growth around 15-20% every year. Kraft-Cadburycan target to capture future market by penetrating in to urban areas, where the
buying power of people is steadily increasing. So all together there is huge marketpotential.
Innovation of products: A large segment of snacks industry is still occupied by thetraditional Indian sweets and snacks. So if Kraft-Cadbury come-up with somegood innovative products tailored to the Indian tastes, then there is hugeopportunity to tap that sector.
Threats
Competition: There is already huge competition from the existing players whohave strong position in the Indian market such as Britannia, Nestle, Parle, Pepsi
8/7/2019 Final Chal Raha
26/44
Merger & Acquisition
co, and Amul. Some of those competitors have very diverse objectives andpowerful strategies to expand their market share, so competition from existingvendors is threat.
Different local tastes: India is a big country with 28 different states and cultures.Every state/ culture has their own tastes that differ much from the others. Eachstate is having its own traditional food preferences and life styles. So looking atIndia as one entity and introducing products that are suitable and acceptable tomajority of states is a challenging task.
Five Forces Model
Porters Five-Forces Model is a key analytical tool to find out how strong are the competitiveforces and to understand where power lies in a business situation. Porters five forces modelis a framework for modeling the industry as being influenced by five forces: Supplier Power,Buyer Power, Competitive Rivalry, Threat of Substitution and Threat of New Entry. We feltthat application of Porters five forces methodology will provide us a good analysis for ourfirst question. So we have applied five forces model in the context of Indian marketconditions, especially focusing those sectors of biscuits and snacks. Applying Porters five
forces model to the marketing conditions, on one hand it will provide us a clear idea abouthow much is threat due to the entry of new players, how strong is the bargaining power of thesuppliers, how well is the buying power of buyers and how much influence they can cast onthe market conditions. On other hand it will gives us an idea about how strong is thecompetitive rivalry from the competitors providing products of similar category and how wellis the threat due to the substitution products that are offered as alternatives to the Kraft-Cadburys intended products. Having a clear-cut understanding of where power lies, willinfluence in crafting strategy to take advantage of favorable forces and to improve situationwhere the forces are unfavorable.
Five Forces Model
8/7/2019 Final Chal Raha
27/44
Merger & Acquisition
Suppliers of inputs
The basic ingredients and commodities used in biscuits and snack sectors areprimarily wheat, sugar, salt etc. India is being a primarily agricultural country, thereare many suppliers providing these commodities to the companies producing biscuitsand snacks, so they act as players with having very little or no power over the controlof the prices. So we have evaluated the supplier force as moderate to normal.
Potential New Entrants
The Indian market is attractive to many international companies because it is acountry with 2nd largest population in the world with a large growth in the markets.So we have evaluated the force associated with the threat of entry from new rivals is
strong due to the following reasons. There are low entry barriers due to lack of regulatory policies, standards and
trade restrictions in the industry.
The fact that buyer demand is growing rapidly.
The markets in the developed countries are already saturated in biscuit andsnack sectors, so most of the companies are targeting enter into emergingmarkets like India. Hence there will be many entry candidates.
Buyers
Buyers cost to switch brands is low as the prices of products of biscuit/snacksare at the basic level.
8/7/2019 Final Chal Raha
28/44
Merger & Acquisition
The population of buyers is huge.
Buyer demand is growing relatively quickly because of rise in the incomelevels.
In rural areas the buyers dont have many other options due accessibility.
Due to the above reasons, we can conclude that buyers force is strong.
Rivalry among competing sellers
Due to the following reasons, we conclude that competitive force among the rivals isstrong.
Already there are many competitors who are very active in these sectors.
The number of rivals varies due to sellers from unorganized sectors
Buyers cost to switch brands is very low
Some of the rivals have diverse objectives and powerful strategies.
Substitutes
In India there are local traditional snack and sweet products offering toughcompetition as substitute products. Especially in rural areas these traditional productshave strong influence and are offered at very affordable prices. So we consider themas Strong force.
Impact of Deal On Brand Valuation
Question 1: Age Group
8/7/2019 Final Chal Raha
29/44
Merger & Acquisition
8/7/2019 Final Chal Raha
30/44
Merger and Acquisition
Question 2: Category Of The sample Size
Question 3: Is there any change in the policies after the deal?
8/7/2019 Final Chal Raha
31/44
Merger and Acquisition
Question 4: If yes, then in which field?
Question 5; whether supply policies are better know
8/7/2019 Final Chal Raha
32/44
Merger and Acquisition
Question 6; Is this deal has help the Kraft to increase the sale of its product
`
Question 7; If yes, then which factors it has led
8/7/2019 Final Chal Raha
33/44
Merger and Acquisition
Question 8; what you think who is going to get more benefits from the deal
Question 9 In which field ( for Cadbury)
8/7/2019 Final Chal Raha
34/44
Merger and Acquisition
For Kraft
Question 10; Which have more competitive promotional policies with respect to itscompetitors
8/7/2019 Final Chal Raha
35/44
Merger and Acquisition
CHAPTER 4
CONCLUSION &RECOMMENDATIONS
8/7/2019 Final Chal Raha
36/44
Merger and Acquisition
Conclusions and Recommendations
Due to annual growth of 15-20% in biscuit and snack industries in India, Kraft-Cadburygroup has a huge opportunity for entering/expanding into these sectors. Also, strong presenceof Cadbury brand name and distribution network in the Indian market is an added advantage.But the analysis of market situation using strategic group mapping and five forces modelreveals that there is a tough competition from the existing companies in these sectors. Ofcourse there are lot of issues on which Kraft-Cadbury group has to work on, such as mergingof their corporate cultures, designing innovative products to suit to the Indian customers etc.In spite of those issues, rapidly expanding biscuit and snack markets in India is very muchlucrative to Kraft-Cadbury group.Based on our analysis, we would like to put forth the following recommendations.
Take advantage of Cadbury brand name and distribution network
The purple wrapping of Cadbury chocolate bars is very familiar Indian consumers, sousing Cadbury brand name along with Krafts brand name will give a native feeling tothe consumers. Also Cadburys strong distribution network is an added asserts, Kraft-Cadbury should make use of it to promote new products to reach the rural as well asthe urban markets in India.
Be Innovative and selective in products
Kraft has a lot of its own global brands, which it would like to push them to the Indianmarket. But Kraft-Cadbury group has to know what the local markets are ready forand they have to choose carefully which products they want to sell in Indian markets,otherwise it might not be successful. Also, to get a good foothold in the Indianmarket, innovation is a critical aspect as still there is strong competition fromtraditional sweets and snacks. So Kraft-Cadbury should be innovative and creative indesigning new products for Indian markets.
Think Globally, Act Locally
Each state in India is having its own culture, life styles and their own food tastes. Sodesigning products that suits to many different tastes is quite challenging. In this caseKraft-Cadbury group can take the approach followed by PepsiCo in launching a verysuccessful snack brand KurKure, which was launched in different flavors to suit todifferent tastes and also managed to take it smoothly into the people by launching the
products during the festivals and other cultural events. In this aspect, even Cadburyhas been slower in tailoring their products to Indian tastes. So Kraft-Cadbury group
should really work on how best they can tailor their products to Indian tastes and how
8/7/2019 Final Chal Raha
37/44
Merger and Acquisition
effectively they can take them to consumers using advertisements and other propaganda in localized trends. Furthermore, introducing new products into themarket, while understanding the customer needs, can create brand loyalty.
Concentrate different segments with varied price range
To give a stiff competition to the existing players, Kraft- Cadbury should come upwith affordable prices for their products. The buyers segment in India is quitestratified according to their purchase power. So targeting different segments with
products of different price ranges will be useful. In this way they can spread to therural markets by having products with low price range, at the same time productshaving medium to high price can be targeting towards urban population. Also Kraft-Cadbury group can maximize profits by using a price discrimination strategy for same
products that is setting up lower prices in rural areas and slightly higher prices at theurban areas and thereby to target to a wider consumer base.
8/7/2019 Final Chal Raha
38/44
Merger and Acquisition
Annexure
A. Questioner
1. Name...............................
2. Age Group
20-35............... 35-45......................... Above 45....................
3. Category
Retailer..................... Wholesaler.....................
Distributor.....................
4. Is there any change in the policies after the deal?
Yes................ No................
5. If Yes, then in which field
Distribution policies................. Financial Policies...............
Promotion Policies............
6. Whether supply policy is better know
Yes............... No............
.
7. Is this deal has help the Kraft to increase the sale of its product
Yes..................... No.............
CADBURY & KRAFT DEAL
8/7/2019 Final Chal Raha
39/44
Merger and Acquisition
8. If yes, Then which factors it has led
Brand image............... Profit Margin............... Customer
Demand.................
9. What you think who is going to get more benefits from this deal?
Cadbury............. Kraft...............
10.In which field
Market area........... Brand Image.............. Financial...............
Expertise..........
11.Which have more competitive policies related to promotion, with respect
to its competitor?
Cadbury..................... Cadbury & Kraft...............
12.Any
suggestion ....................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
.......................................................
Thanking You
Your signature
B. Annual Reports
8/7/2019 Final Chal Raha
40/44
Merger and Acquisition
Cash Flow2008 2007 2006 2005 2004
Net Cash from operatingActivities 469 812 620 891 745Additional Funding of past
service pension 30 48 67 31 0Demerger financial cost 53 0 0 0 0
Income Tax paid on Disposal 44 12 83 0 0
Net Capital expenditure -482 -352 -300 -261 -259
Net dividend received or paid 10 7 2 4 -11
Free Cash Flow 124 527 472 665 475
Balance Sheet
2008 2007 2006 2005 2004
Asset Employed
Intangible Asset 3973 6332 5903 5648 5757
Property Plant Equipment 1761 1904 1664 1446 1464
Retirement benefit asset 17 223 0 0 0
Other non current asset 239 208 248 567 419
Asset held for sale 270 71 22 945 5Inventory and trade and otherreceivables 1834 2018 1914 1893 1859
other Current asset 303 87 87 114 30
Cash & Short term investment 498 495 395 379 346
Total Asset 8895 11338 10233 10992 9880
Toatal current liabilities -2048 -1920 -1862 -1841 -1696Liabilities Directly associated Withasset -97 -18 -9 -291 0
Total non current liabilities -188 -1198 -1085 -1124 -1106
Provision -368 -172 -73 -53 -77
Retirement benefit obligation -275 -143 -204 -369 -485
5919 7887 7000 7314 6516
Financed By Gross Borrowing 2385 3714 3304 4279 4216
Minority Asset 12 11 8 27 229
Called Up Share capital 136 264 262 260 259
Share premium 38 1225 1171 1135 1098
Retained Earning 3348 2673 2255 1613 714
5919 7887 7000 7314 6516
Net Debt
Gross Borrowing 2385 3714 3304 4279 4215
Less Cash -498 -495 -395 -379 -346
1887 3219 2909 3900 3869
8/7/2019 Final Chal Raha
41/44
Merger and Acquisition
Note: Amount in Pound millionLinked: invetis.com/cadbury-ir/report/ar-2008.pdf
8/7/2019 Final Chal Raha
42/44
Merger and Acquisition
REFRENCES & BIBLOGRAPHY
1. Kraft Foods, Inc. http://www.novelguide.com/a/discover/cps_01/cps_01_00159.html
2. Stocks for Kraft Foods (KFT) : http://www.wikinvest.com/stock/Kraft_Foods_(KFT)
3. Stock for Cadbury http://www.wikinvest.com/stock/Cadbury_plc_(CBY)
4. History of Cadbury http://www.englishteastore.com/cadbury-history.html
5. Cadbury plc http://en.wikipedia.org/wiki/Cadbury_plc
6. Mergers and acquisitions http://en.wikipedia.org/wiki/Mergers_and_acquisitions
7. Mergers and Acquisitions: Definitionhttp://www.investopedia.com/university/mergers/mergers1.asp
8. A.A. Thompson & A.J. Strickland (2004): Crafting and Executing Strategy: TheQuest for Competitive Advantage: Concepts and CASES, McGraw Hill, 16thedition.
9. India Knowledge Wharton: Sweet Surrender: Can Kraft's Cadbury Acquisition Help ItTap the Indian Market? http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4451
10. http://www.itcportal.com/newsroom/press_27jun06.htm
11. http://www.foodindustryindia.com:9080/newfood/detailnews.jsp?n=PriyaGold%20aims%20at%2025%%20market%20share%20in%20Indian%20biscuit%20market&id=411
12. http://www.financialexpress.com/news/quiet-launch-of-kurkure-variants-intensifies-
8/7/2019 Final Chal Raha
43/44
Merger and Acquisition
8/7/2019 Final Chal Raha
44/44
Merger and Acquisition