Kraft was seeking to take over Cadbury since September 2009, (see Cadbury: Chocolate all change and A Krafty approach to Cadbury). But the Cadbury board had rejected previous bids as being too low. The September bid, for example, was valued at £10.2bn. On 19 January 2010, however, after heated negotiations the board accepted the latest offer by Kraft valued at £11.5bn ($19bn).
But is the deal good news? Or will what is sweet for senior management and the financial institutions which brokered the deal be dark bitter news for the main stakeholders – consumers, workers and shareholders? The following articles explore the issues.
Cadbury battle ends with midnight handshake Financial Times, Lina Saigol (19/1/10)
Cadbury takeover: a crafty bit of business or an overpriced confection? Telegraph, Jonathan Sibun (20/1/10)
Cadbury’s sweet City deal leaves a bitter taste in Bournville Guardian, Heather Stewart and Nick Mathiason (19/1/10)
Thousands of Cadbury jobs under threat as Kraft swallows a British icon (including video) Times Online, Helen Nugent and Catherine Boyle (20/1/10)
Cadbury deal ‘the price of globalisation’ Financial Times, Jenny Wiggins and Jonathan Guthrie (19/1/10)
Cadbury sale ‘right thing to do’ FT video (19/1/10)
Bitterness as Kraft wins Cadbury Independent, Nick Clark (20/1/10)
The winners: Management duo in line for bumper pay packet from takeover deal Independent, Nick Clark (20/1/10)
Kraft came hunting in the only country that would sell – Britain Independent, James Moore (20/1/10)
Kraft’s takeover leaves a bitter taste in the mouth Telegraph, Tracy Corrigan (19/1/10)
A sweet deal – or a takeover that is hard to swallow? Independent, Hamish McRae (20/1/10)
Cadbury: banks are the real winners BBC News blogs: Peston’s Picks, Robert Peston (20/1/10)
Warren Buffett blasts Kraft’s takeover of Cadbury Guardian, Graeme Wearden (20/1/10)
Cadbury says job cuts inevitable after Kraft takeover (including videos) BBC News (19/1/10)
Cadbury and the open market theory: they’d better be right Guardian blog, Michael White (20/1/10)
The Business: Bonus season and the Cadbury takeover Guardian podcast, Aditya Chakrabortty
How did Quakers conquer the British sweet shop? BBC News Magazine, Peter Jackson (20/1/10)
Why Kraft must keep organic cacao farmers sweet Guardian blog, Craig Sams (20/1/10)
- What were the incentives for the Cadbury board to accept the proposed offer by Kraft?
- Do such incentives lead to the efficient operation of markets?
- Explain what is meant by ‘competition for corporate control’. To what extent is such competition in the interests of consumers?
- What economies or diseconomies of scale are likely to result from the takeover? What will determine the extent to which changes in costs are passed on to the consumer?
- How will the following stakeholders fare from the takeover, both in the short run and in the long run: (a) consumers; (b) workers; (c) shareholders?
- Examine Warren Buffet’s arguments for rejecting the deal.
It’s one of a declining number of UK-owned industries still left in the UK: Cadbury. However, over the past few years, mergers have become the norm and Cadbury looks set to become the next. Kraft, an American food giant, has been interested in taking over Cadbury for some time and this topic was covered on the Sloman Economics News Site at the beginning of September, when we considered Kraft’s bid of £10.2 billion. (see Cadbury: Chocolate all change). Since then Kraft shares have dropped in value and so Kraft’s current bid is now worth less: a hostile bid of £9.8 billion. This has been refused by Cadbury’s Board of Directors, calling it ‘derisory’.
From the time that Kraft’s bid was formally submitted, the stopwatch begins to tick. A 60-day period is allowed under the ‘takeover code’ which is in place to protect shareholders without resorting to a date in court. Following Kraft’s bid, Cadbury share prices immediately fell, but then began to recover as the implications became clearer. Other companies mentioned as potential rivals include Nestlé and Unilever, although, given Cadbury’s recent boost in sales, Unilever has said that it is no longer interested. So, what does the future hold for Cadbury? Will it be the latest in a long line of British companies to leave their UK owners?
Kraft’s Cadbury takeover bid will set 60-day timetabling ticking Guardian, Jill Treanor (9/11/09)
Kraft plays long game in Cadbury pursuit Reuters (9/11/09)
Cadbury rejects hostile Kraft bid BBC News (9/11/09)
Kraft facing 5pm deadline in battle for Cadbury Guardian, Julia Kollewa and Elena Moya (9/11/09)
Strong sales rise boosts Cadbury BBC News (21/10/09)
Cadbury rejects £9.8bn hostile bid from Kraft Guardian, Julia Kollewe (9/11/09)
Kraft may offer more cash in bid for Cadbury Telegraph, Amy Wilson (4/11/09)
Paulson raises Cadbury stake Guardian, Nick Fletcher(11/11/09)
Unilever rule out Cadbury bid as sales beat forecasts Telegraph, Amy Wilson (5/11/09)
Cadbury’s fight for independence BBC News, Edwin Lane (24/12/09)
- Kraft is looking to expand by taking over Cadbury. What type of takeover would you classify this as and what do you think Kraft’s motives are for this takeover bid?
- If Kraft is successful, what are the likely advantages and disadvantages for (a) consumers of Cadbury chocolate; (b) shareholders of Kraft; (c) shareholders of Cadbury; (d) competitiors?
- Cadbury has said that the £9.8bn bid was ‘derisory’. How will Kraft have decided on the price it’s willing to offer and what factors are likely to influence this?
- John Paulson has raised his stake in Cadbury by purchasing another 6.3m shares. What effect do you think this will have on Cadbury’s share price and why? Does this make the takeover by Kraft more or less likely?
- Is there a role for the Competition Commission in this possible takeover? If so, why; and if not, why not?
- Cadbury has reported a boost in sales. What effect will this have on the takeover bid from Kraft? Why has this sales boost caused Unilever to pull out?
Cadbury is arguably the producer of the best Easter eggs and also one of the best known adverts – who can forget the guerrilla playing the drums! If you think there is no substitute for Cadbury chocolate, then you’ll find this story especially interesting.
In early September, Kraft Foods made a £10.2 billion bid for the maker of Dairy Milk. This was duly rejected by Cadbury, whose Chairman said that the offer ‘fundamentally undervalued’ the business. This initial bid, although rejected, has sparked interest in the corporate world and Cadbury shareholders have seen their shares rise in value by almost 40%, closing at 775.5p on Friday 11th September.
Following this bid, other potential buyers have entered the picture, including Nestlé and Hershey’s. There is also the likelihood that Kraft Foods will make a higher bid, financed through a bridging loan. Despite this interest, Cadbury still wants to remain independent, hoping that its investors will be buoyed by the company’s rising profits in recent months.
Take a look at the following articles that consider these possible take-overs of Cadbury and how the corporate world has been, and will continue to be, affected.
Cadbury snubs £10.2bn Kraft move BBC News (7/0/09)
Hershey’s and Nestlé in running to buy Cadbury Telegraph (10/9/09)
Kraft races to prepare new Cadbury bid Guardian (9/9/09)
Return of the Deal? BBC News (7/9/09)
Hershey considers Cadbury counterbid Times Online (9/9/09)
Cadbury spurns ‘low growth’ Kraft BBC News (13/9/09)
Long Cadbury shares? Cash out! Khaleej Times Online (United Arab Emirates) (14/9/09)
Hedge fund Eton Park stakes £180m on Cadbury bid Telegraph (10/9/09)
Cadbury vision is to stay single Financial Times (11/9/09)
- In the 13th September BBC News article, an extract from a letter to the Kraft Chief Executive from the Chairman of Cadbury stated that under Kraft’s offer “Cadbury would be absorbed into Kraft’s low growth, conglomerate business model, an unappealing prospect.” What does he mean by a ‘conglomerate business model?’
- Eton Park has bought £180 million worth of shares. In what ways do you think this will affect the future of Cadbury? Is Cadbury more or less likely to sell now?
- How would you explain the rise in Cadbury’s share price when it looked as though the company might be taken over?
- Cadbury’s Chief Executive hopes that investors will continue to support the company given the positive profit margin growth. What does this actually mean?
- If the take-over were to go ahead, what do you think would be the impact on the (a) the Cadbury factory in Birmingham; (b) Cadbury’s workers; (c) Cadbury’s shareholders; and (d) the price of Cadbury chocolate?
The world experienced a large increase in merger activity from 2003 to 2007. The merger boom came to an end, however, in 2007/8 with the credit crunch and the ensuing recession. For example, the value of acqusitions of UK companies by overseas companies fell from £82.1 billion in 2007 to £52.6 billion in 2008, while the value of acquisitions of overseas companies by UK companies fell from £57.8 billion in 2007 to £29.7 billion in 2008 (see Mergers & Acquisitions data (National Statistics)). The decline continued in the first part of 2009.
Recent evidence, however, suggests that the beginnings of recovery in the world economy, a greater availability of credit and a substatial rise in share prices since March (see for example the FTSE 100 and Dow Jones indices) are leading to a new wave of mergers. Recent weeks have seen, amongst others, the takeover of Marvel Entertainment by Disney (see Disney is ‘Marvel’lous), the proposed merger of T-Mobile and Orange, and Kraft’s bid for Cadbury (see Cadbury: Chocolate All Change). So what has stimulated this new merger wave? How do mergers relate to the business cycle and to the stock market? Should they be welcomed? The following articles look at some recent mergers and at the issues they raise.
The return of the deal The Economist (10/9/09)
The revival of M&A is better than a poke in the eye Guardian (8/9/09)
Hovering Kraft The Economist (7/9/09)
Orange and T-Mobile to create UK’s largest mobile phone company Guardian (8/9/09)
Watchdog urged to investigate T-Mobile and Orange merger Guardian (8/9/09)
- Why has there been a recent rise in M&A activity? Discuss whether the revival in activity is likely to continue.
- Discuss whether an increase in M&A activity is ‘better than a poke in the eye’?
- To what extent will mobile phone users in the UK benefit or lose from a merger between Orange and T-Mobile?
- Will Cadbury’s consumers and workers benefit from a takeover by Kraft?