The continued acceleration of merger and acquisition (M&A) activity remains strong. As companies find it more challenging to increase revenue growth from within their organizations, big mergers across a wide range of industries have become a common growth strategy. In addition, available debt financing has provided another incentive for companies to snap up or merge with competitors. Today, companies are viewing mergers and acquisitions as a substitute for previous traditional growth strategies that involved capital expenditures and expansion.

The $40 billion cash and stock merger of H.J. Heinz Co. and Kraft Foods Group is the brainchild of two investors, 3G Capital and Berkshire Hathaway, run by legendary investor Warren Buffett.

Together, the two companies represent the third-largest food and beverage company in North America, and the fifth largest in the world. H.J. Heinz Company, best known for its iconic ketchup brand, also produces sauces, meals, soups, snacks, and infant nutrition.

Kraft Foods Group is best known for its Macaroni and Cheese, Capri Sun, Jell-O, Kool-Aid, Oscar Mayer, and Maxwell House, to name a few brands. The newly formed company, with dual headquarters in Pittsburgh, Pennsylvania, and Chicago, Illinois, will assign leaders from both organizations.

With this merger, investors benefit from the potential of a $1.5 billion annual savings, mainly a result of economies of scale in the North American market. In a struggling foods industry with wellknown companies like PepsiCo, General Mills, and Campbell's, some predict that next Buffett will build a food conglomerate in much the same way he has done with Berkshire Hathaway, owning a variety of companies in unrelated businesses from Geico Insurance to NetJets to Dairy Queen.

Questions for Critical Thinking

1. Heinz derives 60% of its sales from outside the United States while Kraft derives 98% of its sales within the country. Based on this data, discuss the opportunities for this combined entity. Was this a consideration in the merger? Discuss.

2. Discuss the opportunity for the combined entity given the fact that Kraft's credit rating is far superior to that of Heinz. What might the combined entity do to create efficiencies, and what potential impact might these have on overall financial results?