Case Study : End of a British icon in Confectionery Business

After 180 years as an icon of British business, Cadbury entered 2010 facing a fight for its independence.

The threat came from Kraft Food, the American food giant behind brands such as Oreo and Dairylea, which intended a hostile takeover of the company.The move prompted widespread alarm among staff, trade unions, MPs and even members of the Cadbury family, calling for Cadbury to remain in British hands.

"[Kraft] won't understand the history and quality of the company," Felicity Loudon, a descendent of the company's founder, George Cadbury, told a reporter from the British Broadcasting Corporation. In November, MPs from Birmingham, where Cadbury is based, even tabled a House of Commons motion calling for government support to keep Cadbury in the hands of "an innovative British company".

The government could do little to stop the takeover, however. The decision about whether or not it went ahead rest with the long list of investment banks and pension funds that made up Cadbury's shareholders.And whether or not they agreed to the deal had little to do with nostalgia, heritage or tradition.

"The nationality of the bidder doesn't make any difference - particularly as a large proportion of the shareholders are based in the US anyway," says James Targett, an analyst at Consumer Equity Research. "The most important thing for shareholders is whether any bid represents good value. If the price is right, they will take it." So what is the right price?

Kraft offered to buy Cadbury shares for 3 a piece, plus 0.26 new Kraft shares. That would value the company at about 9.8bn, or 7.30 per share.

The Cadbury board, led by chairman Roger Carr, called the offer "derisory", saying that it "substantially undervalues Cadbury".

The board argument was that shareholders would stand to make a lot more money by holding on to their shares and watching their value rise as Cadbury would grow and succeed - as an independent company instead of a subsidiary. The board's argument was not an unreasonable one. Cadbury had been a hugely successful company in its own right. It had strong brands, a strong record of growth that outperformed the market, and had a strong presence in emerging markets. Simply put Cadbury was constantly making profit.

At the end of 2009 Cadbury said it expected to grow revenues by between 5% and 7% over the next few years. Profit margins, was expected to increase to between 16% and 18% by 2013. Many business analysts agreed that these numbers are plausible and achievable. Cadbury was at the top end of the confectionary scale and could grow further.

That prospect of growth was, of course, what attracted Kraft to Cadbury in the first place. The Cadbury board was eager to point out that Kraft needed Cadbury, but Cadbury did not need Kraft.

At the end of 2009, Kraft was a low-growth company with a heavy dependence on the North American market. Cadbury, on the other hand, had done a good job of accessing developing markets where demand for its products - particularly chewing gum - is still growing strongly.

The healthy picture of Cadbury did not mean a Kraft takeover was entirely without merit. Some analysts pointed out that huge cost savings it could be made by giving Cadbury access to its global distribution networks, as well as sharing research and development costs.

They also pointed out that the acquisition offer could provide shareholders with the "certainty" of a concrete price for their shares - so they don't have to take the risk of trusting the Cadbury board to deliver on their promises.

Shareholders had to decide on the offer made by Kraft.The consensus of opinion among financial and business analysts in UK was the offer, at 7.30 a share, was just too low for shareholders to say yes.

An offer in excess of 8 a share would create "much more of a dilemma for shareholders", said an analyst. Others suggested that an offer of 8.20 a share would seriously attract shareholder interest. and they would be obliged to sit down and talk.

Kraft was prepared to pay more, especially after rumours of a rival bid from US confectioner Hershey were proved accurate. Kraft saw Cadbury as an important part of their future strategy and was determined to get the deal done.

By end of January 2010 Cadbury finally succumbed to the chase made by Kraft. Cadbury board advised its shareholders to accept a new offer of 840 pence a share - valuing the company at 11.5bn ($18.9bn) with a further dividend of 10 pence a share.

(Adapted from an article by Edwin Lane, in BBC News Online dated December 24 2014 with modification done by Associate Professor Dr. Arzmi Yaacob

QUESTION 1

What is the manner of the acquisition called and why?

(20 marks)

QUESTION 2

What dilemma do the shareholders face?

(20 marks)

Question 3

Having an iconic brand synonymous with a nation may hinder a strategic option. Why is this so?

( 30 marks)

Question 4

Do you think it is advisable for Kraft to allow Cadbury to remain as it is and operate as a subsidiary?

(30 marks)