Hostile Takeover: Kraft Foods – Cadbury deal Merger and Acquisition Case Study
Cadbury’s chairman Roger Carr promptly responded to the offer with a rejection note saying that it was an unappealing prospect of being absorbed into a “low growth conglomerate business” of Kraft Foods Group, Inc. As Warren Buffet, a leading shareholder in Kraft Foods warned the US based company not to overpay for buying Cadbury, the target company contacted the UK Takeover Panel with a request to send a “put up or shut up” request to Kraft, giving them a time frame to make a final formal bid.
British Prime Minister Gordon Brown expressed his dissatisfaction with the proposal, saying that Cadbury is a very important organization for the economic growth and future of the country and should not be sold to a foreign investor leaving the domestic British operations uncertain, as it provides a base to a good amount of economic activity in the country.
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The initial bid consisted of a mix of cash and shares, with cash making up only about a 40% component of the offer, and shares totaling for the rest 60%. The comparatively smaller portion of cash on offer further alienated investors from supporting the deal and their decision largely tilted with the management of Cadbury until Kraft revised offers to include a higher percentage of cash along with an increased valuation and offer for the firm.
Read more on investment, cash flow and valuation.
However, a fall in the share prices for Kraft Foods and a depreciation of the US Dollar in an economy still recuperating from a major worldwide recession marked the bid even lower than first proposed.
The hostile takeover bid stood at less than US $16 billion, 2 days after the initial bid rejected as being an undervaluation by Cadbury.
As Cadbury expressed its agreement to look at offers of acquisitions and proceeded further for negotiation of terms, it put forth further terms of protection for shareholders, and existing workforce.
Cadbury, while keeping an open hand to the possibility of the takeover, did not agree to the price being quoted and its investors accused the bidding company of not taking into account potential synergies that Cadbury offers along with the worldwide strength of its brand name.
Experts expected Kraft to go for a huge loan in case it furthered the negotiation with Cadbury by increasing its putative offer to better meet Cadbury’s expectations and especially if it decided to negotiate on the cash component of the deal. However, to Kraft, Cadbury was expected to provide promising long term synergies to the tune of US $625 million, if the deal was consummated. This indicated that it would be relatively easy for it to pay down any borrowings it made in the process, in order to raise its bid for Cadbury. On the other hand, overstretching its financial conditions to buy the company posed a risk for Kraft Foods as it made it anxious that it would lead credit rating agencies to downgrade its ratings, therefore affecting its ability to raise funds in the future, in the process.
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