12, no. The Balance, (2017) What is operating profit margin ratio? Haspeslagh, P. C. and Jemison, D. B. Barsade and Gibson (2007) second this opinion by arguing emotional intelligence in negotiation procedure is an essential quality which contributes to M&A success factors. This is because strategic decision making and execution process have three major characteristics: the companys option between acquisition and organic development, the companys choice between related and irrelative acquisitions, and the corporations choice between integration and autonomy of the acquired unit. Kraft Cadbury Takeover: Summary Reasons Timeline Analysis Advantages Disadvantages StudySmarter Original 4, pp. 80, no. Horizontal M&A on the other hand involve combination of two similar organizations in the same industry (Gaughan, 2011). Stahl, G.K. and Voigt, A. 11, No. Cording, M., Christmann, P., & King, D. (2008). (2001, June 11). By the time of the offer for Cadbury, it was the worlds second-largest food conglomerate, with seven brands that each generated annual revenues of more than $1bn. This is different from equity financing, for example, through which investors take part ownership of your business. 31, pp. (2015) argues, M&A have long interested managers attention and have been explored by several viewpoints and using different theories. Roller, Stennek & Verboven (2006) states Economies of scale is considered another reason for why some companies persist in trying to attain an M&A. traditional methods that implement procedures such as using financial material since it has the capacity of apprehending detailed value-creating mechanisms (Capron, 1999). Hitt, Michael A, Duane R Ireland, and Jeffrey S Harrison. On the other hand, managerial motive is considered a more efficient reason for pursuing an M&A since it helps to build a companys empire, status, power, remuneration, hubris while trying to accomplish longevity by taking an immediate development of strategy that aids in reducing the likelihood of being takeover target (Arnold, 2013). Rani, N., Yadav, S.S. & Jain, P.K. (2002) Mergers and acquisitions finance 05.09. It values Cadbury at 13.3 billion ($21.8 billion), or 8.40 ($13.77) per share. Bodamer, D. (2013), Economies of Scale,National Real Estate Investor,vol. British Journal of Management, vol 17, pp15. Bertoncelj (2009) maintained the view efficient communication is the primary reason why M&A prosper by investigating five difficult success factors and five soft success factors. (8th ed.). Regardless of this, its argued the acquisition was a success as Kraft managed to honour the two-year agreement of no redundancies proposed by Cadburys shareholders before they sold of their shares, this therefore implies Kraft acquisition of Kraft was a success (Finch, 2017). Available at: https://www.theguardian.com/business/2010/mar/30/kraft-irene-rosenfeld-payrise-cadbury [Accessed 3 Apr. Nicola Mirc,(2014), Human Impacts on the Performance of Mergers and Acquisitions, inCary L. Cooper,Sydney Finkelstein(ed.) For example, a company that accumulates oak furniture might buy a plantation establishment which increase oak trees, in that way safeguarding an orderly supply of raw materials in future (This is known as an upward acquisition). Additionally, the method is considered advantageous as a means of measuring M&A as this process can measure value better than other, more i.e. Haspeslagh & Jemison, (1991), Zollo and Singh, (2004) similarly criticised this view because it tends to be destroyed during the integration process. The ROA and the ROS were calculated using the Independent and Joint Effects of the Skill and Physical Bases of Relatedness in Diversification journal formula. whether Krafts acquisition of Cadbury was a success or failure. Dec. 14, 2009 LONDON Stepping up its efforts to fend off a hostile takeover bid from Kraft Foods, the British chocolate maker Cadbury increased its profitability target on Monday and said two. Merced, M (2014). This paper aims to critically evaluate the success of Kraft's acquisition of UK based company Cadburys. 400-415. 134-148. Luff, (2010) summarily reinforced this view by arguing 80% of hostile takeovers failed to deliver the value promised when they took place, often because there was not enough common culture between the two sides. 2.1 The Types of Mergers and Acquisitions, 4. ROE ratio is used to show and illustrate efficiency of equity, it is also used to assist in identifying issues such as those related to the estimation of equity level (Waniewski, Skoczylas 2002). The closing price of 9th November reflected the bid valuation of Cadbury at 710 pence which was lower than the share price of 761p on that day. Cadburys Schweppes, (2007), Annual Report & Accounts 2007. Capron (1999) argues managerial self-assessment is beneficial since the process can measure value better than other, more traditional methods using financial data as it is capable of capturing fine-grained value-creating mechanisms. The Kraft accquisiton of Cadbury caused some controversey back in the early 2010's, and the companies impact is continuing to be felt. DiGeorgio (2002) however, criticised this view by arguing speed integration is recognised as the reason why some acquisition fail. Kraft's proposed takeover of Cadbury has raised widespread fears that the US food group will abandon a landmark deal by the British confectioner to buy only Fairtrade cocoa beans for its. Moreover, Krafts acquisition of Cadbury is considered a success since total selling, administrative expenses decreased by $25 million following the Cadbury takeover (Kraft foods, 2011). The name fischertechnik comes from an original construction toy brand, which was invented by Artur Fischer in 1964. One could therefore argue although Krafts (ROS) decreased in 2011, two years after this overall their results increased significantly to 14.90. these findings therefore suggest Krafts takeover of Cadbury was a success as Krafts profitability level was higher than Cadbury financial performance before the acquisition. Agrawal et al., (1992) nevertheless put forward the view that M&A fail because of reasons such as low shareholder value, low or negative return on equity/assets and declining stock price, among others. In addition, its argued since Kraft failed to keep their promise to keep a York factory open after they purchased another British chocolate maker called Terrys in 1993, suggest they will most likely fail to keep their promise they made to workers when acquiring Cadburys, which proposes the idea that their acquisition of Cadbury was unsuccessful (Wearden, 2017). For instance, the motive of market power is considered beneficial as it fetters the capacity for a company to raise prices directly above the level that would prevail lower than competitive circumstances (Long, & Link, 1983). 36, no. Kraft Foods has sealed its takeover of Cadbury after over 70% of shareholders in the UK's largest confectioner voted in favour of the deal. M&A are characterised as either horizontal, vertical or conglomerate (Biller, 2016). http://smallbusiness.chron.com/three-different-types-corporate-mergers-rationale-type-74109.html. Capron, L. (1999) The Long-Term Performance of Horizontal Acquisitions, Strategic Management Journal, vol 20, pp 9871018. 3rd edn. This is because two firms together are valuable more than the worth of the firms a part, which therefore makes the M&A a gain for the acquiring firm whether that be i.e. Agrawal, A., Jaffe, J., & Mandelker, G. (1992). 45-65. Montgomery, C. A. and Wilson, V. A. Also, the companys net revenues increased by $1,037 million due to the Cadbury acquisition, despite this, its been argued Krafts acquisition of Cadbury was not a success since net pricing increased and operating income decreased by $8 million (Kraft foods, 2011). (1991) Managing Acquisitions: Creating Value through Corporate Renewal. Kraft foods, (2011) states after Krafts acquisition of Cadbury the company implemented three strategies such as To delight global Snacks consumers; to unleash the Power of our Iconic Heritage Brands; and To Create a Performance-Driven, Values-Led Organization. When you take out a bank loan, you have complete control over what you do with the money. 65% 2009. For example, test conducted using this method are essentially joint tests of stock market effectiveness and a model of market equilibrium as the stableness of the expected stock price is the basis of the measure. thirty years of mergers and acquisition research: recent advances and future opportunites, British Journal of management, Vol 17, pp. By Joe Fernandez 2 Feb 2010 5:35 pm Cadbury says it had received valid acceptances of the offer from investors representing 71.7% of the firm. 108116. (2009), Critical success factors in mergers and acquisitions: evidence from Slovenia, International Journal of Sustainable Economy, Vol. Cartwright, S., Cooper, C.L. The announcement that Kraft and Cadbury had reached agreement on a takeover was made on Tuesday after Kraft increased its previous hostile offer of $10.5bn, which Cadbury had rejected. http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/7027042/Kraft-buys-Cadbury-for-11.9bn-a-QandA.html. 36-59. Additionally, evidence demonstrates that M&A fail to produce any significant gains in shareholder value (Grundy, 2003). This idea therefore brings me to question whether Cadbury shareholders selling the company to Kraft was really a smart move as it appears Cadbury was selling itself too short in the long run. This can be a hassle and an obstacle to funding. These variables often differ from bank to bank, and usually can be negotiated and adjusted; you can shop around for the loan terms that best suit you and work with the bank to make the deal as sweet as possible. Despite their promise soon after the deal was done, Kraft announced that they will be shutting the factory, which led to the redundancy of 400 employees who worked in that factory. Buono & Bowditch (1989), however, argued that many M&A fail because of unsuccessful management of the acquisition process. However, three years after Krafts successful bid for Cadbury, the companys (ROE) was 10.70% in 2011, 45.97% and 52.34%, since Krafts (ROE) improved after the acquisition, this suggest the company has become more efficient and thus more profitable after the Cadbury takeover which therefore suggest the acquisition was a success. In February 2010, Cadbury accepted Kraft's GBP11.9 billion (USD19.7 billion) takeover offer after a battle that lasted more than 100 days. 'Bitter sweet' 19, No. Any opinions, findings, conclusions, or recommendations expressed in this dissertation are those of the authors and do not necessarily reflect the views of UKDiss.com. These will be set out and discussed below. 4, pp 402. Business Case Studies Kraft Cadbury Takeover Kraft Cadbury Takeover TABLE OF CONTENTS To be the BEST food company in the world. Furthermore, one could argue Krafts acquisition of Cadburys was a success since the companys net revenues increased as a primarily request of the Cadbury acquisition which also added $9,143 million in net revenues for the company the following year after the acquisition (Kraft foods, 2011). Wearden, (2017) supported this view by stating M&A are difficult to exercise since two companies that are joining may have completely different cultures, and there way of operating may be so unlike that it will lead to a potential disaster more than it could possibly be a success. Performance measures for a long period of time has been a difficult problem that researchers have previously faced within their particular field of study (Dess and Robinson, 1984) This has therefore led naturally to the picking of suitable performance measures that are relevant to the fields in this case of M&A of which varied origins have led to the adoption of a extensive series of performance measures in present research (Cartwright and Schoenberg, 2006; Larsson and Finkelstein, 1999). Rani, N., Yadav, S.S. & Jain, P.K. Therefore, one could argue that Kraft acquisition of Cadburys was a success since they implemented a strategic plan after the successful acquisition. De Paula & Fernando (2002), however criticised economies of scale by arguing shareholder gains have received support to extend the market value of the firm because of M&A, therefore since the advance in the value of the business immediately aids in helping its owners (shareholders) this is the reason why it is considered as a shareholder gain. Cording (2010), argues the expert opinion is considered advantageous as arguably it is the most vital measurement method when historical data are insufficient, modelling is problematic and/or a fully renewed product is anticipated. 2016, no. Rehman. In some cases, interest rates and other terms can change during the repayment period, making the success of your business subject to alterations in the banks demands. (1991) Managing Acquisitions: Creating Value through Corporate Renewal. Credit history is a crucial determining factor for getting a bank loan. Managing mergers, acquisitions and strategic alliances: integrating people and cultures,2nd edn, Butterworth-Heinemann, Oxford. This is because cultural fit can aid in confidence building relationship among employees (Anderson & Weitz, 1989), shorten organizational difficulty (Vaara, 2003), and organizational resistance (Bijlsma-Frankema, 2001). 239-250. Hence, because the strengths of this method outweigh the strengths of the first two quantitative methods discussed, it will be used in this study using certain accounting ratios. Furthermore, it is assumed that Kraft had a strategic plan to acquire Cadbury, the fact they achieved this goal therefore also advocates the notion that Krafts acquisition of Cadbury was a success. Cadbury Report & Accounts 2009, (2010) CADBURY PLC AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR ENDED 12/31/2009. this result therefore suggests the companys (ROS) decreased after the acquisition which thus motivates one to question whether the acquisition was a success or not. The fact that the companys efficiency levels started to lessen therefore suggest Krafts acquisition of Cadburys was not a success since the companys operational performance stated to decline. In Sushil and G. Chroust (Ed), systermatic flexability and business agility (pp 367-383). Scandinavian Journal of Management, vol 26, pp. Collan & Kinnunen (2009) similarly, argued a company has to have an effective strategic plan in order for the merger or acquisition to be a success. Poor credit can pose an obstacle against favorable loan terms or even for securing a loan at all. Branding a perception. So, the return on investment after the acquisition might be expected to grow in the first case, but not necessarily in the second case (although the overall portfolio risk may decrease if the portfolio is more balanced). Finch, J. Based in the state of Illinois, Kraft also believes it can squeeze savings of at least $675m annually by the end of the third year. Retrieved from. But soon after the deal was done, Kraft announced a U-turn and shut . Chatterjee, S. (1986) Types of Synergy and Economic Value: The Impact of Acquisitions on Merging and Rival Firms, Strategic Management Journal vol 7, pp 11940. Tahir, M. & Anuar, M.B.A. 2015; The determinants of working capital management and firms performance of textile sector in pakistan, Quality & Quantity,vol. The Kraft takeover of Cadbury has been marred particularly by the controversy over the closure of Somerdale and has heightened the feelings of mistrust in which . 74, No. Alex Miller cuts through the tension to analyse what the deal really meant This article was written at the time of the Kraft takeover of Cadbury in 2010. Jensen and Ruback (1983), nevertheless proposed interest rates was another motive for acquiring an M&A. Research indicates that generally, M&A activity does not have a positive effect on the long-term financial performance of the acquiring firms (e.g. Orlando: The Dryden Press. Arnold, G. (2013). Available at: http://epublications.marquette.edu/mgmt_fac/124/ (Accessed: 25 November 2016). Agrawal et al., 1992). Therefore, one could dispute the arguably negative impact of speed integration since it is complex with limited study examining speed of integration (Bauer & Matzler, 2014). Arrow, K. J. Firstly, profitability ratio is a useful measure that helps to measure the financial performance of an acquisition. For instance, in 2007 Cadburys FATR was 3.07, followed by 89.88% in 2008 and. Secondly, financial leverage ratios help to measure effectively the value of equity that a business may have by evaluating the businesses debt. Business Process Reengineering Case Study. Mayrhofer (2004) proclaimed that in a merger, firms combine their assets with the intention of creating a renovated company, whereas in an acquisition, one firm takes control of most of the capital of another corporation and unite the two companies. Krafts ROCE results therefore indicates that after their acquisition of Cadbury the companys operating efficiency increased significant post-acquisition, therefore one could argue, these findings suggest Krafts acquisition of Cadbury was a success since the companys profitability increased. At the start of its bid for Cadbury, Kraft announced its intention to keep open Cadbury's factory at Somerdale, which Cadbury had previously earmarked for closure.1 On 9 February, after the takeover had been completed, Kraft announced that it was no longer 1-2. This is not an issue for other types of funding, such as stock offerings. The acquisition of the maker of Dairy Milk chocolate sparked a controversy about hostile foreign bidders. Barsade, S.G. and Gibson, D.E. NPR is used to help calculate the results of the net profit as a proportion of the earnings in internal evaluation. Exploration also depict, that qualified acquirers can produce routines and habit for acquisition implementation which is considered advantageous to the acquiring company (Al-Laham et al., 2010). 1983, The Impact of Market Structure on Wages, Fringe Benefits, and Turnover,Industrial and Labor Relations Review,vol. Kraft has lauded Cadburys leading brands such as Trident and Halls. In this study, I will be using current asset turnover CATR and FATR (fixed asset turnover) since they are the most effective efficiency ratio to use when measuring a company financial performance (Rani, Yadav, & Jain, 2015). For instance, On January19, 2010, Kraft publicised the terms of their final offer for each outstanding ordinary share of Cadbury, one could argue since the Cadbury Board of Directors suggested that Cadbury shareholders agree to the terms of the final offer, it implies Krafts acquisition would be a success since they recommended their own shareholders to accept the deal (Kraft foods, 2011). One could argue after Kraft acquisition of Cadbury the company maintained a successful brand image, this is because the company was dependant on communication within the organisation. view to promoting long term success, and the new Code is an important step towards achieving this. (1982) Risk Perception Psychology and Economics, Economic Inquiry pp 20: 19. Al-Laham, A., Schweizer, L., & Amburgey, T. (2010). (2010). (2011),Mergers, acquisitions, and corporate restructurings,5th edn, Wiley, Hoboken, N.J. Gill, R. (1999). Additionally, this incident has also led to the firm announcing further 200 job cuts (BBC News, 2017). 402. Sherman (2010) put forward the notion that M&A often fail as they are fraught with potential issues and downfalls. Financial management, theory and practice. Also, many M&A fail since many managers fail to realise that merging with another business involves more than taking control of properties, and merging premises, capital, and equipment. (2008), Do cultural differences matter in mergers and acquisitions? However, this method is criticised on the grounds long term stock performance method respecting to short-term measures of stock performance is impressible to influence factors that are unrelated to the acquisition of interest such as competitors product introductions that occur between the date of the acquisition and the termination of the time for which long-term performance is measured (Chatterjee 1986). 4, pp. Thirdly, Krafts motive to attain Cadbury was based on the intention that Cadbury would offer Kraft better accessibility to better progress in emerging markets along with some of the worlds prominent chocolate, sweets and chewing gum brands (Ruddick, 2010). Jennings, O.R. One could therefore argue this implies that the companys acquisition was not a success as the companys net profit decreased post-acquisition, which indicates a lower level of margin of safety. The financial Times, 9th January 2012 [Online] https://www.ft.com/content/1cb06d30-332f-11e1-a51e-00144feabdc0. Brown & Warner (1985), states that for abnormal returns to accurately measure the markets valuation of an acquisition, its indication must first imitate new data for existing investors. Savovic, (2012) stated Speed of integration is one of the main factors that contribute to the success factors for mergers and acquisitions. In that situation, you are not personally liable if they want to cash out, and its up to them to find a buyer. Ruddick, G. (2010) Kraft buys Cadbury for 11.9bn: a Q&A. Bromiley, P. and Marcus, A. Today, developing countries account for 38% of Cadbury's US$8.3 billion group sales and 20% of Kraft's US$40 billion in sales, according to London-based research firm Euromonitor International. This was undertaken to provide the evaluative resource with which I used to help test in the second half of the paper whether Krafts acquisition of Cadburys was a success or not. New York: American Management Association. We've received widespread press coverage since 2003, Your UKDiss.com purchase is secure and we're rated 4.4/5 on Reviews.io. Firstly, the way in which a company finances its acquisition is imperative for its success. Odenthal, M. (2016) Best methods of financing mergers and acquisitions deal making wire. Lubatkin, M. (1987) Merger Strategies and Stockholder Value, Strategic Management Journal, vol 8, pp 3953. Horizontal M&A offer economies of scale, which means that that the regular costs lessen as the business does more business interactions. ROCE also helps to specifies how efficiently the long-term amounts of the holders and lenders remain being used and emphases straight on operating efficiency (ACCA, 2016). Nevertheless, a year after this, in 2012 the companys (ROS) increased to 8.99% and 14.90% in 2013. Wiesbaden, Germany: Springer Gabler. Zollo & Meier, (2008) however criticised this view by arguing given that acquisition performance is a complex and multifaceted concept, our conceptualization is rather broader as we define M&As failure as a situation in which an acquisition did not realize its potential to create and appropriate economic rent through the integrated value chain activities. This is because often smalls businesses are not able to receive competitive interest rates because of liquidity restrictions or to unequal information in the external capital market, subsequently since a big company has better-quality accessibility to the external capital market that a small one has, which thus motivates acquiring firms to carry out M&A as it fetters the contingency for the new organization to borrow more cheaply than separate units. 1998, The Efficiency Cost of Market Power in the Banking Industry: A Test of the Quiet Life and Related Hypotheses,The Review of Economics and Statistics,vol. Kraft Foods challenges Cadbury over its hostile bid defence The Guardian, Tuesday 15th December 2009, [Online] https://www.theguardian.com/business/2009/dec/15/cadbury-kraft-foods-takeover-defence [accessed 1st April 2017]. Irene B. Rosenfeld maintained this claim by arguing It transforms the portfolio, accelerates long-term augmentation and give forth highly alluring returns (Nicholson and Michael J. Return on equity ROE or return on assets ROA are considered a well-organized process for three years time frame after the acquisition, whilst maintaining returns that are assessed relative to the acquirers pre-acquisition accounting performance. 14. N., Yadav, S.S. & Jain, P.K. Conn (1985) stated the dissimilar kinds of acquisitions are considered a substantial factor to contemplate when measuring a businesss success as it aids in determining whether a companys M&A was a success or not. 198-212. This argument also assist to eradicate inept and mislead management and improve underrated shares such as robust companies of partial sturdy form of stock market inadequacy. 61-72. From my observation, its evident that the Krafts acquisition of Cadbury was a success since it appears that the company will benefit in the longer run from the takeover (Kraft foods, 2011). http://smallbusiness.chron.com/advantages-disadvantages-borrowing-money-bank-61049.html. in the case Kraft decides to produce a high-performing, well-diversified collection of companies in their organisation. When the two met in central London on August 28, she made an unexpected proposal: Kraft wanted to buy Cadbury and was prepared to offer around 10.2bn or 745p a share in cash and stock - 31 per . Glencore is a mining and trading company. Barmeyer and Mayrhofer, (2008, pp. Training Journal, 20. Dutordoir, Roosenboom & Vasconcelos, (2014) puts forward the conception synergy gain is primarily the reason why firms undertake M&A. Innovatative mode of financing and abnormal returns to shareholders of indian acquiring firms. (2002), Making mergers and acquisitions work: what we know and dont know, Journal of Change Management, Vol. (1985), Preventing acquisition failures, Management Review, Vol. sales with the endeavour to reach common goals. Kraft foods, (2011) states after Kraft acquisition of Cadburys the companys organisation was good. (Brock, 2005). This idea is evident especially because there was a 27% increase in dividends which led to an increase in shares for shareholder due primarily because of the Cadbury acquisition. Firstly, I measured Cadbury accounting measure of profitability performance three years before the acquisition, and Krafts performance three years after the acquisition since some surveys of merger and acquisition decisions have indicated that managers primarily seek to improve profitability through mergers and acquisition (Ingham, Kran, & Lovestam, 1992; Rose, 1989). Lubatkin, M. & ONeill, H.M. (1987), Merger Strategies and Capital Market Risk,The Academy of Management Journal,vol. Bauer, F., & Matzler, K. (2014). New York: The Free Press. Additionally, Cadbury was not only not for sale, but it vigorously withstood the Kraft takeover (Moeller, 2012). 1, pp. Merritt (2016) supported this view by stating horizontal M&A include businesses that suggest the same products or services to the same kinds of customers. Banks normally require a lengthy and thorough application process before they will approve you or your business for a loan. 47, no. Nevertheless, the method is arguably useful and generally better than i.e. 55, no. Journal of Business and Psychology, vol 26, no 2, pp 161-168. The British government even got involved in the bid wrangling, with Business Minister Peter Mandelson warning Kraft not to try and make "a quick buck" out of Cadbury and Prime Minister Gordon . San Francisco: Jossey-Bass Publishers. 2, pp. This is because of the idea such as in the short run, as promptly as it is for physical assets to retain safe economies of scale, it may also cause the manufacturing of lesser costly amount, therefore short run economics of scale may well take advantage of newly acquired M&A as it helps to allow disposing of dual fixed cost. The deal follows a six month bidding war for the confectioner. Cartwright, S., Cooper, C.L. 2015, Financial performance analysis of mergers and acquisitions: evidence from India,International Journal of Commerce and Management,vol.