Kraft Foods Inc. and Cadbury PLC

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CASE STUDY. In “Kraft Foods Inc. and Cadbury PLC – Part A – A Nutritious Association?”, an investor wonders whether the acquisition of Cadbury is based on sound business sense and whether it will be beneficial to him as a Kraft Foods shareholder.

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Kraft Foods Inc. and Cadbury PLC: Abstract

Kraft Foods Inc. and Cadbury PLC is a case study by Alix Mandron.

This case comprises two parts. In “Kraft Foods Inc. and Cadbury PLC – Part A – A Nutritious Association?”, an investor wonders whether the acquisition of Cadbury is based on sound business sense and whether it will be beneficial to him as a Kraft Foods shareholder. He also puzzles over the value of the mixed payment offered to Cadbury’s shareholders. Details are provided about Kraft Foods’s activities and businesses, followed by a description of Cadbury. Each company’s historical financial statements are appended. Kraft Foods’s rationale for the acquisition is provided, together with the structure of the original and final offers.

“Kraft Foods Inc. and Cadbury PLC – Part B – A Sweet Divorce?” (included only in Enseignement par professeurs license) , which focuses on the subsequent “demerger” of the Snacks division less than two years later, can be analyzed in its own right as a second step. Alternatively, the instructor can use it as a conclusion to highlight points related to strategy and disclosure or to the ex-post measurement of synergy effects.

Teaching objectives

  • Part A: Have students go beyond the company’s qualitative description of the benefits of the acquisition and to discover the real motives underlying the marketing-based presentation. Discuss the determination of a “rational” control premium from the point of view of the acquirer’s shareholders and the reasonableness of the offered premium.
  • Part B: Show how difficult it is to measure the results (the realization of synergy effects) after the fact and help students to understand the limits of strategy disclosure.

Main themes covered

  • Acquisition motives
  • Identification and evaluation of synergy effects
  • Examination of the acquisition premium
  • The exchange ratio in a mixed payment
  • Post-acquisition results
  • Spin-offs
  • Acquisition/divestiture strategy

Concepts and theories related to the case

This case is about financial value creation through an acquisition. It requires some deftness in the analysis of financial statements (although not at an advanced level) and relies on the discounted cash flow model of valuation and the value additivity principle. Students must also be able to relate announced strategic motives to the practical day-to-day operations of a company.

Multi-part case

  • Part A: A Nutritious Association?
  • Part B: A Sweet Divorce? (part B only available with a Teaching License purchase)

Additional information

Teaching notes are available for professors. Contact the HEC Montréal Case Centre.

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