FINESSE CASE STUDY COMPETITION 2011

We are delighted to announce a new Competition for case Studies in Finance. The
competition is open exclusively to students of B-schools.

The case study would be available to the participants online at the www.imnu-finesse.com on
27th of January 2011.

Competition Rules:

1. Applicants can apply only as a team of two.

2. Both of the applicants should be from the same B-School.
3. Only one case analysis is accepted per team.
4. The case analysis should not have been entered for any other case writing
competition.
5. The front page of the case study should contain the title of the case, the names of the
authors, the name of the academic institution, and contact details only. These details
should not appear anywhere else in the case.
6. The formatting should be Times New Roman, font 12, 1.5 spacing, and double
justified. Headings should be in font 14 and in bold, with sub-headings in font 12 and
also bold.
7. As part of the analysis of the case study we would require a seven slide PowerPoint
presentation as well. The presentation would include details of the participating team-
Team Member’s Name, the college to which they belong
8. The presentation must have a brief overview the analysis done by the group.
9. The analysis of all the questions must be done on a word file, preferably calculations
done should be done on excel.
 10. The word limit of the complete analysis should be maximum 1200 words.
11. The participants are allowed to use any data for their evaluation; however they must
attach all the data used with the final document. They must also provide with the link
of the reference used. The data used must be genuine and should be used from a
trusted source

For any queries and clarification please feel free to contact.

The prizes for the competition are:

1st prize Rs 5000

2nd prize Rs 3000

The closing date for submission of entries is 8th February 2011, and the winners will be
announced at the website and will be contacted.

Event Coordinator Perspective Coordinator

Nipath Belani Manan Pamani Arjit Gupta
09099043207 09879659643 09904499818

perspective@finesse-imnu.co.in
 A CHOCOLATEY TAKEOVER?

After months of negotiations, Kraft announced that it would acquire U.K. confection giant
Cadbury with a revised bid of $19.5 billion. The acquisition of Cadbury by Kraft will
generate a joint portfolio of more than 40 confectionary brands, each with annual sales in
excess of $100 million, essentially creating the world's biggest confectionary company. Both
Kraft and Cadbury had a lot at stake to make this deal work. Statistically, deals this complex
have a high rate of failure. In fact, research conducted by RHR International found that 70%
of acquisitions fail to deliver the expected results. Despite the discouraging data, there is
much the leadership teams at both Kraft and Cadbury can do to put the odds in their favor.

KRAFT FOODS
Kraft Foods Inc. is the largest confectionery, food, and Beverage Corporation headquartered
in the United States. It markets many brands in more than 155 countries

The company is headquartered in Northfield, Illinois, a Chicago suburb. Its European

headquarters is just outside Zürich, Switzerland which is run by Roger Federer's
father, Robert Federer.

Kraft is an independent public company; it is listed on the New York Stock Exchange and
became a component of the Dow Jones Industrial Average on September 22, 2008, replacing
the American International Group.

THE HISTORY OF KRAFT

In 1916, the company began national advertising and had made its first acquisition — a
Canadian cheese company. In 1924, the company changed its name to Kraft Cheese
Company and listed on the Chicago Stock Exchange. In 1926, it was listed on the NYSE. The
firm then began to consolidate the United States dairy industry through acquisition, in
competition with National and Borden. Firms acquired are mentioned in exhibit 1.
Later, in 1927, it established its London, United Kingdom, and Hamburg, Germany, sales
offices — its first forays outside North America. Sales for 1927 were $60.4m.

In 1928, it acquired Phenix Cheese Company, the maker of a cream cheese branded
as Philadelphia cream cheese, and the company changed its name to Kraft-Phenix Cheese
Company.

In 1929, the New York Times reported that Kraft Phenix, The Hershey
Company and Colgate were looking at merging. In the same year it was reported that
National, Borden and Standard (a firm that is now part of Kraft Foods) were all looking at
acquiring the firm.

By 1930, it had captured forty percent of the cheese market in the U.S. and was the third
largest dairy company in the United States after National Dairy and Borden. In 1930, the
company also began operating in Australia following a merger with Fred Walker & Co.

In 1961 the firm acquired Dominion Dairies of Canada, marking the first effort by the firm to
expand into fluid milk and ice cream outside the United States. In the same year it also
acquired The Southern Oil Company in Manchester, England.

In 1980, Kraft merged with Dart Industries - makers of the Duracell brand
of batteries, Tupperware brand of plastic containers, West Bend brand of home
appliances, Wilson art brand of plastics and Thatcher glass - to form Dart & Kraft.

During the 1980s, Dart & Kraft offered mixed results to its shareholders, as new acquisitions
in the food business - such as Churny premium cheeses, Lender's Bagels, Frusen Gladje ice
cream and Celestial Seasonings tea - slightly offset the lagging nonfood business -
Tupperware's decrease in sales and KitchenAid's (acquired soon after the merger) slide in
market share - leading Dart & Kraft to spin off its nonfood business
(except Duracell batteries) into a new entity (Premark International, Inc.) while changing its
name back to Kraft, Inc. Premark was bought by Illinois Tool Works in 1999. In 1988, Kraft
sold Duracell to private equity firm Kohlberg Kravis Roberts, who then put it into an initial
public offering in 1989. Gillette bought Duracell in 1996, and itself was acquired by Procter
and Gamble in 2005.

At the end of 1988, Philip Morris Companies purchased Kraft for $12.9 billion. In 1989,
Kraft merged with Philip Morris's General Foods unit - makers of Oscar
Mayer meats, Maxwell House coffee, Jell-O gelatin, Budget Gourmet frozen
dinners, Entenmann's baked goods, Kool-Aid,Crystal Light and Tang powdered beverage
mixes, Post Cereals, Shake 'n Bake flavored coatings and numerous other packaged foods -
as Kraft General Foods. Its aggressive product development was reversed after the merger, as
it became slow in addressing issues on its product lines due to its size, and also company
politics.

In 1990, the company acquired Jacobs Suchard (a European coffee and confectionery giant)
and Freia Marabou (a Scandinavian confectionery maker) to expand overseas as its business
was heavily dependent on the U.S. In 1993, it acquired RJR Nabisco's cold cereal business
(mainly Shredded Wheat and Shreddies cereals) while selling its Breyers ice-cream division
to Unilever and its Birds Eye unit to Dean Foods. In 1994, it sold its frozen dinners unit
to H.J. Heinz and in 1995; it sold its foodservice unit.

In 2000, Philip Morris (renamed Altria in 2003) acquired Nabisco Holdings for $18.9 billion
and merged the company with Kraft Foods the same year. In 2001, Philip Morris sold 280
million Kraft shares via the third-largest IPO of all time, retaining an 88.1% stake in the
company.

In 2004, it sold its sugar confectionery division to Wrigley, while doing minor divestitures -
including its hot cereals division (Cream of Wheat) in 2007, its pet snacks division (Milk-
Bone) in 2006, juice drinks and Fruit2o in 2007 and some grocery brands in 2006.

Altria announced on January 31, 2007, that it would spin off all the remaining Kraft Foods
shares to Altria's shareholders; each will be given approximately 0.7 share of Kraft for every
Altria share they own.
Investor Nelson Peltz bought a three-percent stake at Kraft Foods and is talking with the
executives on revitalizing the business, with options such as buying Wendy's fast food chain
or selling off Post cereals and Maxwell House coffee. On January 31, 2007, after months of
speculation, the company announced that its 88.1% stake would be spun off to Altria
shareholders at the end of March 2007. Kraft is now an independent publicly held company.

In July 2007, the company bought Groupe Danone's biscuit (cookie) and cereal division for
$7.2 billion, including iconic French biscuit brand Lefèvre-Utile. While two years earlier
firestorms of protest had arisen over plans for American PepsiCo's hostile takeover of the
French company, Kraft's announcement was not met with the same protests, in part because
Kraft agreed not to close French factories and keep the new merged divisions headquarters
near Paris for at least three years.

In November 2007, Kraft agreed to sell its cereal unit to Ralcorp Holdings, a major private-
label food maker, for $2.6 billion in a form of a spin-off merger. This would add 50% to
Ralcorp's sales, to $3.3 billion, and will be used for Kraft's debt payment, which is at $13.4
billion, in danger of a downgrade by Standard and Poor's.

In February 2008, Berkshire Hathaway Inc. run by billionaire investor Warren E.

Buffett announced that it had acquired an 8% stake in Kraft worth over $4 billion. Buffett's
business partner Charles Munger had also invested over $300 million in Kraft.

On September 22, 2008, the company replaced the troubled insurance company, American
International Group in the Dow Jones Industrial Average.

On January 6, 2010, Kraft agreed to sell its North American frozen pizza business
to Nestle for $3.7 billion. The sale, which is subject to regulatory clearance,
includes DiGiorno, Tombstone and Jack's brands in the United States, the Delissio brand in
Canada and the California Pizza Kitchen trademark license. It also includes two Wisconsin
manufacturing facilities in Medford and Little Chute. The business generated 2009 net
revenues of $1.6 billion, with 3,400 employees.
THE HISTORIC ACQUISITION
On 7 September 2009 Kraft Foods made a £10.2 billion (US$16.2 billion) indicative takeover
bid for Cadbury. The offer was rejected, with Cadbury stating that it undervalued the
company. Kraft launched a formal, hostile bid for Cadbury valuing the firm at £9.8 billion on
9 November 2009. Business Secretary Peter Mandelson warned Kraft not to try to "make a
quick buck" from the acquisition of Cadbury. On 19 January 2010, it was announced that
Cadbury and Kraft Foods had reached a deal and that Kraft would purchase Cadbury for
£8.40 per share, valuing Cadbury at £11.5bn (US$18.9bn). Kraft, which issued a statement
stating that the deal will create a "global confectionery leader", had to borrow £7 billion
(US$11.5bn) in order to finance the takeover.

The Hershey Company, based in Pennsylvania, manufactures and distributes Cadbury-

branded chocolate (but not its other confectionery) in the United States and has been reported
to share Cadbury's "ethos". But on 22 January 2010, Hershey announced that it would not
counter Kraft's final offer.

The acquisition of Cadbury faced widespread disapproval from the British public, as well as
groups and organizations including trade union Unite, who fought against the acquisition of
the company which, according to Prime Minister Gordon Brown, was very important to
the British economy. Unite estimated that a takeover by Kraft could put 30,000 jobs "at
risk", and UK shareholders protested over the Mergers and Acquisitions advisory fees
charged by banks. Cadbury's M&A advisers were UBS, Goldman Sachs and Morgan
Stanley. Controversially, RBS, a bank 84% owned by the United Kingdom Government
funded the Kraft takeover.

On 3 February 2010, the Chairman Roger Carr, chief executive Todd Stitzer and chief
financial officer Andrew Bonfield all announced their resignations. Stitzer had worked at the
company for 27 years.

On 9 February 2010, Kraft announced that they were planning to close the Somerdale
Factory, Keynsham, with the loss of 400 jobs. The management explained that existing plans
to move production to Poland were too advanced to be realistically reversed, though
assurances had been given regarding sustaining the plant. Staff at Keynsham criticized this
move, suggesting that they felt betrayed and as if they have been "sacked twice.” On 22
April 2010, Phil Rumbol, the man behind the famous Gorilla advertisement, announced his
plans to leave the Cadbury Company in July following Kraft's takeover.

At about the same time, Kraft also announced the Global Chocolate Centre of Excellence will
be located in Bournville, Birmingham, thus securing the future of Research and Development
capability at the spiritual home of Cadbury.

In June 2010 the Polish division, Cadbury-Wedel was sold to Lotte of Japan. The European
Commission made the sale a condition of the Kraft takeover. As part of the deal Kraft will
keep the Cadbury, Hall's and other brands along with two plants in Skarbimierz. Lotte will
take over the plant in Warsaw along with the E Wedel brand.

A commentator recently said that in the history of M&A activity there is no M&A deal that
has made more people unhappy that the impending acquisition of Cadbury by Kraft

In light of the various views from the stakeholders involved in the Kraft and Cadbury’s
merger, one may be fooled into believing that no one is going to win in this deal and that the
deal is bad news for everyone.

That is not the case because some of the stakeholders are going to emerge better off than they
were in September 2009 when Kraft announced its intention to acquire Cadbury.

RATING AGENCY

The rating company Fitch downgraded both Kraft and Cadbury because of the risk nature of
funding that will be used to finance the deal. There is no evidence of default risk, financial
risk or risk to the going concern status of the two firms individually or of the merged firm
should the acquisition go ahead. The downgrading is actually surprising because it assumes
that capital structure matters very much to an organisation’s success.

History is full of successful companies with high gearing ratios as long as they have good
investment prospects. In this case it appears that both firms have good growth prospects as
represented by their strong product portfolios which they are on the verge of taking into new
markets, for example India and China.

CADBURY SHAREHOLDERS

The Cadbury shareholders are crying foul because they think Kraft is getting their company
on the cheap however this crying is without base or foundation. On the other hand the share
price of Cadbury equity stock has increased by 40% since Kraft announced its intention to
acquire it. The shareholders of the target company are the other party in the zero sum game
equation. Cadbury's employees may turn out to be the ponies in the strategic game to be
employed by Kraft in order to achieve the merger synergies.
 Exhibit -1 Various Acquisitions by Kraft

Year Firm Sector Location

1927 A.E. Wright Salad dressings n/a

1928 Phenix Cheese Cheese, other dairy products National

1928 Southern Dairies Fluid milk, milk powder, other dairy products U.S. South

1928 10 "cheese dealers" Cheese, other dairy products New York

1928 Henard Mayonnaise Co Mayonnaise n/a

1929 D.J. Easton Mayonnaise New Jersey

1929 2 other mayonnaise companies Mayonnaise n/a

1929 10 companies Cheese, other dairy products various regional

1929 International Wood Products n/a n/a

1929 Gelfand Manufacturing n/a n/a

 QUESTIONS

Q1. Justify the strategic fit of this acquisition from Kraft’s perspective?

Q2. How is the acquisition different from the other acquisitions that Kraft has
been involved in the past?

Q3. From financial point of view, what is the right value of Cadbury according
to you?

Q4. 12 months after this deal you think it has been successful? (Discuss from
the point of view of all stakeholders)