MERGER

A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger1. can cut costs and increase profits, 2. boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts.

TAKE OVER
A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired.

TYPES OF MERGER
1. and competing in the same kind of business. The merger of JP Morgan and Chase Manhattan is a horizontal merger.

Horizontal Mergers- A horizontal merger involves two firms operating

2. Vertical Mergers- vertical mergers occur between firms in different

stages of production operation for example By directly merging with suppliers, a company can decrease reliance and increase profitability. An example of a vertical merger is a car manufacturer purchasing a tire company. in unrelated types of business activity. There are three types of mergers.

3. Conglomerate Mergers- Conglomerate mergers involve firms engaged

Product Extension mergers Geographic (Market) Extension mergers

Pure conglomerate mergers

MOTIVES FOR MERGERS (Synergies)

OPERATING Synergies include: Operating synergies can affect margins, returns and growth, and through these the value of the firms involved in the merger or acquisition. Economies of scale Greater pricing power Combination of different functional strengths Higher growth in new or existing markets

MOTIVES FOR MERGERS (Synergies)

Financial Synergies: With financial synergies, the payoff can take the form of either higher cash flows or a lower cost of capital (discount rate) or both.

A combination of a firm with excess cash, or cash slack Debt capacity

Tax benefits

AN OVERVIEW
US group Kraft Foods, clinched a takeover deal for British confectioner Cadbury, after winning support from shareholders representing 72 percent of the maker of Dairy Milk chocolate The news came after Cadbury's board agreed to Kraft's improved cash-and-shares bid worth 11.9 billion pounds (19.0 billion dollars, 13.6 billion euro's)

 Kraft had made an initial offer of 10.2 billion to the largest confectionary giant in the UK, but was turned down stating that the company was majorly undervalued. The main motive behind the takeover by Kraft was to become the largest confectionary company in the world which would result in a turnover of around 50 billion per year. When the management turned down the offer, Kraft sent across a petition to the shareholders of Cadbury offering them a cash and shares deal of 300 pence along with a 0.2586 share for every Cadbury share they sell. This valued the share at 748 pence against the previous 568 pence with a first hand profit of 30%. By 9th November, a very hostile Kraft lowered its offer to 9.8 billion and did not imply any modifications to its previous deal. However, this news backfired and led to a drop in 2% in the share market.

 But after months of fiercely resisting any deal, Cadbury finally agreed to an improved takeover offer from Kraft Foods, worth about $19 billion.

KRAFT FOODS BUSINESS VISION

BE THE LEADER

INCREASE ITS DISTRIBUTION CHANNELS

COST OPTIMISATION

INCREASE THE PORTFOLIO MIX

WHY ACQUIRING CADBURY?

1ST RANK WORLDWIDE CONFECTIONER 625 M US $ / YEAR IN SYNERGIES 50 BILLION US $ IN TOTAL REVENUE 1,2 BN US $ COST IN 3 YEARS

Reason why?

THE SYNERGIES

KNOWLEDGE SHARING

A COMPLIMENTARY GLOBAL PRESENCE

ECONOMIES OF SCALE

FINANCIAL EVALUATION

DEAL STRUCTURE

1 cadbury share =

500 pence cash +

0.1874 new kraft share +

10 pence special dividend =

850 pence

Analysis

WHAT HAPPENED?

Alls fair in love and synergies

Because synergies benefit potentially both the acquirer and the target, there was always going to be some argy-bargy over what constituted a fair allocation. Kraft had repeatedly stressed that it would remain financially disciplined. Clearly one route to indiscipline would be to overpay for Cadbury by getting its synergy numbers wrong and in so doing giving all the benefit, and more, to the departing Cadbury shareholders. Once achieved, synergies amount to extra profit. But achieving post-integration plans is of course fraught with uncertainty, and putting an incremental EBITDA number on them is even more difficult. Even armed with this number, the much higher riskiness of achieving the synergies means that a significantly lower multiple is warranted for them than for the company as whole. Kraft initially identified $625m of annual cost synergies; a number it subsequently raised to $675m, supported with Rule 19.1 letters from both Lazard and Ernst & Young. Given that even the most bullish of investment banks tend to take a deep breath before putting their opinions in black and white, it is fair to assume that the underlying assumptions are reasonably conservative. Allowing for the costs of implementation and applying a conservative multiple of ten (versus the 11.5-ish for the company as a whole, discussed above) values the synergies at around 160p per share (for more detail on this calculation click here for an interactive synergy calculator opens in a new window) . Add this to a standalone valuation of 700p per share discussed above and Krafts eventual 850p bid is in the money (just). If your view on the standalone value is 675p though, then Kraft overpaid. Of course if you take a braver view on cost synergies (JP Morgan research initially suggested a figure of up to $1,600m before revising this down to $1,000m) then 850p looks like much more of a bargain. Also, although much harder to quantify, given their complementary geographical spread and the ability to cross-sell each others brands, there is clearly huge scope for revenue synergies. (Kraft wouldnt be drawn beyond saying that these were significant.)

AGREEMENT TERMS
Cadbury shareholder offer: 500 pence cash and 0.1874 new kraft share for each cadbury share. Cadbury shareholders will get 10 pence per share by way of a special dividend. Offer values cadbury at approximately 11.9 billion pounds. Final offer does not require the approval of kraft shareholders. Full acceptance will result in the issue of 265 million new kraft shares,representaing 15% of its enlarged share capital. Cadbury says considers offer fair and reasonable.

Verdict
our integration is progressing extremely well..We moved quickly to name our leadership teams and im pleased that about a third of our top 50 executives are from cadbury. Weve confirmed our synergy targets and the specific initiatives that will drive future margin expansion and accelerate our growth.

Okay, but who came out on top?

Only time will tell if Kraft pulls off the integration of Cadbury. But given its conservative assumptions, it would have to do a pretty poor job not to realise $675m taking into account revenue synergies as well. At 7.7% of Cadburys sales they are less than the 8.3% average achieved in the food sector. So why did Cadburys chairman Roger Carr fold at 850p? Doubtless weighing on his mind was his time as Chairman at Mitchells and Butlers in 2006. The board held out unsuccessfully for six pounds in the face of a 575p offer. Although the share price subsequently stormed above this, in less than two years it was back below 150p and since has barely reached 300p. Essentially the Cadbury board were asking their shareholders to forgo some jam today in return for a bit more later. They also knew that with the pizza business sale done and dusted and facing aborted transaction fees running into the hundreds of millions, Krafts Ms Rosenfeld badly needed a deal, whatever her rhetoric on discipline. At 717p the Cadbury boards position was justifiable. At 850p, and given the large number of hedge fund and other opportunistic shareholders on Cadburys register, Mr Carr swallowed hard and concluded that it no longer was. Still for holders of paper worth 568p just five months previously, the nighon 50% premium Kraft paid cant be considered too bad.

ARPIT UPPAL CHANDNI ARORA DEEPIKA SHARMA ESHA KUKREJA HARDEEP SINGH HARSH BANSAL