The Kraft – Cadbury Takeover and the Glencore-Xstrata Merger

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Table of Contents

Introduction
Kraft-Cadbury takeover and the Glencore-Xstrata Merger
Post-bid Defenses that a Business can Deploy to Resist a Proposal
The Degree of Success of the Post-bid Defenses
The Situation of the Companies after the Acquisition
Conclusion
References

Introduction

Mergers and acquisitions (M&A) is a phrase that generally refers to companies that come together with the view of consolidating their assets or wealth. Cadbury is the world‘s second largest confectionery company that is fully owned by Mondelez International, which was previously known as Kraft Foods. Kraft was formed in 1903. Glencore is also an Anglo-Swiss company, which merged with another Anglo-Swiss firm, namely, Xstrata. Glencore is a mining and trading company. In 2010, Glencore was the world’s largest mining business in Switzerland. This paper compares the Kraft – Cadbury takeover and the Glencore-Xstrata merger. It will also address post-bid defenses and their level of success in the above M&A cases.

Kraft-Cadbury takeover and the Glencore-Xstrata Merger

Potential Motives- Similarities and Differences

Various mergers and acquisitions are associated with a rise in the market value of the merging companies. Such increase in value directly affects the shareholders positively. The Cadbury-Kraft acquisition resulted in an increase in the share price by 3.3% leaping to a trading price of 834.50p per share in the first week of trade in the London Stock Exchange. Kraft funded the bid increment to 771p per share with cash, which rose to 840p with a 10p special share dividend for the shareholders. This strategy changed the board’s earlier decision of rejecting Kraft’s initial bid. Appendix 1 shows Kraft investors’ successful returns in 2015. The deal valued Cadbury at 13 times the basic earnings pre-tax, pre-interest, and before amortization and depreciation. This deal would then add 5 cents per share. The plan was beneficial to Kraft’s shareholders. For instance, in 2011, the shareholder got a more than 10% ROI. In Glencore’s merger with Xstrata, shareholders also gained from the amalgamation plan. Qatar Holdings, which had a 12% stake in Xstrata, received a 3.05% stake in the newly merged company (Blas 2013). Moreover, profits in the first year of the merger were projected to amount to $500 million.

Notwithstanding the previous impasse between Xstrata shareholders regarding their company’s merger with Glencore, the financial market power of Glencore- Xstrata was massive. The merger created a globally reputable firm, which is currently listed on the London and Hong Kong Stock Exchange with its headquarters in Switzerland. In 2014, the merged company generated more than $3.67 billion in net income. Hence, it managed to attain a 20% increase in profits as compared to the situation before the merger in 2013. The merger added Xstrata’s main trading commodities such as coal, copper, nickel mines, and zinc to Glencore’s portfolio. This plan resulted in good returns with annual sales from its operations going above $200billion in five continents. The strategy made it the fourth largest miner in the world. The merger also enhanced efficiency to the extent of leading to a $2.4 billion in cost savings in the same year (Riseborough 2014). Kraft’s collection boasts of many candy and sweets companies, probably above 40, with yearly returns that go beyond 100 million US dollars. The acquisition also brought about a cost saving of roughly $675 million annually after three years of the deal.

The Glencore-Xstrata merger bears a clause on the suitable compensation arrangements for key personnel. The main agenda of this feasible arrangement is to ensure that key employees or managerial level staff members are motivated to enhance the growth and development of Glencore-Xstrata. Mick Davis, the chief executive of the merged company, was the best-paid Financial Times Stock Exchange (FTSE) boss. He earned 18.5 million pounds in 2010. His remuneration in 2011 was 5.4 million pounds. Ivan Glasenberg, the CEO of Glencore, echoed this remuneration increment when he said that shareholders should pay performing managers, especially if they are not shareholders themselves (Ferreira-Marques 2012). Irene Rosenfeld, Kraft’s CEO, was awarded more than 40% pay rise in 2010. She had an annual payment package of more than 17 million pounds. She was paid $ 7.8 million in stock honors, roughly $1.6 million in wages, approximately $11 million in a different enticement plan, $ 2 million in option awards, and $4m in yearly motivation payments. This remuneration plan was said to reveal the momentous endeavor put by Kraft and the eventual Cadbury possession.

Financing Methods-Similarities and Differences

Due to their huge capital base, Glencore-Xstrata and Kraft-Cadbury mergers and acquisitions were self-financed. For Glencore-Xstrata, the deal was financed in shares whereby Glencore offered close to three fresh units for each Xstrata’s piece. The company’s major shareholder publicly rapped Kraft’s CEO and warned that she should not issue many of Kraft’s shares to pay for the Cadbury acquisition deal. Hence, Ms. Rosenfeld persuaded Kraft to sell its pizza subsidiary to Nestle foods and hence partially funded the takeover deal. The rest of the funding came from an apparently reduced issue of shares. Therefore, for the Kraft-Cadbury deal, financing was done through exchanging stock and cash payment.

Impact on Shareholders

Kraft’s acquisition of Cadbury caused an increase in share value for the latter company’s shareholders. Lord Mandelson, the UK’s business secretary, also commented on the acquisition indirectly urging Cadbury’s shareholders to take a long-term view of the shares. Reacting to market news, Cadbury share value went up by 3.5% to hit the 835p mark in 2010. This one-off outcome was expected with reference to the prevailing share rates. However, Mandelson’s spokesperson stated that any decision that was to be made involved the shareholders and the company. The 850p value that was set for each share made it possible to win the confidence of shareholders who had previously declined Kraft’s initial offer. On the other hand, for Glencore-Xstrata merger deal, major Xstrata shareholders such as Qatar Holdings complained that they required an offer that was higher than 3.05 Glencore shares per Xstrata’s share, which was not the case since the deal was done at 3.05. The majority of shareholders benefitted from the merger deal after Xstrata agreed Glencore’s least offer of 3.25. The market capitalization and the imprint of Glencore-Xstrata as a global force in mining led to increased profits in 2013, which consequently resulted in augmented earnings per share for the shareholders. Glencore-Xstrata became the world’s largest producer of coal, lead, and zinc and the largest independent producer of copper.

Impact on Managers/Employees

After the acquisition of Cadbury by Kraft, the majority of Cadbury’s employees panicked because they did not know their fate. In fact, hypothetically speaking, whenever mergers and acquisitions are established, layoffs are bound to happen during the restructuring process since the new company adopts a different business model and strategy. The majority of job termination cases negatively affect employees who lack sufficient skills. Hence, it becomes difficult for them to move on to better jobs. In the case of the merger between Glencore and Xstrata, both companies retained their individual workforce, which made the business operate in 20 or more countries where it employed 70,000 people. Regarding the acquisition of Cadbury, the UK Prime Minister, Gordon Brown, urged Kraft not to cease the operations in the country and suggested the government’s influence on maintaining jobs for Britons after the takeover.

Impact on Customers

A merger or acquisition may present a variety of product lines, economies of scale, and cost-containment for two businesses. In a market where some competitors have a brand image that is important to consumers, an acquisition can lead to customers shifting towards the opponent. For the acquisition of Cadbury by Kraft Foods, not all customers from Cadbury became part of Kraft’s customers. Besides, changes are bound to happen in terms of prior customer service experience. If the clients feel that the changes are negative, they will progress to the original business’ competitor (Hitt, Harrison, & Ireland 2001).

Competition Issues

Mergers and acquisitions help in eliminating competition on the same field. Kraft’s acquisition of Cadbury ensured that the company (Cadbury) was eliminated from the market and that Cadbury’s assets became Kraft’s possessions. The move was aimed at increasing Kraft’s asset base and marketing leverage power (Lei 2001). The plan was advantageous to Kraft in the confectionery world. After the merger between Glencore and Xstrata, the new company Glencore-Xstrata became a major force in the mining industry. Acquisitions occur with the view of acquiring the assets of a company that has a great capital portfolio before rival companies do so. Consequently, such acquisitions make the weaker company competitively stronger compared to its stature before.

Regulatory Implications

According to Gregoriou and Renneboog (2007), mergers and acquisitions affect a company’s corporate governance. They are part of any business’ strategic management. Moreover, it is imperative for legal due diligence to be done to facilitate a merger or an acquisition, which can help in minimizing any legal risk that might be implicated on the deal. The initial stage involves analyzing both businesses’ Articles of Association and aspects that relate to employee registration with the relevant regulatory bodies. For instance, the Cadbury-Kraft deal was delayed for more than four months due to regulatory observance.

Post-bid Defenses that a Business can Deploy to Resist a Proposal

Shareholders Rights Plan

Shareholders rights plan is the most common takeover defense mechanism. The strategy is activated the moment potential investors announce their plans of acquiring a firm. Through this mechanism, shareholders can purchase additional stock at a discounted price hence making it difficult for the potential acquirer to come in.

Voting Rights Plan

When implementing this plan, target companies ensure that the majority of shareholders are barred from voting on matters of a takeover bid. Thus, a corporate predator’s presence may cause the super-majority type of voting, which necessitates 80% of the shareholders to approve the merger, rather than the usual majority of 51%.

The Degree of Success of the Post-bid Defenses

Kraft maintained that it would safeguard the contractual agreements on employment rights for all Cadbury company’s employees, including their pension rights. However, as Peston (2010) reveals, “Kraft shut down the Somerdale Cadbury plant in Keynsham in 2011 by citing plans to move to a new plant in Poland” (para. 7). This move led to a loss of over 400 jobs. Regarding management, when Kraft and Glencore CEOs managed to seal the acquisition and merger plans, they were awarded packages that were matching their roles towards the success. Hence, the post-bid defenses that were applied in each deal can be regarded as successful to the extent that they protected the interests of the upper elite of corporate executives instead of investors or the company.

The Situation of the Companies after the Acquisition

In Cadbury’s post-acquisition process, the UK plant was shut down, a move that caused massive loss of jobs to the company’s parent country while the Glencore-Xstrata merger produced profits in the recurrent trading periods. The corporate financial strategy adopted by Kraft was inappropriate as cited in a report. For instance, the committee chair, Adrian Bailey, asserted that the committee would monitor the previous pledges made by Kraft to the employees. Moreover, Kraft decided to change the recipe of the Cadbury dairy milk egg to one that was made of a standard cocoa mix. This strategy led to a dip of over 6 million pounds in sales in 2015 and more job cuts in the Bourneville plant. In the 4^th quarter of 2010, Kraft’s profits also reduced by 24%. On the other hand, in 2014, Glencore made a net profit of $ 2.31 billion, notwithstanding the $7b write-down in 2013. The profitability was witnessed due to the company’s merger with Xstrata.

Conclusion

Kraft Foods struggles to change Cadbury’s business model. The Bourneville Union convener, Peter Taylor, confirmed his apprehensiveness about further job cuts. On the other hand, Glencore-Xstrata enjoys brisk business in terms of profits due to its large market share after the merger. The merger has not had any job cuts. In fact, it has employed more workers in the mining plant in South Africa and other parts of the world. Kraft acquisition of Cadbury may be regarded as a work in progress. However, Glencore-Xstrata is a major force to reckon with in the mining industry since it is the second largest mineral company after BHP Billiton.

References

Blas, J 2013, Glencore Finishes takeover of Xstrata, Web.

Ferreira-Marques, C 2012, Glencore CEO defends Bumper Executive Pay Deals, Web.

Gregoriou, G & Renneboog, L 2007, Corporate Governance and Regulatory impact on Mergers and Acquisitions, Academic Press, Amsterdam, Netherlands.

Hitt, M, Harrison, J & Ireland, R 2001, Mergers and Acquisitions, Oxford University Press, Oxford.

Lei, D 2001, ‘Strategic Restructuring and Outsourcing: The Effect of Mergers and Acquisitions and LBOs on Building Firm Skills and Capabilities’, Journal of Management, vol. 21, no. 5, pp. 835-859.

Peston, R 2010, Kraft Takeover of Cadbury: The Terms, Web.

Riseborough, J 2014, Glencore 2013 Profit Rises 20% as Copper Production Gains, Web.

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