Comparison of Kraft - Cadbury Takeover and the Glencore - Xstrata Merger - Assignment Example

Mergers and Acquisitions

• 1. Comparison of Kraft - Cadbury takeover and the Glencore - Xstrata merger
  • a. Potential Motives

Cadbury, a UK chocolate maker company was finally acquired in 2011 by one of the renowned food and beverage companies of US named Kraft. This has created a great deal of emotion upon the workers as well as the media. However, this deal was done after a reasonable analysis and meant better for both the companies (Moeller, 2012). This acquisition considered as hostile rather than mutual as Cadbury resisted the takeover by Kraft. However, there were several reasons for acquisition of the chocolate maker Cadbury one of which is gaining the economies of scale and reducing the cost of unit. It would allow acquirer to achieve the various economies of scale (Moeller, 2012). Moreover, the acquirer will also enjoy growth in the business by gaining access to the market of the developing countries such as India.

In case of the merger between Glencore and Xstrata, both of them were giants in mining and commodities trading and their merger cost GBP 37 billion. Such an activity has geared the outcome of the merger as its demand boomed across the globe. Unlike the Cadbury acquisition by the US giant Kraft, this merger was friendly and was based on the mutual understanding but somehow was the clash of egos. The main benefit which both the companies could enjoy through this merger is that they can access new sources of growth along with an improvement in the value chain. The combined synergy of these companies will also improve the market intelligence and network (Kayakiran and Riseborough, 2012). However, the point where both the acquisition and merger have reflected similarity is the benefit of cost and access to new geographical regions with new markets scopes.

• • b. Financial Methods of Merger and Acquisition

In case of the acquisition of the Cadbury by Kraft, the approach was made by the US giant. In the first approach, the deal was made with a cash and share takeover. In the opening bid Kraft was ready to pay 300p in cash as well as .02589 new share of Kraft for each of the Cadbury’s share. In this case, the chairman of the UK firm rejected the bid. In the next bid, Kraft bid lower and accepted to pay GBP 10.2 billion but this offer also got rejected (Moeller, 2012). The US Company has also been requested by Warren Buffet, who is a stakeholder not to overpay for Cadbury (ACCA, 2015). However, Cadbury eventually got absorbed by Kraft in 2011 where the price paid in cash and share worth GBP 11.5 billion.

Glencore is considered as the world’s largest commodity supplier has agreed to buy Xstrata for about GPB 26 billion. This takeover is also considered as the biggest mining takeover. In this deal, Glencore offered 2.8 new shares for each of Xstrata’s shares which reflect a premium of 8%. This was such a synergy where the business was expected to create sales of $209 billion (Rowley, 2013). There are both the similarities as well as distinction between the two. Unlike Cadbury takeover, this does not include cash but the trade is based on shares. In both the cases, the main reason for the acquisition is gaining the market and increasing the sales.

• • c. Impact of Takeovers

Shareholders- The shareholders are the owners of the share which makes it legit that they will get affected by any kind of change in the management of the company or any kind of mergers and acquisitions. In case of Cadbury, the investors feared the acquisition at first as it may alter with the policies but were finally came to rest when the value of the same increased due to the announcement made by Kraft regarding adding 0.26 new craft share for each Cadbury share (Moeller, 2012). However, unlike the acquisition of Cadbury, the merger between Glencore and Xstrata was opposed by its shareholders as their share value was going low. All the major shareholders of the organisation were against the deal as they might face loss due to the same. It is because deal valued Xstrata at 28% above its market value at GBP 39.1 billion which was not appealing to the shareholders (Kayakiran and Riseborough, 2012).

Employees and managers- The employees and managers are the one who are affected to the maximum extend by the mergers or acquisition. In case of Cadbury takeover, the workers were against the deal. It was much of an emotional decision and they feared the cultural change that may occur. However, their fear actually came true where Kraft decided that it will not continue with the Somerdale factory and this caused 500 job losses and other 30000 were at stake when the company decided to pay the debt on cost of the jobs (Moeller, 2012). Unlike the previous case, the employees at Xstrata were asked by the acquirer Glencore to stay with the organisation (Kayakiran and Riseborough, 2012). They were mainly approaching the employees who were engaged in operations.

Customers- The customers are also the stakeholder of a company but they are external influencing factor. However, they are also the main factor of change as they are the one responsible for sales. In case of Cadbury, the acquirer company cut its production in UK factories and took it overseas. They also changed the selling strategy where they improved the quality using extra cocoa which the customer liked and their sales inflated (Moeller, 2012). On the other hand, the customers for the Glencore and Xstrata are the production houses itself. Therefore, any changes in the demand will impact the company but the merger proved to be good for the customer as well.

Regulatory Implication- The response which provided by the government is that it will monitor Kraft’s delivery of commitments as it has shut down one of the strategic factories in UK. However, there is an issue where the government has a limited power to force the company to comply with the commitments. On the other hand, the European commission mentioned that there will be no problem from the regulatory point. It is so because both the companies are from the same country unlike the Cadbury case where both the companies are from different countries.

• 2. Post Bid Defences

Post bid defence or corporate takeover defence is one where the target company tries to save itself from any kind of hostile takeover. This is very much reflected in the case of Cadbury takeover as the chairman of the UK firm was trying to resist it along with the workers (Tsagas, 2014). In order to resist the takeover, the company actually put together the defensive advisory team. The first step which it took was to undervalue the company by branding it unattractive as its share offer was 745p per share. It thought that if the company wanted to get takeover then it would probably be one of the confectionary companies which it would recommend as buyer (Pai and Subramanian, 2014). Moreover, the UK’s business secretary also announced that it would not let the deal happen if the buyer fails to respect the historic company. It also planned to trick the shareholders to reject the proposal made by the US giant Kraft by announcing them that the company will get absorbed in the low growth conglomerate model of Kraft (Wachman, 2010). This news was also spread that the company will have unappealing prospect if gets absorbed by Kraft.

In the case of the merger that happened between Glencore and Xstrata, this was merger at first but later Glencore absorbed Xstrata. In this case, there was no obstruction from the regulatory bodies or the management of the company but the shareholders were dissatisfied. A change in the management was not exactly what the shareholders were looking forward to, as the policy for Xstrata was more detailed than that of Glencore’s itself. When Glencore took control of the management turning the merger largely into takeover, the chairman of Xstrata did not take any action against it and stood down during the negotiation. It mainly happen when the shareholders of Xstrata voted against the decision of the management to pay retention bonuses to the employees who would work for the joint company (Bowers, 2012). However, during the annual meeting, the shareholders voted against the chairperson and removed him from the position as well as even from the position of director.

• 3. Success or Failure of Bid Defence

As per the previous discussion of the bid defence that Cadbury took against the takeover where it asked its shareholders to vote against the deal and even undervalued itself but it had a final defence strategy against the hostile takeover. The final line of defence for the UK chocolate making firm was to attack the US giant’s stock price performance. It was the time when the chairman of Cadbury was trying to prove that Kraft was a low growth conglomerate as its share price fell from $31 to near about $27. Therefore, he announced that the low growth company is trying to buy UK confectionary giant on the cheap. However, on the final date which was provided to Kraft, the issue grew up where investors of Cadbury said that it worth 850p but the US Company was valuing it at 740. Finally, the deal closed at 777p which was 20p down after the biggest investor of Kraft warned to vote against the bid as the company was overpaying for the acquisition.

The merger between Glencore and Xstrata was very much opposed by the shareholders of Xstrata as they found the deal quite unappealing. However, the company recommended its shareholders to accept the offer made by Glencore. Moreover, the Qatar Holdings which is holding 12% stake also asked the company to provide the offer higher than 3.05 Glencore’s share in exchange of Xstrata. Such a deal would provide all the shareholders with benefits from the deal. However, this was analysed that it might be very beneficial for the shareholders but may impact the customers negatively as the product will get costly.

• 4. Post Acquisition Position of the Companies

After the acquisition of the Cadbury by the US giant Kraft, their first quarter financial reflected the success of the deal. It is so because the company has actually performed very well as reflected from its high revenues which were $12.6 billion. However, the main motive with which the company acquired was not fulfilled by that time. The main motive was not only to increase the profitability and shareholder’s wealth but also to gain the economies of scale (Moeller, 2012). As per the financials of the company, the growth in the earnings had been stemmed by the high financial cost as well as high outstanding shares. However, the increased earnings have been detected on the operating income of the company to $1.6 billion. However, the company had a positive outlook about the acquisition and was hoping that the net revenue will grow till the year end and will be reflected on the annual reports. The main strategy it was making was to control the cost and stabilise their sales in order to record profit.

The Glencore Xstrata synergy is considered as one of the excellent mergers and it has also been reflected in its annual reports. The synergy benefit was firstly budgeted to be $2bn but it exceeded the expectation to score $2.4bn and the company will also increase through cost saving strategy. The nominal value of assets decreased by $7.5bn after the takeover but still their deal is seen as one of good decisions made by both the companies and cost saving intention of Glencore has also been appreciated. Moreover, it also impacted the economy as this synergy created about more than 8000 jobs across the globe (Marais, 2014).