Thursday, April 22, 2010

Strategies We Need to Implement After the Acquisition

Dear shareholders and employees of Kraft Foods,

I would like to talk about the strategies our company will implement after the takeover and potential problems we will face. I will break down the problems and provide solutions for them so everyone can see why it is important to support our CEO in her decision.

During the meeting with our CEO, Irene Rosenfeld, she called this takeover "truly a transformational combination”. Negotiations are still underway but if the takeover is successful, Kraft and Cadbury will take over past industry leaders Mars and Nestle and become the World’s largest chocolate and candy company. This is an industry status, which every company covets and this can be achieved by acquiring Cadbury.

One of the drawbacks of this acquisition is the backlash that we will face in the U.K market due to the prospect of having one of their most revered companies taken over by a U.S. food giant. There are also skeptics who question Kraft’s offer and criticized that we overpaid to consummate the deal. Our biggest shareholder, Warren Buffett, had urged our CEO not to raise her initial offer of USD$ 17 billion.

A marketing strategy will need to be devised after the acquisition. Our CEO will need to be cautious not alter employment in the U.K as employees are protected by unions. Any uprising will harm Kraft’s image and may decrease sales.

Our CEO had made her intentions clear when she vowed to “preserve Cadbury’s proud heritage and traditions” by increasing the capital inflows into its brands and to retain “a strong presence” in the U.K.

One of the most significant things our company has done in the last two years is to decentralize our organization so local managers can gain more authority to make the decisions affecting their local markets. The same strategy will be applied to Cadbury so the U.K operations need not worry about Kraft’s interference after the acquisition. U.K markets will be analyzed and managed by U.K managers and Kraft will merely finance its operations.

Cadbury and Kraft can also mutually use their international networks to advance together. For example, Cadbury is more popular in India, Turkey, and South Africa. This can help reform our business in Mexico. On the other hand, Kraft can also promote Cadbury’s sales in Brazil, Russia and China, where we have a more dominant market share.

Integrating Kraft and Cadbury into convenience stores and gas stations are also opportunities we need to venture into. Sales in these small stores are growing despite its high price (compared to supermarkets) as consumers prioritize convenience; this leads to higher profit for both brands

Additionally, combining operations of both companies will save about $675 million annually by eliminating duplication in operations, administration and marketing. Kraft will expects earnings to grow in 2011 while maintaining our dividends and investment-grade debt ratio. Research done by Moody’s Investors Service has concluded that our company can stay investment grade if we are committed to reducing our debt.

Our company has bough and sold brands 19 times since 2007. These include the sale of our frozen pizza to Nestle in January, Balance bar to private investors in November 2009 and Post Cereals to Ralcorp in 2007. The timing or pricing of many of these deals is not optimal thus our company has made the decisions after thorough considerations.

The Cadbury acquisition would undoubtedly be the most expensive deal and the biggest company Kraft has ever acquired. Acquiring and selling brands however, is a common practice in our industry and we should not be skeptical due to its magnitude. As a result of the size and scope of this acquisition, other confectioners will be left to wonder if they need to make deals to catch up.

This acquisition is not only an opportunity to advance our company forward, but also a competitive advantage we will have over other companies within this industry. The economies of scale after the consummation of this acquisition is just too good to pass up.

Yours Sincerely,

Dolly Chia

VP of Marketing.

Sunday, April 18, 2010

Dear shareholders and employees of Kraft Foods,

The last couple of weeks have been an intense deliberation period for Kraft Foods, as shareholders and the board of directors were pressured to make a final decision regarding the acquisition of Cadbury. After continued analyzing and reflecting via blog entries, I have arrived at a decision that is in the best interest of the company, as well as it investors and other trustees. Although I have carefully explained the pros and cons of this possible deal, my opinion is that Kraft Foods should not acquire Cadbury. Despite Cadbury’s many beneficial aspects, the potentially devastating effects of the dilution and agency costs are among many reasons why I believe Kraft Foods should not pursue this deal.

Because dilution is the decrease in equity position of a share of stock due to issuance of additional shares, it is usually detrimental to existing shareholders, as it weakens their proportional claim on earnings and assets. If Kraft Foods acquires Cadbury, this dilution effect would substantiate and earnings are likely to be diluted. This may be counteracted by proportionally increasing the combined number of shares in the newly created company, but this venture may prove to be more consuming than necessary.

Another reason why the acquisition of Cadbury might be problematic and less than ideal is imposition of agency costs. Agency costs are mainly due to deviation of control, separation of ownership and the different objectives. A high leverage, as in case of Cadbury, might possibly arise conflicts of interest arise stockholders and bondholders. Because of this, stockholders of Kraft Foods will be tempted to pursue selfish strategies, imposing agency costs on the firm. These strategies might be very costly, because they lower the market value of the whole firm.

Kraft Foods has a proud history of business savvy, staying afloat even in the face of the present economy. A merger with Cadbury, though appealing, would not be advantageous to upholding this tradition. It is my hope and expectation that Kraft consider my recommendation to reject this deal, and continue on in preserving the company’s overall success.


Alexander (Sasha) Tyan

VP of Finance

Cadbury's Current Market Status: Pros and Cons

Dear shareholders and employees of Kraft Foods,

Moving on from my previous blog entry, this entry serves to analyze Cadbury’s market status in the confectionary industry.

I’m sure all of you have heard of Cadbury, or even tried its products. Cadbury has been around since 1824, more than a century before our company was founded. The company has an extremely solid foundation and history of delivering high quality chocolate to consumers.

Cadbury products are marketed under many different brands such as Crème egg, Green and Black’s, Trident, Dentyne, Cadbury, Cadbury Éclairs, Hollywood, Bassett’s and the Natural Confectionary Company. These brands already have a solid market status and a concrete customer base, which makes their sales stable.

Cadbury also has 35,000 direct and indirect suppliers in over 60 different countries and manufacturing facilities in South Africa, Swaziland, Botswana, Namibia, Egypt, Lebanon, Kenya, Morocco, Ghana, and Nigeria. Moreover, Cadbury obtained their chocolates from sources, which do not employ child labor. Corporate Social Responsibility is instilled within Cadbury and this makes the company even more desirable.

Other strengths of Cadbury include strong growth prospects, as the demand for chocolate is relatively stable. Cadbury also has a strong focus towards innovation, with a dominant market position. Future opportunities include the emergence of low calorie chocolates market and strategic acquisitions of other brands, which will advance the company.

Despite of all the prospects Cadbury projects, our department has also considered their weaknesses such as their limited liquidity position and operating margin. Further analysis of their market position has also shown that their market share has been declining over the years.

Commercial threats that could hinder Cadbury’s progress are the growing demand for private label, hand made products and the rising prices of cocoa. Chocolate has always been an extremely affordable luxury and consumers will not be willing to spend a lot of money on it.

After analyzing Cadbury’s weaknesses, our department came up with several solutions. Acquiring it will give us the opportunity to resolve the issues, which will make Cadbury a better company than ever. Their declining market share can be resolved by creating a massive advertising campaign by using the publicity from the acquisition. Letting consumers know the magnitude of our market status will increase our brand image and credibility. Additionally, Cadbury’s limited operating margin will be supplemented by the acquisition. Sourcing for cheaper sources of cocoa will also be easier due to the economies of scale.

The addition of Cadbury into Kraft will not only elevate our company’s status as one of the biggest food manufacturers in the world but also make us the biggest international confectioner. Kraft will be a renowned brand, even bigger and stronger than before. Marketing our products will also be relatively easy as we gain credibility from our market status. Our new market status will be conducive to our company’s progress in the long run and propel our company forward. So why say no to this acquisition? Financing the acquisition may be the only outstanding issue, which our Finance department will try to resolve.

Yours truly,

Dolly Chia

VP of Marketing

Saturday, April 17, 2010

Dear Managers,
I believe that it would be a bad idea and financially irresponsible for us to accquire Cadbury. Kraft is hurting from the recessions and operations on several products have been cut back. Although Cadbury is a world famous brand, the operational costs are too great for Kraft to handle at this time. With the long time span it takes to ferment and grow chcocolate, it would be unrealstic for Kraft to take on a further $2-$3 million dollar, especially since operational costs have been cut by $5million dollars in the past year. The cost to the company will outweigh the benefits of the new brand. So from an operational standpoint, chocolatiering is too time intensive, elaborate and expensive at tthis point for Kraft to accquire all those overhead costs from Cadbury. I strongly reccomend against it.
Sambaran Chatterjee
VP of Operations

Thursday, April 15, 2010

Dear Managers,
As VP of Production, I must inform you of the nature of chocolate production. Chocolate production's most valuable asset is time. The cocoa seeds that are used to make chocolate are usually ground and then fermented for a period of several weeks before being put through the rest of the process. Chocolate must be monitored carefully and by hand for years before cacaosees can be sent to factories to be processed into chocolate. Thus this will create high costs in producing these seeds. And the best cacao comes from South America, which as seen recent economic and political downturn which could increase the price and mke it harder for us to procure cacao.Furthermore, the cacao needs to to sorted, rooasted and crushed by great machines that liquefy it into paste at highly specific temperatures. These production costs range from $2-$3 milllion dollars per month.
Fortunately, Cadbury has longstanding relationships with many cacao farmers, which we can take advantage of. But the element of cost and time are still crucial factors. Can Kraft food afford to wait months to launch new chocolate products, and how will our marketing strategy ensure its success? True, the market for chocolate is growing, but in terms of production costs, I don't believe Kraft will be able to spend another $2 million or $3 million dollars on chocolate production per month without significant layoffs in personnel or cutbacks in other products. These could have significant effect on our production track. Thus I would think twice before acquiring Cadbury.


Sambaran Chatterjee
VP of Production

Saturday, April 10, 2010

Dear shareholders and employees of Kraft Foods,

Now that we have discussed the benefits this acquisition might bring, it is important to consider the adverse outcomes this deal might produce. After the valuation of Cadbury, we have determined a very high leverage which significantly reduces the value of the acquisition and the possibilities for future growth. One of the biggest mistakes made by Cadbury management was excessive debt financing and leverage accumulation that hurts shareholders. Inevitably Kraft, by taking over a highly-leveraged company, will seek bankruptcy protection due to insufficient funds inflow; the only way to circumvent this may be to strategize a debt repayment program and forecast future cash flows. We are all aware of the fact the Warren Buffett, as the largest shareholder and a value investor, is skeptical of this deal, because Cadbury stock has proven to be a growth stock over the years. His investing strategy is widely known s effective, thus factoring in the opinions of financial giants, such as Mr. Buffett, would be prudent. In addition, we believe that management of Cadbury has unfairly valued their firm at 15x multiple, which is much higher than the actual market value. None of the shareholders would like to leave money on the table, knowing that the fair market value is four billion dollars below the ask price.

We are facing a high volatility project which has required us to proceed with very careful examination of long-term benefits. We, the board of directors at Kraft, all acknowledge the fact that the greater risk we face may generate higher return; however our shareholders may not share our approach for risk. All things considered, it would be in the best interest of Kraft to hold off on this deal because the disadvantages are greatly outweighed by the benefits to be gleaned by said endeavor.


Alexander Tyan (Sasha)

VP of Finance

Saturday, April 3, 2010

The Best Expansion Plan for Kraft Foods

Dear shareholders and employees of Kraft Foods,

My name is Dolly Chia and I am the President of the Marketing Department. The purpose of this post is to inform all of you why acquiring Cadbury is the best strategic move for our company. Kraft Foods is the second biggest food company in the world with annual revenue of USD$42 billion. After thorough planning and research, my department has proposed for the company’s expansion in the chocolate industry.

Most people find chocolate irresistible, thus our company should expand in this market. By acquiring Cadbury, our company is able to gain more market share in the Global Cocoa, Chocolate and Sugar Confectionery Manufacturing industry.

The industry has a low market concentration, with 4 leading companies (including Kraft) accounting for about 36% of the market share in 2009. This further increased to 40.3% in 2010 due to aggressive acquisitions by leading companies. Kraft Foods should also use the same strategy to increase our market share. Our company will be the biggest in the Global Cocoa, Chocolate and Sugar Confectionery Manufacturing industry and own 14% of total market share if we acquire Cadbury.

Our chocolate products, which currently compete with other products in the industry are Côte d'Or, Alpen Gold, Milka, and Toblerone. Our research has indicated that there is more room for more products in the market. Chocolate is the most popular snack that is loved across different cultures and in terms of marketing, little advertisement is needed for consumers to buy chocolate.

Our company can target health-conscious consumers, children and adults by increasing awareness for the health benefits of moderate chocolate consumption. Chocolate is a known natural aphrodisiac, which causes the release of endorphins into the bloodstream, causing pleasure. Chocolate is also highly versatile, it can be drank or eaten in its pure form. With the many forms of chocolate and the joy it brings to consumers, it is definitely a product that is underdeveloped in our company.

Acquiring Cadbury would be an ideal addition to the robust brands we currently carry and maintain our status as one of the biggest company in the food manufacturing industry.

In the next post, I will be analyzing Cadbury’s market status as a chocolate manufacturer and why acquiring it would advance our company to newer heights.

Yours truly,

Dolly Chia

VP of Marketing