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