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A Sweet Deal? Kraft unlocks profits not value

Posted by: Greg Silverman on January 21, 2010

The US $19 billion price tag attached to Kraft’s takeover of Cadbury has sparked both warnings from investors like Warren Buffett and accusations of an undervalued bid from Cadbury. How much Cadbury is worth isn’t really the question, but rather how much is it worth to Kraft?

With the approval of its takeover offer yesterday, Kraft is paying for the significant opportunity to create incremental profits for its shareholders. In this deal, Kraft will have several operational levers it can use to drive improvements: staff cuts, distributions synergies, marketing leverage, and procurement efficiencies, to name but a few. These traditional approaches to profit enhancement are likely to breed many one time or short-term benefits. A well-run company like Kraft is likely to realize these benefits. Hence the US $19 billion price tag.

However, it’s unlikely that the deal will dramatically create value at the product level. Brand value creation occurs when demand is generated in unique ways. Most of the Cadbury brands that come with the acquisition are well established with broad sub-brands. The Cadbury portfolio’s preeminence in the market suggests that Kraft believes that buying brands is a better bet than developing what’s currently in its pipeline, an indicator that its internal innovation may not deliver their growth objectives.

If Kraft makes the common post-M&A mistake of putting innovation on hold to focus on creating marketing efficiencies, then it’s likely that the breakthrough, demand-generating ideas that will make the deal “pay” won’t emerge. So Kraft will need to make the deal work with efficiencies through combined operations, and effectiveness through brand portfolio management.

This is a tough job—and in order for Kraft to pull it off, it is also imperative that it pays equal attention to its internal operations. While the face it presents externally is key here, engaged employees are also critical to any mergers' success. As a recent SHRM foundation survey focused on M&A employee-related issues pointed out, 63 percent of newly merged brands are unable to sustain financial performance, 62 percent see a loss in productivity, 56 percent experience incompatibility between cultures, and 53 percent lose key talent – the list goes on.

Cadbury’s culture, in particular, may jibe with Kraft’s. While undoubtedly a large company with an extensive portfolio, Cadbury has a history of being a “family brand” and its employees are already up in arms about the acquisition. And as Kraft begins streamlining its portfolio, inevitable layoffs are likely to fuel more fire. Additionally, while Cadbury’s workplace is all about being open, honest, creating quality products, and acting with complete integrity, Kraft is guided by a more dynamic proposition, which promises a “fast-paced environment” founded on results-focused principles like innovation, decisiveness, and teamwork.

If handled correctly, potential synergies between the two cultures could outweigh fallout or loss of trust. If handled improperly, we could see the brands face the same obstacles as Sprint/Nextel or AOL/ Time Warner. That's why Kraft will need to focus and align employees to immediate effect with a properly defined, well-managed, and communicated corporate brand.

While the challenges that come with this deal are numerous—Warren Buffett's disapproval, notwithstanding—as with any merger, good strategy will ultimately dictate its long-term success.


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