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Case

Despite speculation that offers from U.S.-based candy company Hershey and the Italian

confectioner Ferreiro would be forthcoming, Krafts bid on January 19, 2010, was accepted

unanimously by Cadburys board of directors. Kraft, the worlds second (after Nestl) largest

food manufacturer (after Nestl), raised its offer over its initial September 7, 2009, bid to

$19.5 billion to win over the board of the worlds second largest candy and chocolate

maker. Kraft also assumed responsibility for $9.5 billion of Cadburys debt.

Krafts initial bid evoked a raucous response from Cadburys chairman Roger Carr, who

derided the offer that valued Cadbury at $16.7 billion as showing contempt for his firms well-

known brand, and dismissed the hostile bidder as a low-growth conglomerate. Immediately

following the Kraft announcement, Cadburys share price rose by 45% (7 percentage points more

than the 38% premium implicit in the Kraft offer). The share prices of other food manufacturers

also rose due to speculation that they could become takeover targets.

The ensuing four-month struggle between the two firms was reminiscent of the highly

publicized takeover of U.S. icon Anheuser-Busch in 2008 by Belgian brewer InBev. The Kraft-

Cadbury transaction stimulated substantial opposition from senior government ministers and

trade unions over the move by a huge U.S. firm to take over a British company deemed to be a

national treasure. However, like InBevs takeover of Anheuser-Busch, what started as a

donnybrook ended on friendly terms, with the two sides reaching final agreement in a singleweekend.

Determined to become a global food and candy giant, Kraft decided to bid for Cadbury after

the U.K.-based firm spun off its Schweppes beverages business in the United States in 2008. The

separation of Cadburys beverage and confectionery units resulted in Cadbury becoming the

worlds largest pure confectionery firm following the spinoff. Confectionery companies tend to

trade at a higher value, so adding the Cadburys chocolate and gum business could enhance

Krafts attractiveness to competitors. However, this status was soon eclipsed by Marss

acquisition of Wrigley in 2008.

A takeover of Cadbury would help Kraft, the biggest food conglomerate in North America,

to compete with its larger rival, Nestle. Cadbury would strengthen Krafts market share in Britain

and would open India, where Cadbury is among the most popular chocolate brands. It would also

expand Krafts gum business and give it a global distribution network. Nestle lacked a gum

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business and was struggling with declining sales as recession-plagued consumers turned away

from its bottled water and ice cream products. Cadbury and Kraft fared relatively well during the

20082009 global recession, with Cadburys confectionery business proving resilient despite

price increases in the wake of increasing sugar prices. Kraft had benefited from rising sales of

convenience foods because consumers ate more meals at home during the recession.

The differences in the composition of the initial and final Kraft bids reflected a series of

crosscurrents. Irene Rosenfeld, Kraft CEO, not only had to contend with vituperative comments

from Cadburys board and senior management, but also was soundly criticized by major

shareholders who feared Kraft would pay too much for Cadbury. Specifically, the firms largest

shareholder, Warren Buffetts Berkshire Hathaway with a 9.4% stake, expressed concern that the

amount of new stock that would have to be issued to acquire Cadbury would dilute the

ownership position of existing Kraft shareholders. In an effort to placate dissident Kraft

shareholders while acceding to Cadburys demand for an increase in the offer price, Ms.

Rosenfeld increased the offer by 7% by increasing the cash portion of the purchase price.

The new bid consisted of $8.17 cash and 0.1874 new Kraft shares, compared to Krafts

original offer of $4.89 cash and 0.2589 new Kraft shares for each Cadbury share outstanding.

The change in the composition of the offer price meant that Kraft would issue 265 million new

shares compared with its original plan to issue 370 million. The change in the terms of the deal

meant that Kraft would no longer have to get shareholder approval for the new share issue,

since it was able to avoid the NYSE requirement that firms issuing shares totaling more

than 20% of the number of shares currently outstanding must receive shareholder

approval to do so.