CADBURY

AND
KRAFT

Key terms relevant to the case

Hostile takeover-A "hostile takeover" allows a bidder to take

over a target company whosemanagement is unwilling to agree

to amergeror takeover.
White Knight-A white knight is an individual or company that
acquires a corporation on the verge of being taken over by
forces deemed undesirable by company officials (sometimes
referred to as a "black knight").
While the target company doesn't remain independent, a white
knight is viewed as a preferred option tothe hostile company
completingtheir takeover.

Story Of Cadbury Plc.

Leading confectionery company and constant member of FTSE100 since

commencement of the index.

Produces 7.3 per cent of the worlds chocolate, 27 per cent of the worlds
gum, and 7.4 per cent of the worlds candy.
Market share of 10.1 per cent of the global confectionery market
Under the leadership of CEO Todd Stitzer, Cadburys revenue in 2008
was a whopping 5.384 billion with a profit of 366 million

Krafts Takeover Bid- No 1

Kraft Foods Inc. was the second largest confectionery, food and beverage

corporation in the world after Nestl SA, with revenues of US$40.4

billion and profit of US$3.02 billion in 2008.
On 7 September 2009, Kraft initiated its takeover bid of Cadbury for
US$16.7 billion (9.8 billion), offering US$4.92 in cash and 0.2589
new Kraft shares per Cadbury share. This was a premium of 31 per cent
from Cadburys closing price of 5.68.
Analysts, however, suggested that the initial offer by Kraft significantly
undervalued Cadbury as it valued Cadbury at less than 15 times EBITDA
when Cadbury arguably deserved more than 19.5 times EBITDA.

 Krafts offer was emphatically rejected by Cadburys board, led by

Roger Carr.
Krafts offer is fundamentally undervalued and made no strategic

or financial sense- Stitzer

Cadbury family members had been hostile to the takeover.

Approaching the US takeover Panel

On September 22,2009, Cadbury approached the US takeover panel,

asking it to impose a deadline for Kraft to make a formal offer.

Cadbury wanted a put-up-or-shut-up action, which would force Kraft to
make a bid within one month or thereafter stay away from Cadbury for at
least six months
On 30 September, 2009, the UK Takeover Panel agreed to Cadburys
request and announced a deadline of 9 November for Kraft to make a bid
for Cadbury.
Cadburys share price then rose to 7.96 following the Takeover Panels
decision, 11 per cent above Krafts original offer.

Government voices its concern

The UK government seemed not in favour of the takeover of home-

grown chocolate champion Cadbury.

UK Business Secretary Lord Mandelson slammed Krafts takeover
attempt of Cadbury and cautioned against the long-term effects and
obligations of transparency and accountability of foreign ownership.
The Financial Services Secretary (City Minister) Paul Myners was also
apprehensive that too many British companies were being lost to foreign
hands which do not care much for domestic heritage.

Krafts Second Takeover Bid Offer

Potential Arrival of the White Knights

RESISTANCE TO TAKEOVER!!

Escalating resistance to take over

Possibility of Cadbury being sold to a foreign firm stirred strong

emotions from Cadburys stakeholders. The general public lamented the

loss of 186 years of British heritage.
On 10 December 2009, Cadburys workers union Unite announced a
Keep Cadbury Independent campaign to resist Krafts advancement.
Workers later took the campaign to the UK Parliament on 16 December.
Ironically, State owned Royal bank of Scotland-Aided 120 Million in fees
The chocolate maker raised targets for the next four years and pledged to
hand more cash to shareholders if it could remain independent.

Kraft Sells Pizza Business to Nestle to Fund

Cadbury Offer
Kraft needed to win over at least 50 per cent of Cadburys shareholders or

stay away from Cadbury for at least six months

5 January 2010, Kraft sold its pizza business to Nestl for US$3.9 billion to
help fund its offer for Cadbury
Announced that those who elected to accept the Partial Cash Alternative
would get more cash in lieu of stock - 60p more per Cadbury share.
Krafts shareholders supported the acquisition. Renowned investor
Warren Buffett, one of Cadburys major shareholders, was one of them.
Krafts proposed bid risked undervaluing Krafts stock, and he sent an
indirect warning to the company not to pay too much in cash or shares on
the deal.

Cadbury releases final defence document

On 12 January 2010, Cadburys board published another document,

which was seen as the last line of defence to reject Krafts bid.
It reiterated the boards opinion of Krafts derisory offer, attacking
Krafts management and revealing that it beat its own target for operating
margins in 2009
Carr mentioned that Krafts latest offer was even more unattractive than it
was when Kraft made its formal offer in December.
At this point, attempts to thwart the completion of the deal were
becoming increasingly futile.
The final straw came when Franklin Templeton, a large mutual fund with
a 7 per cent stake, indicated it would accept an offer of 830p (8.30).

The Kraft Takeover

On 19 January 2010, Cadbury board advised its shareholders to accept a

new offer of 840p a share - valuing the company at 11.5bn ($18.9bn).

The deal was a significant increase on earlier Kraft bids. Consequently,
Hershey dropped its plans to acquire Cadbury.
The deal became final after Kraft secured acceptances from shareholders
representing 71.73 per cent of Cadbury.
On 2 February 2010, Cadbury officially became a part of Kraft and was
delisted from the London Stock Exchange on 8 March 2010.
The takeover of Cadbury by Kraft was met with continued disapproval
from the UK public, as Cadbury was regarded as part of British culture

HOW IT WENT AFTER TAKEOVER

Kraft promised to keep open the chocolate firm's Somerdale factory near Bristol.

But soon after the deal was done, it announced a U-turn and shut the factory.
Further announcements of job cuts in Cadbury came in the

following months. Those announcements bothered local

workforce and unions generating a sense of nationalism
After Krafts announcement of the Somerdale facilities closure,

the Takeover Panel began an investigation process against Kraft.

Aftermaths
In the end, evidencing its limited powers, the Takeover only criticized

Kraft for breaching Rule 19.1 of the Takeover Code (regarding the
standards of announcements and statements made by bidders during
the course of offers).
In addition, as a consequence of such case, some minor amendments

were made to the Takeover Code and the Cadbury law was proposed.
Cadbury law proposed to require a super majority of votes in the

Shareholder Meeting (at least 60%) to pass a company takeover.

Furthermore, such super majority should be composed by votes of long
term shareholders

Conclusions
It has been said that in the Kraft-Cadbury transaction, the

decision to sell the company was made by short-term

shareholders and arbitrageurs ignoring Cadbury board claims
about the undervaluation of the company by Kraft offers.
Therefore, although the Cadbury law did not succeed, many

players have challenged the British takeover system after the

Kraft-Cadbury transaction; aiming for more protection to
companies from shareholders short-termism and hostile
takeovers

Other Aftermaths
Fairtrade Dairy Milk chocolate bars were launched in July 2009.
The Fairtrade Foundation has begun urgent talks with Cadbury's executives to see if the

company's agreement will continue after the takeover.

Carr suggested raising the victory margin from 50% plus one share to 60% plus one share, and

that simultaneously there should be a rule that those who bought shares during the course of any
takeover battle would not be permitted to vote until the battle was over.
50m investment in Bourneville, was welcomed, in spite of job cuts as it was a necessary step

towards long term success.

A mandatory Put Up or Shut Up (PUSU) deadline was part of the new rules. The rules also set the

clock ticking immediately, forcing which bidders to table a formal offer or walk away for six
months.

CHANGES AFTER THE MERGER WHICH WAS NOT WELCOMED

BY PEOPLE

Changing the chocolate on Cadbury cream egg

Ditching the Bourneville chocolate from the Heroes tub

Not only Bourneville its oldest brands, but one that pays homage to the

great Birmingham home of Cadbury.

Cutting the number of Fingers in a pack

It seemed that Cadbury chocolate Fingers had gone on a diet. Packs of

the much loved biscuits were cut by 11g, which equates to around two
fingers.

Axing Christmas chocolate gift to pensioners

One of the perks of working for Cadbury, one of the great Victorian firms
set up by Quakers, was that you were looked after in retirement. Long-term
former employees were given a gift of chocolates at Christmas.

Hostile takeover as an important corporate

governance mechanism
Remove Managerial Inefficiency-Hostile takeovers represent a mechanism

to eliminate agency costs(conflict of interest between shareholders and

management) and correct inefficiencies via the replacement of the entire
control system.
Improve targets performance-the threat of a hostile takeover can also act
as a mechanism that encourage management to align its interest with that
of the shareholders.
Distribution of Cash Flow -When facing the threat of an unsolicited bid,
target management will look for shareholders satisfaction regarding their
investment results as well as its managers performance. Therefore, target
management will tend to distribute free cash flow of the company
shareholders from time to time and to use its money only for beneficial
projects

Role of Government in regulating hostile takeover

The hostile takeovers positive or negative effects may be

accentuated or mitigated by:

(i) the control on hostile bidders actions or on management
defenses,
(ii) the powers of regulators to impede or allow takeover
attempts
(iii) the efficiency of the systems in solving controversies
arose in the framework of hostile bids.

Warren Buffetts comments

Buffett whose Berkshire Hathaway group owns 9.4% of Kraft said he "felt

poor" following Cadbury's decision to accept Kraft's 11.9bn cash-andshare deal.

Kraft has agreed to pay 500p in cash plus 0.1874 of new Kraft shares for
each Cadbury share. Because the share component is less than 20% of
Kraft's existing share capital, a shareholder vote is not required because of
the N.Y.S.E. Listing Rule 312.
Kraft has deliberately structured its final offer to acquire Cadbury so that
it wont need the approval of its shareholders.
Shareholders have an interest in a hostile takeover of the company in
which they own a portion of the capital so that they might be in a better
position to maximize their wealth by selling to the highest bidder.

It all depends on how much you trust management to make the right decision. The end result is that, so
long as enough cash financing is available, acquirers can easily structure their deals to avoid taking them to
their own shareholders.

Hostile takeovers relatively rare in Asia

TAKEOVER FUNDAMENTALS IN USA

Corporate takeover laws and regulations got a major thrust from the

State Acts and Judicial decisions.

There are two main authorities involved in Takeovers in the US (1)
The Securities Exchange Commission and (2) The Antitrust Agency.
Securities Exchange Commission: The SEC has the regulatory power
over the rules applicable to tender offers. The SEC is required to
look and review all tender offers.
The Antitrust Agency: These agencies have the power to reduce the
waiting period by granting early termination.

 The statutes relevant to Corporate Takeovers in the US are: Williams Act, 1968: This Act requires Company negotiating takeover to meet

the prescribed requirements of transparency and disclosures in the interests of

shareholders and investors. This was an amendment to the Securities Act of
1934.
Sherman Act, 1890: This Act prohibits the restraint of trade or attempt to
monopolistic trade.
Clayton Act, 1914: This Act prohibits acquisition resulting into lessening
competition or tendering to create a monopoly
Hart-Scott-Rodino Antitrust Improvements Act, 1976: This Act brought
improvement on Clayton Act, 1914 which tightens antitrust laws.
Security Exchange Act, 1934: This Act deals with insider trading under Rule
10(b)-5 under the said Act, imposing upon directors and the insiders an
obligation to disclose material non-public information in connection with the
purchase and sale of Companys shares.

TAKEOVER FUNDAMENTALS IN UK
In 1968, City Code on takeovers and mergers was drawn up and

administered by self regulatory body known as city panel on takeovers

and mergers. The code is founded on the principle of equal protection of
shareholders.
The City Code emphasizes six general principles and 38 rules. Its
underlying objectives can be summed up in three underlying principles.
All the shareholders of the same class in a target company must be
treated equally and must have adequate information so that they can
reach a properly informed decision.
A false market must not be created in the securities of the bidder or the
target company and,
The management of the target company must not take any action which
would frustrate an offer without the consent of its shareholders.

TAKEOVER FUNDAMENTALS IN INDIA

On September 2011, the SEBI amended the new set of takeover rules i.e.; the

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

The main purpose is to prevent hostile takeovers and at the same time, provide
some more opportunities of exit to innocent shareholders who do not wish to be
associated with a particular acquirer.
Both promoter and public shareholders of a listed company would now get the
same price for their shares being purchased by an acquirer.
In another shareholder-friendly move, SEBI has scrapped the non compete fee or
control premium, which were being paid to only the promoters earlier and could
have been as much as 25% of the public offer price.

KEY TERMS
Initial threshold limit: Increase in threshold limit, from 15% to 25%,

provides more headroom for acquisition.

Creeping acquisition limit: Creeping acquisition of 5%, in a financial
year, is allowed up to the maximum permissible non-public shareholding
(generally 75%).
Mandatory open offer: A mandatory open offer gets triggered on any of
the following cases:
Acquisition of substantial shares or voting rights entitling the acquirer to
25% or more voting rights in the target company.
Creeping acquisition of more than 5% voting rights in a financial year by
the acquirer who already holds 25% or more voting rights in the target
company.

 Voluntary open offer: The acquirer holding 25% or more voting rights in

the target company can make a voluntary offer for at least 10% of the
total shares of the target company.
Total shareholding of the acquirer post open offer should not exceed
maximum permissible non-public shareholding (generally 75%).
The acquirer should not have acquired shares of the target company in the
preceding 52 weeks without attracting open offer obligation.

CONCERNED PEOPLE
PACs -persons who, with a common objective or purpose of acquisition of shares,

directly or indirectly co-operate for the acquisition of shares or voting rights in, or
control over, the target company.
The shares or voting rights held by PACs are aggregated with those of the

acquirer for the purpose of computing triggers, shareholding and creeping limits
under the Takeover Regulations.
Shareholder Involvement: Institutional investors in the minority position have

become active in observing the investee companies. Proxy advisory companies

are closely scrutinizing the related party transactions, appointment of several
executives and their remuneration.

 The Board of Director also is required to pass the M&A in the meeting of the board and not by

circulation.
The shareholders are also required to be given the report on valuation of shares along with the

scheme which will ensure the shareholders to take informed decision.

The objections for the M&A can be raised by only those shareholders who hold not less than

10 per cent of shares in the company. Creditors can object to the scheme if and only if they
hold not less than 5 per cent of the outstanding debt
Minority squeeze out-The shareholders/ group of persons holding 90 per cent or more shares

have also been granted the authority to compulsorily notify their intention to acquire minority
shares and can subsequently acquire those shares.