Why Kraft is Making the Wrong Acquisition

Kraft is attempting to buy a company that essentially is a company deriving the majority of its business in Europe and North America. At the present time Cadbury's sales percentage in emerging markets are; 19% in Asia Pacific, 8% in South America and 7% in Middle East and Africa. It grew its top line by 7% in an industry that is growing at 6%.

Now that Kraft has shown its hand, it most likely will pay a premium to essentially buy sales. What can Cadbury bring to Kraft that can be defined as Strategic Growth?

The fundamental issues a company should consider in making an acquisition are:

Using this as a basis of criteria, the answer would be yes and no for this sale. Kraft does have a small base of confectionary business. It really does not yield any strategic advantage, the brands are developed and the rate of growth in their largest markets are only keeping pace with the rate of industry growth. The eventual price is unknown but presently is a little above two times revenue but expected to go up from there.  The technical capabilities already existing at Kraft is primarily different than Cadbury's. Their core competence is dairy, oils, meals and baking. Cadbury's is purely confectionary (chocolate, sweetened products, gums and etc) with some baking . Operationally they are also dissimilar. The understanding of business is pretty much the same, they both go through the same type of distribution channels. The biggest negative would be the integration process. They are both large complex companies with a far flung network of manufacturing, technical centers and offices. Any number presented as savings through consolidation is likely to be greater than that achieved, as it usually is.

At present Kraft receives 12% of their revenues from snacks on $42B of revenue (an increase of 3% in 2008). That equates to $6B of which a percentage was a a result of the United Biscuit acquisition. By purchasing Cadbury they would double their snack  sales and change the product mix of that business to 50% baked snacks and 50% confectionary. Kraft only shows 16% of their revenues in developing countries, Cadbury 34%. A blended total would make the percentage coming from the fastest growing markets at 16.6%. At present Nestle's Emerging Market contribution is approximately 30% and Unilever's is closer to 50%.

If Kraft is to grow it must do so by driving more Emerging Market sales. It must also maximize the product lines they already have. Nestle coffee products grew 39%, Kraft's Beverages in total grew .4% primarily domestic. By pushing out into other markets that total would increase in a large product category.

Acquisitions that would make more sense lie outside existing markets where they would not only buy sales, but also distribution systems (which are more important in less developed markets), manufacturing and product lines that have already developed a following and are targeted to those markets. One candidate might be Tingyi the leading snack producer in China. Last years sales were $4.2B (EBITDA 15.25%) and grew 32% from 2007 (and have been averaging 30+% per year since 2004). Their product line is more in sync with Kraft's (baked snacks, meals and beverages/dairy) there would be less integration and more of a bolting on process. It would dramatically increase Kraft's revenue generation in emerging markets and would offer a launching pad for their family of brands as well as being able to push out Tingyi's existing products into more asian markets.

This author consults with leading institutions through GLG