Chocolate boxing: Kraft's battle for Cadbury
There was much nostalgia, genuine and contrived, around Kraft Foods’ takeover of the iconic UK brand Cadbury. When IR magazine spoke to John Dawson, the IRO for the unsuccessful defense, during his last week in the office, he mused wryly but without rancor: ‘I’m an early cost saving, an early synergy for the new group.’
Dawson’s previous job was head of investor relations for ICI and, as he pondered his next move, he laughed, ‘I’ve been involved in four high-profile businesses that were acquired. Sometimes it feels like I’ve been officiating in the liquidation of the industrial revolution. It would be good to begin with an IPO, a turnaround or even an acquiring company.’
It was no fault of Dawson’s that the defense failed, however. ‘Cadbury did everything it could be expected to do,’ says Kraft vice president of IR Chris Jakubik. ‘And it did it in a high-quality fashion.’
A consultant involved also allows that ‘Cadbury had some strong and well-crafted rhetoric about its prospects and got people to see it with a different valuation, which is what you do in a defense. That’s not a bad tactic, if you can knock out your opponents in the first round. The trouble is, as the pursuit continues, it raises unrealistic expectations about where down the line you’re going to fold.’
Those expectations were more predominant among the workforce, the media and political circles, however. Both IR teams agree their investors were well aware of the real parameters. In the end, the consultant says, ‘Cadbury got a fair price rather than being undersold but it did not get the big uplift some contested bids achieve.’
The battle was taxing on both sides, but for Kraft it was almost a D-Day landing across the Atlantic – except that some 40 percent of Cadbury stock was already held in the US, with another 20 percent in continental Europe and elsewhere. This is a fact that was all but lost in some nationalistic noise in the UK media.
Mike Mitchell, who handled Kraft’s corporate communications with the Brunswick Group while Cadbury used Finsbury, stresses that the UK media did not really know Kraft. ‘So one of the key points for us was the education factor, letting them understand what we were beyond the single product they may associate us with,’ Mitchell explains. ‘Certainly, as an American company, we were always at a bit of a disadvantage but we engaged strategically to ensure our messages were being delivered.’
Kraft also had to adjust to the enhanced role of the brokers in the UK compared with the US, which the team found to be a boon, while coping with the lawyers handling four different regulatory bodies: the SEC, the NYSE, the UK Listing Authority and the UK’s Takeover Panel.
In part, the Kraft campaign hinged on the fact that it was a good time for an acquisition because of strong operational and financial momentum. Management also emphasized the ‘exceptional strategic fit for both companies’, which would create value. ‘We laid out how we were going to maintain financial discipline with four specific criteria,’ Jakubik recalls. ‘Frankly, it was a dogmatic repetition of those four things that certainly resonated with our shareholders and presumably, in the end, with theirs, too.’
While the bid was unsolicited, it did not catch Cadbury flatfooted. The company had kept its powder dry and its bayonets sharp, as the oft-acquired Dawson recalls. ‘If you’re well organized, you have regular meetings to discuss defense strategy anyway, and we had just had a brief update of our defense review in June,’ he points out. ‘We had also kicked off a process update to look at where we were in relation to our corporate four-year plan, making sure we had a realistic sense of our own expectations and whether we were doing the right things to communicate those expectations to investors.
‘Even if Kraft had not come along, investors would have had a clear view of what we were looking to achieve, when, how and at what cost. So we were prepared when the bid came along – true, we had to accelerate our communications, but we were in pretty good shape.’
Despite newspaper reports of hedge funds wading in, both IROs maintain that these took only a small proportion of the shares. Indeed, Cadbury had a remarkably sticky shareholder base. ‘Most of our US investors were long-term, very value-oriented and return-oriented, and were looking to generate capital and income growth from the firm,’ Dawson says.
A big part of Cadbury’s defense strategy rested on using ‘the stability we had created in the register to limit the impact of hedge funds in determining the deal,’ Dawson continues. ‘If there had been more hedge funds, Kraft could probably have put in a lower offer and got the business cheaper because hedge funds would have just taken the offer and left.’
Care and maintenance of the share register involved very active communication. ‘We monitored our top 50 to 75 investors – who had contacted them, when, what the feedback was, how frequently we should contact them in future to see how they were still involved, and what methods we should use,’ says Dawson. ‘It was a very tactical engagement to build people’s expectations of what value Cadbury could deliver in the face of this offer.
‘Because we had a very significant proportion of long-term investors interested and involved in the stock, we were able to force Kraft’s hand: it had to come to the UK and talk to our investors. They gave it very clear feedback about what they were expecting, and so Kraft had to come back to the table to negotiate rather than just put its offer out. The structure of the register delivered the result rather than the price.
‘We had a very distinct impression Kraft was limiting its activities for a long time: it had decided it would put out a low offer, let people get used to it, not do anything that would fuel higher expectations, and then come back with a higher offer at just the level to secure the deal.’
All’s well that ends well?
Warren Buffet’s intervention, cautioning against the cost to Kraft, had a mixed effect. While it gave wry comfort to Cadbury, it also added pressure on Kraft management to keep its offer down and to spend time reassuring Kraft’s own shareholders.
Still, Jakubik says most of Kraft’s effort was devoted to Cadbury’s investors. ‘Our CEO, CFO and head of strategy were very involved on the UK side,’ he notes. ‘Even so, I’m not sure that we did anything unconventional. We had a very solid, cross-functional team from IR and corporate communications to legal. There was just a lot of hard work because of the unprecedented nature of the transaction.’
In the end, Jakubik is gratified that, apart from some index funds necessarily bailing out of the new combined stock, ‘the feedback from larger investors that own us is that they will be sticky, they will hang onto us. Their belief is in the base business.’
Dawson, when asked if there were anything he would redo if he could start over, is impassive. ‘To be honest, very little,’ he says. ‘In the end, Kraft paid a price that was more than satisfactory, which is why the board recommended it. If you get to that point, you’ve really done your job.’