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Kraft-Cadbury Merger Analysis

Strategic Focus

Although many large-scale corporate mergers flounder, Kraft has rather benefited from its acquisition of Cadbury. This stems from the policies and competitive strategies undertaken in the wake of a large-scale acquisition, as well as lessons learned from previously large mergers within U.S. corporate history. While there are many potential benefits of mergers, the integration of a large-scale corporation into another large-scale corporation does not always lead to positive results for both parties. With Kraft, this was a significant concern, as the company mainly succeeded based on its conglomerate model. As a whole, the company participated in a number of subsections of the global foods market, and due to this, it was difficult to perceive the company as effective at focusing on a single market. The diversified nature of conglomerates means that although they are largely safe from large-scale movements in the market, their multi-focus competitive model prevents effective competition in a single market and dilutes the ability of division to effectively react against market conditions.

This was particularly worrying for Cadbury, as it had already faced the low growth prospects that are potential within an ill-advised merger; Cadbury had largely stalled in growth due to the merger with Schweppes, as its beverage division was facing near-zero growth compared to its confectionary business. This served largely as a dead weight, as Schweppes absorbed much of the profitability that was associated with the confectionary market from the company. Cadbury managed to gain significant value and organizational growth after the company was spun off, as this allowed a single focus for management and in terms of market competition. The split-up of Kraft into its global snacks company and Mondelez International alleviated these concerns, as it allowed the organization to focus on its primary competencies without using a single division as a profit center in order to off-set losses elsewhere in the company. This was necessary, as it allowed the organization to effectively utilize the value and resources brought to the company through the acquisition of Cadbury, as otherwise there was concern that it would lead to low-growth for both organizations.

Stock Performance

As a whole, Kraft has displayed significant stock growth in the wake of its acquisition of Cadbury and subsequent split into two separate organizations. Since Kraft Foods began trading after the split, it has displayed positive stock growth along with the stock market in general. Shares on opening day September 21, 2012 were traded at $45.98 USD, with subsequent growth increasing shave value to $57.87 at the end of Nov. 7 2014. This represents a growth of over 25% in the company’s valuation within the last two years, with much of the growth attributed to continued efforts as a result of the advantages acquired by the company through its purchase of Cadbury. In particular, developing market growth has become a key component of the organization growth strategy, as these markets have begun to generate significant sales for the company. Kraft Foods market capitalization currently stands at $34.08 Billion USD, with a P/E ratio of 14.6. The ratio demonstrates that the company is being traded at a healthy valuation; in fact, the current ratio can still increase before the company is considered ‘overvalued’.

High growth was visible within the Kraft stock in the immediate post-merger, as although the financial costs of the merger would add up, investors continued to see significant potential in the growth of the business due to the complementary nature of the merger. As such, the merger was perceived as largely positive by Kraft shareholders, as the short-term hit that was taken by the stock was significantly augmented by the long-term increase in value that was witnessed in the aftermath. Largely, investors were bearish on the acquisition, with the stock price increasing from $16.14 USD at the beginning of 2010 to $25.28 before the split of the company.

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