Homework Exercise #1 Agency Problem Suppose you own shares in a company. The current price per share is £25. Another company has just announced that it wants to buy your company, and will pay £35 per share to acquire all the outstanding equity. Your company’s management immediately begins fighting off this hostile bid. QUESTIONS: Is management acting in the shareholders’ best interests? Why or why not? Dr Kevin Campbell, Corporate Finance 2011 1 Homework Exercise #1 Solution The goal of management should be to maximize the share price for the current shareholders. If management believes that it can improve the profitability of the firm so that the share price will exceed £35, then they should fight the offer from the outside company. If management believes that this bidder or other unidentified bidders will actually pay more than £35 per share to acquire the company, then they should still fight the offer. Dr Kevin Campbell, Corporate Finance 2011 2 Homework Exercise #1 Solution However, if the current management cannot increase the value of the firm beyond the bid price, and no other higher bids come in, then management is not acting in the interests of the shareholders by fighting the offer. Since current managers often lose their jobs when a corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers in situations such as this. Dr Kevin Campbell, Corporate Finance 2011 3 Homework Exercise #2 Agency Problems In 2009 the US company Kraft launched a takeover bid for the UK chocolate company Cadbury. Though Cadbury’s management initially resisted the bid, they eventually recommended acceptance and Cadbury was acquired by Kraft in 2010. TASK & QUESTIONS: Research the background to the bid using the Internet (eg FT.com). Do you believe that Cadbury’s shareholders benefitted from the takeover? Do you believe that Kraft’s shareholders benefitted? Why or why not? Dr Kevin Campbell, Corporate Finance 2011 4 Homework Exercise #2 Solution September 7 2009 Dr Kevin Campbell, Corporate Finance 2011 5 Homework Exercise #2 Solution Cadbury vows to fight Kraft offer By Jenny Wiggins Published: September 7 2009 21:33 | Last updated: September 7 2009 21:33 Cadbury has vowed to mount a staunch defence against an unsolicited £10.2bn ($16.7bn) takeover offer from Kraft of the US in the midst of rapid consolidation in the confectionery industry. On Monday the confectionery group rejected a cash and stock offer from Kraft, which approached the company nearly two weeks ago, valuing it at 745p per share – a 31 per cent premium to its Friday closing price. It claimed the offer “fundamentally undervalued” the group, which has sold cocoa and chocolate since its foundation by John Cadbury in Birmingham in the early 1830s, because of the strength of its brand name around the world. Dr Kevin Campbell, Corporate Finance 2011 6 Homework Exercise #2 Solution Cadbury vows to fight Kraft offer By Jenny Wiggins Published: September 7 2009 21:33 | Last updated: September 7 2009 21:33 CONTINUED… Ms Irene Rosenfeld [Kraft CEO] would not comment on whether Kraft would raise its offer for Cadbury, but analysts believe it will have to offer between 800p and 900p per share to bring the company to the negotiating table, and lift the proportion of cash in the offer (about 60 per cent of the offer is stock). Cadbury’s shares closed up 38 per cent at 783p. She added that Kraft hoped to engage in friendly negotiations with Cadbury but did not rule out a hostile offer. Cadbury’s shareholders said they supported the decision to reject the bid. Legal & General Investment Management, Cadbury’s biggest shareholder with a stake of 5.4 per cent, said: “This approach materially undervalues Cadbury.” Dr Kevin Campbell, Corporate Finance 2011 7 Homework Exercise #2 Solution The outcome? Bitter-sweet end to Cadbury’s independence By Jenny Wiggins and Jonathan Guthrie Published: February 2 2010 22:37 | Last updated: February 2 2010 22:37 Cadbury’s 186 years of independence came to an end on Tuesday as a majority of its shareholders accepted Kraft’s £11.7bn takeover offer. Almost 72 per cent of shareholders accepted the US food group’s offer by Tuesday’s deadline, allowing the takeover to proceed. One US fund manager who holds Cadbury stock said he was happy with the outcome of the battle, which ended last month after Cadbury’s board recommended an offer worth 850p a share. “Roger Carr [Cadbury’s chairman] did a very good job for shareholders in looking after our interests,” he said. Legal & General, Cadbury’s second-biggest shareholder, which last month said the final offer failed “to fully reflect the long term value of the company,” declined to comment. Dr Kevin Campbell, Corporate Finance 2011 8 Homework Exercise #2 Solution Someone’s not happy … Warren Buffett has blasted the controversial takeover of Cadbury by Kraft, and revealed that he would block the deal if he could. The veteran investor, whose Berkshire Hathaway group owns 9.4% of Kraft, claimed the US food group has blundered in its pursuit of the British chocolate producer. Appearing on CNBC, Buffett said he "felt poor" following Cadbury's decision to accept Kraft's £11.9bn cash-and-share deal. "If I had a chance to vote on it, I'd vote no, but I don't get a vote," said Buffett, who added that he "has a lot of doubts" about the takeover. 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. Buffett is particularly displeased that Kraft is paying partly in new shares because he feels they are undervalued – a point he first made publicly to Kraft chief executive Irene Rosenfeld earlier this month. "I like Irene. She's done a good job in operations … she could be a trustee in my will. I just don't want her to do this deal," said the 79-year-old. Buffett is also unimpressed that Kraft sold its pizza business to Nestlé to raise cash for the Cadbury bid. He said this was done in an "enormously tax-inefficient way" that cut the underlying value of the deal from $3.7bn (£2.3bn) to $2.5bn. Shares in Kraft fell 2.2% in pre-market trading on Wall Street after Buffett made his remarks, eroding both the value of Kraft's bid for Cadbury and his own stake in the company. SOURCE: Graeme Wearden, The Guardian Wednesday 20 January 2010 Dr Kevin Campbell, Corporate Finance 2011 9 Homework Exercise #2 Solution … and now? Kraft boosted by Cadbury purchase By Greg Farrell in New York Published: August 6 2010 00:15 | Last updated: August 6 2010 00:15 Kraft on Thursday reported a 13 per cent rise in second- quarter earnings as contributions from its recently acquired Cadbury unit helped it overcome weak North American results. Net profits were $937m, compared with $827m in the same period of the previous year. Revenues rose 25.3 per cent to $12.3bn – with about 90 per cent of that gain reflecting Cadbury’s contributions. Dr Kevin Campbell, Corporate Finance 2011 10 Homework Exercise #3 Agency Problems In 1999, the UK company Cadbury bought Wedel, the Polish chocolate company. After Cadbury’s acquisition by the US company Kraft in 2010, Wedel was sold to the Japanese conglomerate Lotte Group to meet European Commission requirements. TASK & QUESTIONS: Research the background to this transaction using the Internet (eg FT.com). Why did Kraft have to sell Wedel? Who benefitted from this transaction? Dr Kevin Campbell, Corporate Finance 2011 11 Homework Exercise #3 Solution Why did Kraft have to sell Wedel? To comply the European Commission Merger Regulation that prohibits excessive market concentration arising from mergers, ie: Regulation (EC) No 139/2004 Merger Procedure See the full judgement Case No COMP/M.5644 - KRAFT FOODS / CADBURY at: http://ec.europa.eu/competition/mergers/cases/decisions/m5644_20100106_20212_en.pdf Dr Kevin Campbell, Corporate Finance 2011 12 Homework Exercise #3 Solution Excerpt from: Case No COMP/M.5644 - KRAFT FOODS / CADBURY (p20) Market shares of the parties and their main competitors at the retail level Dr Kevin Campbell, Corporate Finance 2011 13 Homework Exercise #3 Solution Excerpt from: Case No COMP/M.5644 - KRAFT FOODS / CADBURY (pp 20-22) Tablets: “Post transaction, the market share of the merged entity will be [60-70]% with a substantial increment (Cadbury [20-30]%) and competitors are significantly smaller than the new entity (Jutrzenka below [5-10]%, Ferrero [0-5]% and Nestlé [0-5]%). ... the large majority of customers and competitors have raised concerns with regard to the transaction given the very high combined market share of Kraft and Cadbury post transaction and their very strong tablet brands. Respondents explain that the transaction will allow Kraft to reinforce its already very strong position and negotiation power in the tablet market which may lead to less promotional activities and to higher prices for customers. .... For the reasons set out above, the Commission concludes that the notified concentration raises serious doubts as to its compatibility with the common market on the Polish tablets market.” Dr Kevin Campbell, Corporate Finance 2011 14 Homework Exercise #3 Solution Kraft sells Polish Cadbury business to Lotte Group The Associated Press June 28, 2010 Kraft Foods Inc. has agreed to sell a Polish candy business it acquired through its acquisition of Cadbury to Japanese conglomerate Lotte Group. The food maker did not disclose terms of the deal for Cadbury's E. Wedel business in a news release Monday. The company, based in Northfield, Ill., said it had to sell the business and another one in Romania as part of the European Commission's approval of its Cadbury buyout. The company said the sale of the Romanian business will be announced later. The sale announced Monday includes Cadbury's E. Wedel-branded chocolate and sugar confectionary operations, related brands and a manufacturing facility in Warsaw. About 1,000 Cadbury Wedel employees will transfer to Lotte Group. Dr Kevin Campbell, Corporate Finance 2011 15 Homework Exercise #3 Who benefitted from this transaction? The shareholders of Lotte Group have benefitted from the acquisition of Wedel because it was a forced auction which gave Kraft little bargaining power The price paid by Lotte Group is most likely lower than would be paid in a conventional takeover They have gained a prestigous brand and enabled the group to diversify its business Dr Kevin Campbell, Corporate Finance 2011 16 Homework Exercise #3 … the future? SOURCE: http://www.confectionerynews.com/Financial/Lotte-set-to-expand-Wedel-plants-in-Poland-report Dr Kevin Campbell, Corporate Finance 2011 17 Homework Exercise #3 … the future? Dr Kevin Campbell, Corporate Finance 2011 18