Interbrand's View of The Kraft-Cadbury Deal: Profits But Not Value


Jan 25, 2010

The $19 billion price tag attached to Kraft’s takeover of Cadbury has sparked both warnings from investors like Warren Buffett and accusations of an undervalued bid from Cadbury. How much Cadbury is worth isn’t really the question, but rather how much is it worth to Kraft?

With the approval of their takeover offer, Kraft is paying for the significant opportunity to create incremental profits for its shareholders. In this deal, Kraft will have several operational levers they can use to drive improvements: staff cuts, distributions synergies, marketing leverage, and procurement efficiencies to name but a few.  These traditional approaches to profit enhancement are likely to breed many one time or short-term benefits. A well-run company like Kraft is likely to realize these benefits. Hence the $19bn price tag.

Interbrand, however, takes the view that it’s unlikely that the deal will dramatically create value at the product level. Brand value creation occurs when demand is generated in unique ways. Most of the Cadbury brands that come with the acquisition are well established with broad sub-brands.  The Cadbury portfolio’s preeminence in the market suggests that Kraft believes that buying brands is a better bet than developing what’s currently in their pipeline, an indicator that their internal innovation may not deliver their growth objectives.

If Kraft makes the common post-M&A mistake of putting innovation on hold to focus on creating marketing efficiencies, then it’s likely that the breakthrough, demand-generating ideas that will make the deal “pay” won’t emerge. So Kraft will need to make the deal work on two fronts: efficiencies through combined operations, and effectiveness through Brand Portfolio management.

Key points on the deal to consider:
  • The odds favor efficiency and may be why shrewd investors looked for the deal to have a higher commitment of cash. Paying with cash creates pressure for returns while protecting shareholder equity.
  • The distinctiveness of Cadbury’s product is an opportunity for Kraft to bring new consumers to the brand through broader distribution. Portfolio management is critical in order to position brands to complement rather than compete.