Analyzing Post-Acquisition Performance1
Background
On 2 February 2010, Kraft Foods Inc. (“Kraft”) announced that it has acquired control of
Cadbury plc (“Cadbury”). The merger between the two companies created the second-largest
confectionery, food, and beverage Company in the world. Kraft funded the cash portion of
the deal from two sources:
Selling of the Pizza business – Net cash proceeds are $2,483 million, after transaction
costs and tax.
Debt Issuance – On 8 February 2010, Kraft issued $9.5 billion of senior unsecured notes
at a weighted-average effective rate of 5.211% (due in 3.25, 6, 10 and 30 years) to
finance the Cadbury acquisition and general corporate purposes (not all the debt
financing was actually used for the transaction).
Pro Forma Consolidated Balance Sheet 31/12/2009
Following the finalization of the deal, Kraft prepared a pro forma consolidated balance Sheet
for 31 December 2009 that gives effect to (1) its merger with Cadbury and (2) the divestiture
of the Pizza business, assuming that these two events occurred on that day.
Fair Value Adjustments
Based on a preliminary fair value estimation, Kraft assumed the fair value of the following
Cadbury’s items to exceed their book value by the associated amounts:
$ Million
Assets
Inventories 58
Property, plant and equipment 678 Excluding land – $146M with useful life of 9 years
Other assets (non-current) 86 Investments is associations
Intangible assets 9,871 Definitely lived assets added – $2,400 million,
with remaining useful life of 15 years
Total assets 10,693
Liabilities
Long term debt 135
Deferred tax liability: Stemming from recording the above items at FV
Current 66 Recorded under Other current liabilities
Non-current 3,373
Total liabilities 3,574
GAAP Adjustments
While Cadbury uses IFRS to present its financial statements, Kraft uses U.S. GAAP.
Consequently, Kraft must adjust Cadbury’s financials to U.S. GAAP before consolidating it.
1
This case was written by Chemi Wieder and Eli Amir for the sole purpose of class discussion and
learning. The case was later revised by Marco Ghitti and Rony Zappela. All data were retrieved from
public disclosures.
2
The following liabilities were adjusted to align Cadbury’s IFRS financial information with
Kraft’s U.S. GAAP accounting policies:
Liabilities $ Million
Other current liabilities -10 Future legal costs which do not meet the US
GAAP criteria for recognition
Other non-current liabilities -26 Same as above
Deferred tax liability (noncurrent)
59 More rigorous requirement by US GAAP in
regards to recognition of tax benefit
Accrued pension 16 Change in actuarial value
Total liabilities 39
Exhibit A presents Kraft’s balance sheets for fiscals 2011, 2010, and 2009, as reported.
Using information on Cadbury’s balance sheet, fair value adjustments and balance sheetrelated GAAP adjustments, Exhibit B presents the pro-forma consolidated balance sheet for
31/12/2009, as if the transaction took place on that date (see also notes to exhibit B for
explanations).
Pro Forma Consolidated Income Statements
Exhibit C presents Kraft’s income statements for fiscals 2008-2011 (years ended 31
December). As described earlier, Kraft sold the Pizza business in fiscal 2010; this transaction
was recorded as a discontinued operation. To comply with accounting standards, and to
enhance comparability, the income statements for fiscals 2009 and 2008 were adjusted to
reflect the Pizza business as a discontinued operation. Therefore, Exhibit C also includes the
income statements for fiscals 2009 and 2008 as originally reported.
Recall, that the acquisition of Cadbury’s was effected in fiscal 2010. To compare fiscal 2010
with 2009, we need to prepare a Pro-Forma consolidated income statement for fiscal 2009.
This task requires: (1) Cadbury’s income statement for fiscal 2009 translated into U.S.
dollars; (2) A separate income statement for the Pizza business for fiscal 2009; and (3)
Information on differences between Cadbury’s income under IFRS and its income under
U.S. GAAP.
(1) Cadbury’s Income statement for fiscal 2009
The income statement of Cadbury was issued by Kraft and is aligned with Kraft’s financial
reporting methods.
$ Million Margins
Revenues 9,326
Cost of Sales 5,010
Gross Profit 4,316 46.3%
SG&A Expenses 3,269
Asset Impairment and Exit Costs 256
Operating Profit 791 8.5%
Interest and Other Expenses, net 201
Earnings before Income Taxes 590
Income Taxes 161
Net Income 429 4.6%
3
(2) Separate Income statements for the Pizza business for fiscals 2009 and 2010
$ Million $ Million
2009 2010
Revenues 1,632 335
Cost of Sales 968 202
Gross Profit 664 133
SG&A Expenses 323 60
Operating Profit 341 73
Income Tax 123 25 See p.24 of 111 Kraft 2010 10-K
Net Income 218 48
(3) Income Statement GAAP adjustments
These are the income statement items that were adjusted to align Cadbury’s financial
information under IFRS with Kraft’s U.S. GAAP accounting policies (a positive figure
reflects an increase in expenses):
$ Million
Cost of Sales 95 Actuarial losses, not recognized under IFRS
SG&A Expenses 95 Actuarial losses, not recognized under IFRS
SG&A Expenses 14 Periodic difference of legal expenses recognition
Interest Expenses 5 Non-qualifying derivative hedging in US GAAP
Total Expenses 209
Additional Information
Exhibit D contains information from Kraft’s Management Discussion and Analysis
(MD&A) for fiscal 2010 (Comparing operating income for fiscal 2010 with that of fiscal
2009).
Exhibit E includes “Note 2” (Acquisitions and Divestitures) taken from Kraft’s financial
statements for fiscal 2009 and fiscal 2010.
Assignments
Comment: In your answers and calculations, ignore the divestitures of certain Cadbury
confectionery operations in Poland and Romania (unrelated to the Pizza business).
1. Prepare a Pro-forma consolidated income statement for Kraft and Cadbury for fiscal
2009. For the purpose of this report, assume that Kraft acquired 100% of Cadbury’s
shares in 1 January 2009. We will use this Pro-forma income statement to analyze the
post merger financial performance of Kraft. Consequently, the Pro-forma income
statement should also reflect the divestiture of the Pizza business.
2. Companies often acquire other companies when they are unable to generate sufficient
organic growth (growth from within), where growth is often measured using sales
revenues. Another benefit from mergers and acquisitions is the expected synergies from
the transaction. Using information in Exhibit C, estimate whether Kraft had organic
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growth in 2009, the year prior to the acquisition. Also, using information in Exhibit C
and Cadbury’s income statement for fiscal 2009, assess whether there could be potential
synergies and cost savings in the acquisition. For the purpose of assessing synergies,
examine profit margins.
3. Using all available information in the case, estimate Kraft’s organic growth in fiscal
2010 (as compared to fiscal 2009) by analyzing growth in revenues, operating income
and net income.
4. Analyze the post-merger performance (2010 and 2011) of the combined company.
Focus on sales growth, profit margins, return on equity and return on assets. Use
information in Note 2, fiscal 2010.
5. Estimate whether Kraft was successful in materializing synergies from the merger. In
your opinion, was Kraft’s acquisition of Cadbury successful?