Did the Best-Laid Plans of Kraft Go Astray?

Acquisitions are a tricky beast. Management teams tend to get fired up over the idea of cost savings, cross-selling growth opportunities, and any number of other niceties that they file under the heading "synergies." When it comes to small, "snap-on" acquisitions that are focused on products -- think a big pharma company buying a drug developer -- the absorption can often be pretty seamless. But megamergers are nothing if not fraught with challenges.

As we hit the one-year anniversary of Kraft (NYSE: KFT  ) scooping up U.K. confections giant Cadbury, Kraft may be facing some integration struggles. To be sure, as my fellow Fool Mike Pienciak noted last year, Kraft's board of directors gave the deal an enthusiastic thumbs-up fairly early on and rewarded CEO Irene Rosenfeld with a big pay raise as thanks for her role in the purchase. But a recent article from the Financial Times highlights some skirmishes going on as Kraft continues its integration efforts.

According to the FT, a clash of cultures has led to a wave of departures at Cadbury. It noted:

... insiders retort that Kraft's propensity for lengthy meetings, and a desire to include top-level executives on every decision, made the new jobs less compelling ...

There have also been significant concerns from U.K. factory workers. The acquisition started off on a rough note as Kraft decided to close a U.K. plant that it had formerly said it would keep open, and the move to close Kraft's U.K. location in Cheltenham didn't help matters. Meanwhile, the FT also circulated the rumor that the management team at organic-chocolate maker Green & Black wanted to separate from Kraft.

Given that Cadbury was actually showing significant growth at the time of the acquisition, it would seem pretty silly for Kraft to come in and ride roughshod over what was obviously a successful culture.

Of course, this all needs to be taken with a grain of salt. Part of the "realizing synergies" process, particularly with a megamerger, almost always involves cutting down on overlapping costs -- whether they're locations, employees, or product offerings. Those that become casualties of synergy realization are unlikely to have kind things to say about the company that showed them the door. Similarly, a new corporate culture may fit like a glove for some employees, while it may drive others absolutely batty.

For investors, what really matters is whether Kraft will be able to show results. The company expects to realize $1 billion in revenue synergies and $750 million in cost synergies from the deal by 2013, and investors should expect to see a chunk of that hit Kraft's results this year.

If only this were Kraft's only major hurdle right now. The company is also fighting Starbucks (Nasdaq: SBUX  ) tooth-and-nail to prevent the coffee company from terminating an agreement that allows Kraft to market and distribute Starbucks coffee. Last week, Kraft said it faces "irreparable harm" if Starbucks is allowed to move forward.

A 2011 price-to-earnings ratio of 13.5 and a 3.7% dividend definitely make Kraft's stock interesting, but it could be a bumpy year ahead for investors.

Want to keep up with everything Kraft? Add the stock to your Foolish watchlist.

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2011, at 5:02 PM, t0bes wrote:

    I think Kraft have handled things poorly and generated a lot of ill will from Cadbury customers in the UK. That will impact sales.

  • Report this Comment On January 18, 2011, at 6:40 PM, Clint35 wrote:

    I agree with t0bes. I also think the merger was a bad idea in the first place and the CEO wanted it mainly to make herself look so she could get that big raise. They even sold off some of the pizza brands that were their best sellers. That just doesn't make any sense. I doubt the merger will turn out to be the great deal Rosenfeld thought it would be.

  • Report this Comment On January 19, 2011, at 12:46 AM, divinediscerner wrote:

    I can see absolutely no reason to own this stock.

    The company is heavily in debt, it's valuation not compelling, and we still don't know the potential impacts to margins from rising ag costs.

    I'd stay away from this stock for awhile. It has done absolutely nothing to earn investor's trust. So far under the CEO's leadership they've done nothing except make expensive acquisitions.

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