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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.
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