Posted on: September 11, 2012
The lessons that Indian companies can learn from Kraft’s acquisition of Cadbury have been highlighted in a recent paper co-authored by Kirloskar Institute of Advanced Management Studies’ professor, Dr. V. S. Pai.
The case study, to be published by the Asian Case Research Journal, University of Singapore, concentrates on the central question: How can a company extract value from an acquisition?
In brief, United States-based Kraft Foods, Inc. (KFI) acquired the United Kingdom-based Cadbury plc, gaining entry into the Indian market. The aim was to use developing markets to achieve a five per cent organic growth rate and hope that Cadbury India’s strong position would expand Kraft’s presence in the Indian market. But nearly a year after the acquisition, Kraft was moving slowly in India and appeared content to consolidate Cadbury’s market presence.
Obviously, change was in the air. Kraft had to decide whether to continue consolidating the Cadbury brand in India or use Cadbury’s strong market presence to launch brands from Kraft’s global portfolio. Kraft bought Cadbury for $18.5 billion, a 70 per cent premium over Cadbury’s stock price. It’s common knowledge that when a company pays a premium rate to acquire another company, the acquisition has to help the acquirer grow and increase its profits.
The paper co-authored by KIAMS’ Dr. Pai examines Kraft’s attempts to grow the India market through its Cadbury acquisition, with a view to: examining the motivations for an international acquisition, evaluating the effectiveness of an acquisition decision, critically examining the value of a firm’s resources and identifying ways to use resources to create value in an acquisition.The authors contend that the Kraft-Cadbury case offers several lessons to be learned by Indian companies considering mergers or acquisitions. According to them, a firm should carefully evaluate an acquisition by using the attractiveness, cost of entry and better-off tests; they noted that while the Cadbury acquisition passed the attractiveness test, both the cost of entry and better-off tests are still unanswered.
Secondly, they point out, a resource-based strategy calls for carefully evaluating a firm’s key resources and deploying them in the right context. They believe that in all likelihood, Kraft hasn’t fully deployed Cadbury India’s valuable resources to launch its own brands.
And finally, they say an acquisition is only as good as its integration, which is a key to making it a success, and in the year since the acquisition, Kraft has been rather slow in integrating the Kraft and Cadbury units in India.
Dr. Pai has more than 27 years of academic experience and has conducted research in strategic management, guided three Ph.D. scholars successfully, completed an ICSSR, New Delhi-funded research project and published several research papers. His publications, which number around 70, have appeared in refereed journals, business magazines and national business newspapers. The business cases he has written have been uploaded to the European Case Clearing House (ECCH), Cranfield University, UK and have won prizes in international case competitions held in Canada.
Co-author of the paper, Dr. Ram Subramanian is a professor with the Department of Management and Information Systems, School of Business, Montclair State University, New Jersey, U.S.A.
A Ph.D. from the University of North Texas, Denton, Texas, he has published research papers in several refereed international journals of repute.