August 5, 2011
Kraft: Mergers & Acquisitions… America's Snakes
The cycles of mergers and acquisitions are truly amazing. When existing business units are predicted to experience slowing growth but cash is on hand to explore synergistic areas or opportunities exist to reduce cost, diversification is pursued. The painful cycle of integrating two or more businesses/organizations is endured with the promise of "building shareholder value". Yet, markets are rarely stagnant, dynamics can change rapidly, impacted by the global economy, R&D development progress, and competitor moves. If diversification seemed like an appropriate business strategy yesterday, a divestiture may appear more suitable tomorrow.
So seemingly the story of Kraft, which over the last couple of days announced its decision to separate the fast growing global snacks business (roughly $32 billion in annual sales) from its slower-growth North America grocery business (roughly $16 billion in annual sales). "Investments fashions come and go", so Helen Thomas in today's Financial Times. Over the last ten years, Kraft has morphed its portfolio starting with the $15 billion acquisition of Nabisco in 2000. Philip Morris/Altria sold its stake in Kraft in 2007, the same year in which Kraft acquired LU biscuit business from Danone for approximately $7 billion. The diversification continued with the hostile acquisition of Cadbury for $19 billion. As one of three articles on the topic in today's Financial Times points out, "The U.S. group had angered many after the Cadbury takeover, when it closed a factory in Bristol, […], with the loss of hundreds of jobs, in spite of having promised to keep the site open." [Business is business, right? No Bodhisattva principles applied here. Maybe a topic for another blog.]
Irene Rosenfeld, who remains one of the few leading ladies in Corporate America, and according to Forbes is one of the most powerful woman in the country, has served as a strong leader for Kraft since 2006. [Interesting feature in the Chicago Tribune on her career today.]
Over the last ten years, Kraft had some turnover in its corporate leadership, maybe a bit more so than expected at that post. [At least three that I can come up with.] Just one more turn in the road. I like to think of organizations as snakes that slither around obstacles. They swallow large foods that sometimes take a long time to digest (merger/integration). They spit out indigestible leftovers (consolidation/layoffs) and after some growth, shed their skin to come out leaner and more energetic than ever before (divestitures/further consolidation). And depending on what kind of snake it is… they sometimes bite! [Maybe in my next blog I will match companies with their appropriate "snake counterpart". Shareholders beware!!]
During my professional career, I have seen few acquisitions that have yielded actual ROIs. Bold moves that are mostly plagued by challenges and only under a next-generation of leadership may yield some benefits. Kraft is clearly looking for greater shareholder confidence and credit for its growth businesses. The timing is a bit unfortunate, given the weakness in the stock market. There really appeared to be no gains in share price to speak of yesterday. Good luck Kraft. Good luck Irene!