AFS1-1 Kraft and Cadbury PLC

On February, 2, 2010, Cadbury"s Board of Directors recommended that Cadbury"s shareholders accept the terms of Kraft"s final offer to acquire Cadbury. This ended one of the larger hostile takeovers that combined one company (Kraft) that reported using U.S. GAAP with an international company (Cadbury) that reported using IFRS as promulgated by the IASB and prepared financial statements in a foreign currency (the pound). The acquisition allowed Kraft to increase its presence in the food processing industry in the developing world and to acquire a company specializing in confectionary products.

On February 2, 2010, Kraft acquired 71.73% of Cadbury"s shares for $13.1 billion. Incremental interest costs for Kraft to finance the deal are estimated to be approximately $500 million (based on borrowing of $9.5 billion). This interest cost is expected to decrease over time. Cadbury earned approximately $428 million in income (exchange rate adjusted) for 2009. One issue that merging companies always face when another company is acquired is whether the merger will be accretive or dilutive in the early years after the acquisition.

(1) Discuss some of the factors that should be considered in analyzing the impact of this merger on the income statement for the next few years.

(2) Discuss the pros and cons that Kraft might have weighed in choosing the medium of exchange to consummate the acquisition. Do you think they made the right decision? If possible, use figures to support your answer.

(3) In addition to the factors mentioned above, there are sometimes factors that cannot be quantified that enter into acquisition decisions. What do you suppose these might be in the case of Kraft"s merger with Cadbury?

(4) This acquisition is complicated by the lack of consistency between the two companies" methods of accounting and currency. Discuss the impact that these issues are likely to have on the merged company in the years following the acquisition.