Essay on Kraft Case Study

1464 Words Jul 26th, 2011 6 Pages
Purpose

The purpose of this Case Analysis Report is to advise Philip Morris on the Acquisition of Kraft Inc.

Overview

Kraft is a food-focused company with many well known brand names. In 1987 net sales were $9.9 billion which was an increase of 27% over the previous year., and net income increased by 11% to $435 million. This follows an earlier attempt to diversify where in 1980 Kraft merged with Dart Industries and then acquiring Hobart Corporation in 1981. However, by the end of 1986 Kraft had returned to a food-focused strategy.

Philip Morris is a company that is dependant on the tobacco industry. Most of Philip Morris’ income is from its Marlboro, Benson & Hedges, and Virginia Slim cigarette brands. Though tobacco sales
…show more content…
An example of synergy is operating economies. Essentially, the merger of Kraft will result in economies of scale with facilities being used with a higher degree of utilization and becoming cost efficient and thus reducing COGS. This would be a result of the spreading of manufacturing overhead cost with the advantages of common learning curves and will all save any expenses related to building new factories. It will also give greater pricing power as the merger will create the largest food company creating greater market share. Kraft itself has a great marketing team as it has done very well with known brands such as Miracle Whip and Seven Seas. In conjunction with Phillip Morris’ resources, they can use the well established Kraft brand to be combined with General Foods to allow the goodwill and positive image of Kraft to be attached to General Foods’ products. Differential efficiencies where the more effective and experienced management of Kraft will bring the underperforming General Foods operations to greater efficiency.
Philip Morris wants Kraft to take over management of general foods, who has been missing a chief officer since 1988.

Proposed Purchase of Kraft

The offer of $90 per share is to be financed through $1.5 billion in excess cash and up to $12 billion in available bank credit lines.
The 50% premium is justified by the potential synergies and diversification that an
Open Document