When Kraft (KFT)(KRFT)(NASDAQ:MDLZ) was looking to buy Cadbury in late 2009, there was a lot of back and forth on the pricing and the mix between cash and stock to finance the deal; at the time, Warren Buffett was unhappy with the move, calling it a bad deal – particularly the fact that Kraft was selling its pizza business at nine times earnings ($2.5 billion after taxes for a business with earnings of $280 million – and growing) to purchase Cadbury at a mid-teens multiple (and using stock that Kraft’s own directors were saying was significantly undervalued). Despite the company’s largest shareholder and likely the greatest investor of all time being against the deal, CEO Irene Rosenfeld powered ahead – maybe due to some incentive from a compensation committee that paid her for “exceptional leadership” by simply closing the acquisition.
At the time of the deal, Rosenfeld said the transaction was right for Kraft Foods because “it was the opportunity to combine the two companies to create a global powerhouse in snacks, confectionary, and quick meals, [with] the potential to benefit our brands, our employees, our consumers, and certainly our shareholders. It would become a $50 billion company, one that would have the scale, the scope, and the resources to grow faster today and well into the future.”
At the time, Buffett said the following on CNBC: “Whenever a company makes a deal, I go to the store and I buy a congratulations card and I buy a sympathy card. And then five years later I decide which one to send.” Later on, Rosenfeld responded with this: "What I have said to him is that I am quite confident he will be sending me a congratulatory card and it will be in far less than five years."
The end of 2014 is still a couple years away – yet 18 months after completing the Cadbury deal, Kraft’s management was on to their next move: breaking up the recently created “global powerhouse” into a North American grocery business and a global snacks business. An analyst from KeyBanc Capital Market said the following upon the split announcement: “This is a very interesting, elegant solution for an issue that they faced – how do you appropriately capitalize value and get credit for two distinctly different businesses with different priorities and challenges?”
I have no particular opinion on the latest moves – I haven’t followed Kraft or the split plans closely enough to add any insight. But according to an article from Vending Times, here’s what Rosenfeld noted as rationale for the split: “She said the separate companies would have different growth profiles that will be better served by individual operating models. One model will allow the snack company to focus on overseas growth, while the other will position Kraft's domestic grocery business to manage itself for steady cash flow and dividend payments.”
My question is simple: If individual operating models is appropriate for these separate companies – and this very well may be true – what about the benefits to “our brands, our employees, our consumers, and certainly our shareholders” from creating a global powerhouse? I could be wrong, but wasn’t this apparent in late 2009? The fact that growth in the emerging middle class will outpace development market growth isn’t a revelation of the past few years. And what about the benefits of scale, scope and resources that come with being a $50 billion company; have the advantages of global size simply fallen out of the window – and now only matter on a regional basis?
My biggest problem with these type of moves is that they come with big price tags (which often appear to have more concern with empire building than value creation), and also plenty of time and money spent on planning and investment bankers (with Centerview Partners, Evercore Partners, and Goldman Sachs advising Kraft on the split – and as Buffett likes to say, “Never ask the barber whether you need a haircut”) – yet limited time focused on continuing to run the actual business in its current form. Again, these moves may both be justified – but I get nervous when a management team’s compensation is based upon their ability to show “leadership” by continually slicing and dicing the company in an attempt to please people like our KeyBanc analyst, who are concerned with getting “credit” from the market, rather than focusing on solid performance (which, I assure you, will take care of the stock price with time).
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.