On June 30, 2016, press reports, which were later confirmed, stated that Mondelez (MDLZ, Financial) had made an offer to acquire The Hershey Company for $107 per share in a half-cash, half-stock transaction. While an acquisition of Hershey would certainly strengthen Mondelez's confectionery presence in North America, whether or not a deal creates value for shareholders depends on the price paid, the acquisition currency used and, as importantly, the potential for significant cost savings at Hershey.
We believe that Mondelez shares are currently undervalued, and that the issuance of Mondelez stock at current prices to fund the acquisition of Hershey would likely be costly for Mondelez shareholders. More importantly, if Mondelez were to acquire Hershey or any other company, management must continue to be accountable for its own target of 17% to 18% operating profit margins by 2018 at the existing Mondelez business, excluding the impact or benefit of any acquisitions. We expect that shareholders would fmd it unacceptable for an acquisition of Hershey by Mondelez to delay or derail the productivity and cost savings transformation currently underway at the company.
On July 27, 2016, Mondelez reported second quarter 2016 results. Underlying organic growth was generally in-line with Mondelez's categories at 2.5%, including volume growth of nearly 1% which was a sequential acceleration of 60 basis points from the first quarter. While we believe that the long-term outlook for the global snacks categories in which Mondelez participates remains robust, the company is currently facing short-term headwinds from slowing emerging market economies.
Operating profit margins expanded by 265 basis points to 15% in the quarter driven primarily by a 200 basis point reduction in overhead costs as a percentage of sales reflecting the implementation of zero-based budgeting as well as an increase in gross margin reflecting the company's supply chain transformation. Year-to-date, the company continues to show progress with its significant cost savings opportunity and productivity initiatives.
From Bill Ackman (Trades, Portfolio)'s mid-year 2016 letter.
