Philip Morris Companies and Kraft Inc - Merge and Acquisition

Philip Morris Companies and Kraft, Inc.

Case #1 Student questions - Philip Morris Companies and Kraft, Inc

1. Why is Kraft a takeover target?

2. Should Philip Morris buy Kraft?

3. Does the market think this offer is good for Philip-Morris?

4. Does the market think this offer is good for Kraft shareholders? Why?

Set of events

1. Kraft stock price around $60 in early October of 1988

1. October 18th, Philip Morris offers $90 cash for each share of Kraft

1. Kraft management does not like this

--argue that offer is too low

--on Oct. 24th, Kraft management proposes a restructuring- argue it is worth $110 per share

Question #1: Does the market think this offer is good for Philip-Morris?

• Market did not like Philip-Morris’s prior diversification moves

• Stock price goes down on October 18th by $4.50 per share (-5.5% abnormal return) -+

shareholder loss of $1.3 bil.

Question #2: Does the market think this offer is good for Kraft shareholders? Why?

• Stock price goes up to above $90

• Kraft shareholders are much richer

• Potential for

--improved offer

--a restructuring plan

--an offer by another potential acquirer

Question #3: What does the market think of the restructuring plan?

Stock price goes up to $102 -+ market believes restructuring will not occur or is not worth $110 a share

Would a restructured Kraft be worth much more than the old $60 per share- appears to be a well-run company

More likely explanation: market believed that plan would result in a new or improved offer

What are the potential economic gains from this acquisition?

• Kraft management can be used to help run General Foods division of Kraft

• If there are synergies, the market believes Philip Morris is overpaying

-+ Kraft shareholders benefit by the synergy value plus some

What happened?

Oct. 28th, Mr. Maxwell and Mr. Richman meet at 10 p.m. Maxwell offers $104 per share

Richman asks for $106 per share Maxwell agrees at 1 a.m.

Richman becomes vice-chairman of merged company Kraft headquarters to remain in Illinois for at least 2 years

An alternate view of the Dynamics:  

Diversification to Mitigate Expropriation in the Tobacco Industry, Beneish, Jansen, Lewis, Stuart, Journal of Financial Economics 89.1 (July 2008) pp. 136-157