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Kraft Foods is one of the world largest makers of food, confectionery, and beverage Products.The Company has over 10 globally renowned brands yielding in excess of $1 billion annually. Since its inception in 1923, it has seen unprecedented growth not only in US but also across the globe. The company was formed following the rebranding of the National Dairy Products Corporation. Since then, the company has laid down planned strategies to grow.
On the other hand, Philip Morris Companies is one of the largest tobacco and general food makers. The company has over the year’s strategies to gain market share in its industry through various strategies among which acquisition and merger.
Philip Morris Companies is interested in Kraft foods to diversify and expand its market share in the food industry. All the foods unit of Philip Morris Companies was merged with Kraft Foods in 1989. On the other hand, in early 2001, in order to raise capital to pay expenses and debts incurred during the acquisitions, the company opted to go public with Kraft in the form of an Initial Public Offering.However, the negative reactions of public to the multinational company that sold both cigarettes and dairy products prompted Philip Morris to slowly move away from Kraft.
Financial package Pre-merger and Post-merger Analysis
Philip Morris Companies made an offer of $11.5 billion bid for the Kraft Company. This offer involves a combination of cash and stock swap. However, Kraft Company agreed to take $13.1 billion, or $106 per share. Towards this, shareholders of Kraft Company have an equal chance of owning part of the resultant company of Philip Morris Companies Kraft. In order to gain and retain the control over Kraft Foods, Philips Morris Companies introduced the partial IPO in the stock exchange market. The general public was sold about 270 million Class A shares while the company retained a round 1.19 billion class B shares. In view of the fact that every B share equal to about 10 Class A shares, Philips Morris Companiesretained over 95% of Kraft Foods. Whereas the shares were initially sold at $31.00 apiece, by the end of the first trading day, it gained $0.25 which was 25% which was commendably good. With the first trading going up to $31.25 the company share price became strong in the market with time.The IPO amounted to approximately $8.7 billion making this it one of the biggest IPO offerings in US history. Currently, Philip Morris Companies Kraft continues to be stable and strong in the market. Their equity price in the stock market continues to be steady in spite of the economic challenges in the recent years.
During merger process of Philip Morris Companies and Kraft Foods, Kraft foods proposed a $13.2 billion restructuring plan which was geared to generate a total value estimated to be in excess of $110 per share. Out of the targeted $110 per share, shareholders were proposed and arranged to get $84 in cash dividend, $14 in high yield debentures. The plan also stipulated the shareholders would retain stock interest, with an adjustment of $12 per share so as to reflect an even cash and securities distribution. In the part of shareholders, the Kraft deal had tax advantages over the Philip Morris Companies offer. The deal Philip Morris Companies and Kraft Foods further stipulated that any gain on Philip Morris's all-cash arrangement would be taxable, but no tax on the Kraft equity or any part of the dividend. However, this restructuring plan left the Kraft foods with a debt of approximately $12.4 billion. The merger was successful and Philip Morris Companies Kraft continues to hold on a higher market share despite economic challenges across the globe.
The merged company will value $37.6 billion which is a great improvement of the two companies in terms of market share and capital base. This value will propel the company to gain a higher mark let share and gain a higher profit margin.
Financing of the merger
The merger should be financed through IPO and company assets. This will ensure that the acquiring company does not go into serious debt which may hinder its progress. On carrying out PRICTO analysis of the transaction, the two companies got value for money. The biding process and share pricing yielded more benefits to all both companies.
In conclusion, the merger between Philip Morris Companies and Kraft food was great step to all the firms in their strategy to gain more market share and profits. The merger process and the offering were well calculated to the benefits of each party. Therefore, this was one of the best economic moves carried out by these companies. In my opinion all the two companies won in the long run. This merger will positively affect the general public by enhance the quality and pricing of the joint companies products. This is because the company will have increased capital, technical skills not only to make new improvements but also to offer products at affordable rates.