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Homework Exercise #1
Agency Problem
Suppose you own shares in a company. The
current price per share is £25. Another company
has just announced that it wants to buy your
company, and will pay £35 per share to acquire
all the outstanding equity. Your company’s
management immediately begins fighting off this
hostile bid.
QUESTIONS:
Is management acting in the shareholders’ best
interests? Why or why not?
Dr Kevin Campbell, Corporate Finance 2011
1
Homework Exercise #1 Solution

The goal of management should be to maximize
the share price for the current shareholders.
 If management believes that it can improve the
profitability of the firm so that the share price will
exceed £35, then they should fight the offer from
the outside company.
 If management believes that this bidder or other
unidentified bidders will actually pay more than £35
per share to acquire the company, then they should
still fight the offer.
Dr Kevin Campbell, Corporate Finance 2011
2
Homework Exercise #1 Solution

However, if the current management cannot
increase the value of the firm beyond the bid price,
and no other higher bids come in, then
management is not acting in the interests of the
shareholders by fighting the offer.
 Since current managers often lose their jobs when
a corporation is acquired, poorly monitored
managers have an incentive to fight corporate
takeovers in situations such as this.
Dr Kevin Campbell, Corporate Finance 2011
3
Homework Exercise #2
Agency Problems
In 2009 the US company Kraft launched a takeover
bid for the UK chocolate company Cadbury.
Though Cadbury’s management initially resisted
the bid, they eventually recommended acceptance
and Cadbury was acquired by Kraft in 2010.
TASK & QUESTIONS:
Research the background to the bid using the
Internet (eg FT.com).
Do you believe that Cadbury’s shareholders
benefitted from the takeover? Do you believe that
Kraft’s shareholders benefitted? Why or why not?
Dr Kevin Campbell, Corporate Finance 2011
4
Homework Exercise #2 Solution
September 7 2009
Dr Kevin Campbell, Corporate Finance 2011
5
Homework Exercise #2 Solution
Cadbury vows to fight Kraft offer
By Jenny Wiggins
Published: September 7 2009 21:33 | Last updated: September 7 2009 21:33
Cadbury has vowed to mount a staunch defence against an unsolicited £10.2bn ($16.7bn)
takeover offer from Kraft of the US in the midst of rapid consolidation in the confectionery
industry.
On Monday the confectionery group rejected a cash and stock offer from Kraft, which
approached the company nearly two weeks ago, valuing it at 745p per share – a 31 per cent
premium to its Friday closing price.
It claimed the offer “fundamentally undervalued” the group, which has sold cocoa and
chocolate since its foundation by John Cadbury in Birmingham in the early 1830s, because
of the strength of its brand name around the world.
Dr Kevin Campbell, Corporate Finance 2011
6
Homework Exercise #2 Solution
Cadbury vows to fight Kraft offer
By Jenny Wiggins
Published: September 7 2009 21:33 | Last updated: September 7 2009 21:33
CONTINUED…
Ms Irene Rosenfeld [Kraft CEO] would not comment on whether Kraft would raise its offer
for Cadbury, but analysts believe it will have to offer between 800p and 900p per share to
bring the company to the negotiating table, and lift the proportion of cash in the offer (about
60 per cent of the offer is stock). Cadbury’s shares closed up 38 per cent at 783p.
She added that Kraft hoped to engage in friendly negotiations with Cadbury but did not rule
out a hostile offer.
Cadbury’s shareholders said they supported the decision to reject the bid. Legal & General
Investment Management, Cadbury’s biggest shareholder with a stake of 5.4 per cent, said:
“This approach materially undervalues Cadbury.”
Dr Kevin Campbell, Corporate Finance 2011
7
Homework Exercise #2 Solution
The outcome?
Bitter-sweet end to Cadbury’s independence
By Jenny Wiggins and Jonathan Guthrie
Published: February 2 2010 22:37 | Last updated: February 2 2010 22:37
Cadbury’s 186 years of independence came to an end on Tuesday as a majority of its
shareholders accepted Kraft’s £11.7bn takeover offer.
Almost 72 per cent of shareholders accepted the US food group’s offer by Tuesday’s
deadline, allowing the takeover to proceed.
One US fund manager who holds Cadbury stock said he was happy with the outcome of the
battle, which ended last month after Cadbury’s board recommended an offer worth 850p a
share. “Roger Carr [Cadbury’s chairman] did a very good job for shareholders in looking
after our interests,” he said.
Legal & General, Cadbury’s second-biggest shareholder, which last month said the final
offer failed “to fully reflect the long term value of the company,” declined to comment.
Dr Kevin Campbell, Corporate Finance 2011
8
Homework Exercise #2 Solution
Someone’s not happy …
Warren Buffett has blasted the controversial takeover of Cadbury by Kraft, and revealed that he would block
the deal if he could. The veteran investor, whose Berkshire Hathaway group owns 9.4% of Kraft, claimed the
US food group has blundered in its pursuit of the British chocolate producer. Appearing on CNBC, Buffett said
he "felt poor" following Cadbury's decision to accept Kraft's £11.9bn cash-and-share deal.
"If I had a chance to vote on it, I'd vote no, but I don't get a vote," said Buffett, who added that he "has a lot of
doubts" about the takeover.
Kraft has agreed to pay 500p in cash plus 0.1874 of new Kraft shares for each Cadbury share. Because the
share component is less than 20% of Kraft's existing share capital, a shareholder vote is not required. Buffett
is particularly displeased that Kraft is paying partly in new shares because he feels they are undervalued – a
point he first made publicly to Kraft chief executive Irene Rosenfeld earlier this month. "I like Irene. She's
done a good job in operations … she could be a trustee in my will. I just don't want her to do this deal," said
the 79-year-old.
Buffett is also unimpressed that Kraft sold its pizza business to Nestlé to raise cash for the Cadbury bid. He
said this was done in an "enormously tax-inefficient way" that cut the underlying value of the deal from $3.7bn
(£2.3bn) to $2.5bn. Shares in Kraft fell 2.2% in pre-market trading on Wall Street after Buffett made his
remarks, eroding both the value of Kraft's bid for Cadbury and his own stake in the company.
SOURCE: Graeme Wearden, The Guardian Wednesday 20 January 2010
Dr Kevin Campbell, Corporate Finance 2011
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Homework Exercise #2 Solution
… and now?
Kraft boosted by Cadbury purchase
By Greg Farrell in New York
Published: August 6 2010 00:15 | Last updated: August 6 2010 00:15
Kraft on Thursday reported a 13 per cent rise in second- quarter earnings as contributions
from its recently acquired Cadbury unit helped it overcome weak North American results.
Net profits were $937m, compared with $827m in the same period of the previous year.
Revenues rose 25.3 per cent to $12.3bn – with about 90 per cent of that gain reflecting
Cadbury’s contributions.
Dr Kevin Campbell, Corporate Finance 2011
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Homework Exercise #3
Agency Problems
In 1999, the UK company Cadbury bought Wedel,
the Polish chocolate company. After Cadbury’s
acquisition by the US company Kraft in 2010,
Wedel was sold to the Japanese conglomerate
Lotte Group to meet European Commission
requirements.
TASK & QUESTIONS:
Research the background to this transaction using
the Internet (eg FT.com).
Why did Kraft have to sell Wedel? Who benefitted
from this transaction?
Dr Kevin Campbell, Corporate Finance 2011
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Homework Exercise #3 Solution
Why did Kraft have to sell Wedel?

To comply the European Commission Merger
Regulation that prohibits excessive market
concentration arising from mergers, ie:
Regulation (EC) No 139/2004 Merger Procedure

See the full judgement
Case No COMP/M.5644 - KRAFT FOODS / CADBURY
at:
http://ec.europa.eu/competition/mergers/cases/decisions/m5644_20100106_20212_en.pdf
Dr Kevin Campbell, Corporate Finance 2011
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Homework Exercise #3 Solution
Excerpt from:
Case No COMP/M.5644 - KRAFT FOODS / CADBURY (p20)
Market shares of the parties and their main competitors at the retail level
Dr Kevin Campbell, Corporate Finance 2011
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Homework Exercise #3 Solution
Excerpt from:
Case No COMP/M.5644 - KRAFT FOODS / CADBURY
(pp 20-22)
Tablets:
“Post transaction, the market share of the merged entity will be [60-70]% with
a substantial increment (Cadbury [20-30]%) and competitors are significantly
smaller than the new entity (Jutrzenka below [5-10]%, Ferrero [0-5]% and
Nestlé [0-5]%).
... the large majority of customers and competitors have raised concerns with
regard to the transaction given the very high combined market share of Kraft
and Cadbury post transaction and their very strong tablet brands.
Respondents explain that the transaction will allow Kraft to reinforce its
already very strong position and negotiation power in the tablet market which
may lead to less promotional activities and to higher prices for customers.
.... For the reasons set out above, the Commission concludes that the notified
concentration raises serious doubts as to its compatibility with the common
market on the Polish tablets market.”
Dr Kevin Campbell, Corporate Finance 2011
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Homework Exercise #3 Solution
Kraft sells Polish Cadbury business to Lotte Group
The Associated Press June 28, 2010
Kraft Foods Inc. has agreed to sell a Polish candy business it acquired through its
acquisition of Cadbury to Japanese conglomerate Lotte Group.
The food maker did not disclose terms of the deal for Cadbury's E. Wedel business in a
news release Monday.
The company, based in Northfield, Ill., said it had to sell the business and another one in
Romania as part of the European Commission's approval of its Cadbury buyout. The
company said the sale of the Romanian business will be announced later.
The sale announced Monday includes Cadbury's E. Wedel-branded chocolate and sugar
confectionary operations, related brands and a manufacturing facility in Warsaw. About
1,000 Cadbury Wedel employees will transfer to Lotte Group.
Dr Kevin Campbell, Corporate Finance 2011
15
Homework Exercise #3
Who benefitted from this transaction?

The shareholders of Lotte Group have benefitted
from the acquisition of Wedel because it was a
forced auction which gave Kraft little bargaining
power
 The price paid by Lotte Group is most likely lower
than would be paid in a conventional takeover
 They have gained a prestigous brand and enabled
the group to diversify its business
Dr Kevin Campbell, Corporate Finance 2011
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Homework Exercise #3
… the future?
SOURCE:
http://www.confectionerynews.com/Financial/Lotte-set-to-expand-Wedel-plants-in-Poland-report
Dr Kevin Campbell, Corporate Finance 2011
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Homework Exercise #3
… the future?
Dr Kevin Campbell, Corporate Finance 2011
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