Philip Morris Companies And Kraft, Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Philip Morris Companies And Kraft, Inc. Case Solution

Introduction

This case discusses the effects of free cash flows on decision making related to the acquisition and strategies’ development. Along with that, this case will allow the students to draw conclusions from the stock prices, and the valuation techniques have also been discussed in the case. Philip Morris has created a hype among the stockholders of Kraft foods, by offering 50% premium over the current stock price of Kraft foods. The stock price of Kraft was $60 in October 1988, but Philips Morris was ready to acquire its stocks at $90 per share. In response to such hostile offer; the management of Kraft Company announced that the company’s stock was undervalued in the market as it was investing in long-term projects by foregoing the current profits in order to achieve its corporate objectives. Its’ intrinsic worth is more than $90 as per the analysis of our investment banker Goldman, Sachs & Co.

Moreover, if the management of Philip Morris offers more than $90 and around $110, then the company’s management will be able to negotiate on this deal. However, the management of the Philip Morris refused this stance as they were confident about the price which was offered by them.

Philip Morris is a tobacco company with a famous product line of Marlboro, Benson & Hedges, and Virginia slim. Its declining local sales were compensated by an increasing exports outside the U.S because of widespread consumption of cigarettes across the globe, especially in Japan and Taiwan. Philip Morris was offering $90/share to Kraft, to merge it with general foods. It is expected that this merger could have resulted in the creation of the world’s largest food company.

Problem Statement

John Richman (the CEO of Kraft food) opposed this deal as in his opinion Kraft’s intrinsic worth was more than $90/Share (Richard S; 1989). Now what steps should the managements of both the companies take? What is the worth of share price? What should the shareholders do?

Stock Market and Philip Morris

$90 per share bid for Kraft possesses changes for Philip Morris’s. As Philip Morris has decided to purchase common stocks at this price. Philip gave this offer at 50% premium on its closing price. In timeline is in appendix 1, where we can see that after the biding price by Philip the Kraft’s price had also increased from 88.250 to 90.375. After the bid of $90;Philip’s market share prices faced fluctuations, i.e. 94, 99, 97 and 95. Philip targeted Kraft because Kraft was the company which was involved in the food sector and it also had many well-known brands. Moreover, the sales that were generated from the operations amounted to almost $9.9 billion. This is considered to be an increase of almost 27% since 1986. There was also an increase in the net income of Kraft, i.e. of almost 11%, and in monetary terms, it was equal to $435 million. If Philip becomes successful in making an acquisition with Kraft, then there would be higher chances for it to become a larger food company in the globe, after the successful completion of the merger. Moreover, due to the international recognition of Kraft and its branded products; Philip Morris and Kraft can reach those global market segments which both the companies might haven’t been able to explore or reach before as they were unable to do so while operating solo.

As per the exhibits; it can be seen that the sales revenue is growing by a significant percentage of almost 40.26%. It is also worth mentioning that Kraft is perfect for Philip Morris, as per the latter’s opinion. General foods was acquired by Philip, whose position can also be strengthened if Kraft is added to it. However, in order to avoid a decline in the tobacco industry; Philip is moving into un-related diversification.

Restructuring value for Shareholders

For shareholders, restricting was an opportunity as shareholders believed that this will create the value for the company. Along with that,Kraft was considering to move forward with the restructuring plan rather than accepting Philip Morris’s offer. The board was also considering the restructuring plan, alongside which they also said that they would prefer any other viable offer that would have the potential to generate better transactions. Restructuring was more feasible and decent option for the shareholders rather than accepting Philips Morris offer. But the ratio analysis of the company shows that its solvency position which indicates that how much would the company be able to pay its long-term obligations. This ratio is most important for the shareholders as it evaluates the chances of bankruptcy for the company. Debt to equity ratio indicates how much debt the company is in. In this case, the debt to equity ratio of the company will increase from 0.336 to 0.727, which is an alarming situation for the company as great ration will push the company towards greater suffering in future..........................

Philip Morris Companies And Kraft, Inc. Case Solution

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