Cadbury (CBY): Money Changes Everything

The Kraft (NYSE:KFT) deal to buy Cadbury (NYSE:CBY) was concluded today at a purchase price of about $19.44 billion. That was all it took to close the deal–a rich offer made and accepted.

It was never about the strategic fit that Cadbury’s board flaunted as a reason to stay independent. It was never about Cadbury’s rosy forecasts or Kraft’s less robust picture of the future. It was never about a white knight bid from Hershey (NYSE:HSY) or about Kraft heeding the wishes of one of its largest shareholder, Warren Buffett, not to pay a huge premium for the UK company.

The deal came just ahead of a deadline set by the UK government for Kraft to make its final offer and just as Hershey was prepared to make an offer of its own.

Part of what pushed Kraft to a higher offer was news interviews with several of Cadbury’s largest shareholders. They “set the price” in public by making it plain at what amount they would sell their stock.

The success of the deal is based on what most deals are–synergy. Kraft CEO Irene Rosenfeld had better watch her step. Many deals that have started with synergy as their presiding purpose ended up in tangles of political infighting and layoffs that kill morale in the wrong part of the new company. One has to only look at Alcatel-Lucent and Time Warner-AOL to see how deeply flawed mergers based on synergy can be.

Kraft assumes that access to Cadbury’s overseas markets will help it improve its revenue abroad. That is based on the belief, of course, that people in India and China will like Kraft products. They may not like them at all.

The cash part of the Cadbury buyout is 500 pence of the total 840 pence per share offer. That loads enough debt on the new company to cause a great deal of stress if the global recovery does not continue at a healthy pace.

Kraft got the prize but will rue what it paid.

Douglas A. McIntyre