Thursday, August 04, 2011

Breaking up is the thing to do: Does Kraft's split make sense?

Kraft announced this morning that it will be splitting into two independent companies.  According to the firm's press release, it will divide into "a high-growth global snacks business with estimated revenue of approximately $32 billion and a high-margin North American grocery business with estimated revenue of approximately $16 billion."   While some investors applauded the move, others expressed some surprise given that Kraft recently acquired Cadbury.  At the time, Kraft made a strong argument for the synergies between Cadbury's chocolate and gum business and the Kraft food businesses.  

I'm still trying to sort through the logic and details of the split, but I am a bit puzzled by a few details that have emerged.  According to the company, the high-growth global snacks business will include brands such as "Oreo and LU biscuits, Cadbury and Milka chocolates, Trident gum, Jacobs coffee,and Tang powdered beverages."  The high-margin North American foods business will include brands such as "Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee, Capri Sun beverages, Jell-O desserts and Miracle Whip salad dressing."  Now, wait a second.  We're going to have coffee brands in each new firm.  We're going to have other beverage brands (Capri and Tang) in each new firm.  How can one argue that the break-up is about keeping the most synergistic businesses together if you are putting identical products in different companies?   

To me, the logic appears to be: keep the high growth stuff in one entity and the low growth stuff in the other entity, rather than focusing on the actual synergies among the businesses.   The press release is very explicit about that motivation.  The move seems designed to try to drive the stock price through a focus on attracting different types of investors to each entity, and through trying to garner as high a price multiple as possible for the global snacks business.   I think this may be somewhat short-sighted though.  At the end of the day, brands should be together in one firm if there are true economies of scope (i.e. synergies).  Price multiples should not be driving competitive strategy.    I'll be interested in hearing more about how and why different brands have been put into each entity.  Perhaps there's more to the story. 

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