Corporate Strategic Analysis Report.

ALL CHANGE AT TEVA

Expansion under Eli Hurvitz and Shlomo Yanai

After a series of consolidations within the Israeli home market, in 1976 the company became Teva Pharmaceutical Industries Ltd, Israel's largest healthcare company, and appointed EliHurvitz as the first CEO and President, a role he was to keep until 2002, when he took on the role of chairman until his departure from ill health in 2010. Under Hurvitz's control Teva's revenue would grow from

$30m in 1976 to $16bn in 2010, strongly focused on generic pharmaceuticals. Hurvitz identified the huge opportunity for generic medicines in the USA and Europe when the USA passed laws in 1984 encouraging the sale of generic drugs after patents had expired, if the manufac turer could prove they were equivalent to the origina molecule. This rapid growth was achieved through a series of European and US acquisitions focused on generic phar- maceutical companies, moving Teva away from domi- nating the local lsraelimarket to eventually becoming the uvorld's largest generic pharmaceutical company.

In the 1980s, a series of collaborations with Israeli university research departments, saw Teva beginning to develop non-generic or branded pharmaceuticals. By the mid-1990s, Teva's first non-generic drug, Copaxone® for the treatment of multiple sclerosis (MS), was approved in Europe and in the USA. Copaxone® still accounted for around 20 per cent of Teva's turnover and 50 per cent of profit in 2015. One of the cornerstones for the successfu expansion strategy was a strong focus on cost savings and the very rapid integration of acquired companies.

In April 2002, Hurvitz took on the role of Chairman and appointed another Teva insider, Israel Makov, who had joined Teva in 1995, as CEO. Although some acqui- sitions were made by Makov, it was a period of relative quiet for the company albeit with rumours of board room disagreements between Hurvitz and Makov. According to the journalist Mina Kimes, Eli Hurvitz still has a significant influence over Teva: '. . black and white portraits of him hang on the walls. Employees quote his favoured aphorisms, such as, "It's better to get a speeding ticket than a parking ticket." The company maintains an empty office in Hurvitz's memory at lts Jerusalem facility.':

following the resignation of Israel Makov in 2007, Teva recruited a high-ranking member of the Israeli defence forces, Shlomo Yanai. as Teva's President and CEO. Working with Hurvitz as Chairman. Yanaistated that Teva's aim was to achieve a sales revenue of around $33bn by 2015. Together they oversaw a doubling of sales revenue In lust three years, from $8bn in 2007 to $16bn in 2010. This was achieved by a dual approach of aggressive acqui- sition of competitor generic companies and diversifying

the company into over-the-counter (OTC) medicines and looking for branded pharmaceuticals to replace the aging Copaxone®. Aggressive growth in generics was accom- plished by the acquisition of Barr in the USA, Ratiopharm in Europe and Taisho and Taiyo in Japan. The company also announced an OTC joint venture with Procter & Gamble.

CASE STUDY

All change at Teva Justin Boar and Sarah Holland

Purchase of Cephalon and share price collapse

Af ter a period of ill health, Hurvitz stepped down in 2010 and the first non-Israeli Chairman, Philip Frost, a US-based billionaire, was appointed in his place. In May 2011, af ter a short bidding war, Teva successfully trumped a rival hostile bid from Valeant Pharmaceuticals to acquire Cephalon, a research-based pharmaceutical company of around 4000 employees located in Pennsylvania, USA, in a deal worth $6.8bn.

Cephalon posted sales of$2.76bn in 2010, up 28 per cent, and adjusted net income of $657m, an increase of 40 per cent. Growth was driven by the sleep disorder drug Provigil® and its follow-up long acting drug Nuvigil®, the cancer drug Treanda® and the cancer painkiller Fentora®. Cephalon also boasted a large research portfolio in several key areas central nervous system ('CNS'), oncology, respiratory and women's health, the most promising but highest risk being its proprietary stem celltechnology.

Valeant, an aggressively acquisitive Canadian pharma- ceutical company, had seen in Cephalon's established products an opportunity for further revenue growth and increased profitability, and had bid $5.7bn, but had discounted the value of the therapies in development. The takeover by Teva was welcomed by the board of Cephalon, which saw Teva as an organisation that valued their pipeline and would support their ambitious research and development plans. As Cephalon CEO Kevin Buchi said at the time: 'Teva shares our strong commitment to R&D, and we believe our pipeline will thrive under their leadership.'3 Mr Yanai added;

Introduction

After less than 18 tumultuous months as the head of Teva, the world's largest generic pharmaceuticals company, in October 2013 Jeremy Levin stepped down as CEO. He had been brought into the company in January 2012 to change Teva's strategy from that of the outgoing CEO and President Shlomo Yanai. a former high-ranking army officer, when it seemed clear that the target of achieving global sales of US$D 33bni by 2015 was no longer achievable, and the share price had subse- quently collapsed. lts third CEO within two years was appointed in 2014: Erez Vigodman, a company insider. who announced that Teva would introduce its third new global strategy in three years with a focus on product rationalisation, organic growth and cost saving.

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a 0 >\

g Teva in a nutshell

p World's number one generic company e 15th largest pharmaceutical company e Sales of $19.7bn in 2015 e Product portfolio of over 1000 molecules e Active in 120 countries e 73 manufacturing sites B 45,000 employees

Teva's operating results for the years 2011-2015 are shown in the Appendix at the end of the case.

Sot/nce: Clynt Garnham Medical/Alamy Images.

Founding of Teva

Teva was founded in 1901 in Jerusalem as a small drug wholesale business that distributed imported medica- tions. It moved to manufacturing pharmaceuticals in the 1930s and had a considerable boost in the Second World

War supplying allied troops with medical supplies. By 1951, it was being listed on the lsraelistock exchange.

'0ur newly-expanded portf ono in CNS, Oncology, Respiratory and Women's Health along with our robust pipeline of more than 30 late-stage products truly cements our position as a leader in specialty pharma. . . . We are welcoming many of Cephalon's talented employees into the Teva family. The combina- tion of our two winning teams will position Teva to create maximum value for our patients and customers."+

This case was prepared by Justin Blag an

of good or bad practice. © Justin Boag and Sarah Holland 2016. Not to be reproduced ar quoted without permission. -'"'

Teva and Cephalon executives said they saw particular potential in a stem cell therapy for congestive heart failure under development with Mesoblast Ltd, in reslizumab

690 691

ALL CHANGE AT TEVA ALL CHANGE AT TEVA

for asthma and in the lung-cancer treatment obatoclax. Ori Hershkovitz, a partner at Sphera Global Healthcare Fund in Tel Aviv commented in an interview at the time: 'Teva's making four or five shots on goal with a very high- risk, high-reward kind of profile. If they pull off the stem cell product, they're in the clear. But if they pull off two or three of the others, it would also be a very good deal.'s

The company, however, had a number of significant chal- lenges: the rapid inorganic expansion in generic pharmaceu- ticals from 2007 10 meant that the manufacturing base was not consolidated, with over 100 manufacturing sites spread across a large number of countries. Supply chain and quality-control issues had also meant that, in the USA, crucial supplies of two generic drugs had not been made in 2009. The patent protection on Copaxone® was nearing expiry and, ironically for a generics company, around 20 30 per cent of the sales revenue and a significant amount of profit was at risk in the next two to three years of generic erosion with no obvious replacement in view.

The share price began to slide and a number of shareholders called for a significant reduction in costs and expressed dissatisfaction with the decision to purchase Cephalon. In response to this criticism and the falling share price, Philip Frost accepted the resin nation of Shlomo Yaniv and appointed Jeremy Levin, a South African born, UK-educated pharmaceutical executive with a highly successful track record at two major pharmaceutical companies. For the first time since its creation, Teva was headed by two outsiders. both non-Israeli citizens and with no previous experi- ence of Teva.

actively seeking new products as a replacement for Copaxone®. This strategy it was claimed would reshape the company into 'the most indispensable medicines company in the world ' and provide significant value to shareholders.7

Teva began a series of rationalisations and econo. mien. aimed at reducing costs by around $2bn per year, involving around 700 job losses in Israel. With the CEO working alongside the new Chairman it appeared the company had moved into a new era. As Philip Frost stated: 'Teva also must act like a global

pharmaceutical company. There's a lot of nostalgia for the good old days when it was a family company and the board got together for a little lunch. That's not what Teva is nowadays.'' Levin said Teva would sustain 'profitable growth ' but confirmed that the company would not achieve the ambitious previous target of $33bn revenue by 2015.

Key elements of the new strategy included:

. Tailoring the product offering to address regional needs. With its diversified portfolio, Teva was well placed to focus on high-value generics in the USA and Japan, but consumer OTC products in Latin America and Russia, for example.

e Rationalisation of the marketed generic product port- folio. Less profitable products were to be culled, while price increases were implemented for others.

e Globalizing key functions to streamline operations and gain economies of scale, cutting costs by $1.5 to $2bn per year.

. New R&D focus on high-value generics. Teva planned to leverage its huge portfolio of over 1400 medicines, and its extensive formulation and drug delivery exper- tise. to create new combination products that would be harder to imitate than traditional generics. These would offer medical value through improved efficacy or compliance, or reduced side-effects, in order to justify higher prices. For the first time, Teva would incorporate formal medical input to its generics business.

. Ref ocusing the R&D pipeline, with a strong emphasis on CNS and respiratory products. The oncology product obatoclax developed by Cephalon was discontinued.

. Formation of a drug discovery network comprising all the academic centres in Israel.

The announcement did not meet with shareholder

approval and the share price dropped by nearly seven per cent. Cost cutting and consolidation continued, mostly

without major workplace disruption, except in Israel where a number of sites threatened strike action. ,

lilt :l£l=«£: jill ' It ';:. ':=w management team. Dispute apparently came from two

directions:

. The Israeli board members who felt that the new CEO working alongside the Chairman failed to understand the unique culture of Teva.

p Rumoured disputes between Frost and Levin over the size and speed of cost cutting.

The relationship between board and directors was often challenging and at one point there were even stories that Levin had hired a private detective agency, which had used a polygraph test on board members to identify the source of boardroom leaks to the press.9

worked with Teva in the past. In July 2014, Teva announced a new commercial structure, effectively dividing the company into two business units, the Global Specialty Medicines group and the Global Generic Medicines group. They stated that this would bring a heightened focus on profitable and sustainable business, driven through organic growth of it two business units and in defending Copaxone® from generic competitors by launching a new higher dose formulation. They also stated they would increase their focus on key markets and on key products. The company stated that it would continue its cost-saving drive but would also look for appropriate business development opportunities

In April 2015, Teva launched a $40bn hostile bid to buy Mylan, a Netherlands-based rival generic pharma- ceutical manufacturer. The combined companies would have a turnover of around $30bn and a profitability of around $8bn. Teva argued that cost-saving synergies of around $2bn could be achieved by the acquisition. Teva believed that: 'The combined company would leverage its significantly more efficient and advanced infrastructure, with enhanced scale. production network, end-to-end product portfolio, commercialization capabilities and geographic reach '.:: Mylan rejected Teva's offer and took the unusual step of publishing the text of a letter sent from its CEO, Robert Coury, to Teva's Erez Vigodman, saying that he hoped Teva's culture would change and they would have more credibility in their future business dealings but that the Mylan board did not want to inflict Teva's problems on Mylan's shareholders. Coury went on to say:

Levin departs and Teva enters a new era n October 2013, following further press speculation and

a press story that the management team had sent a memo to the controlling board asking them not to intervene so heavily in management decisions, Jeremy Levin left Teva and the Finance Director was appointed as temporary CEO. The already-lowered share price reduced by a further seven per cent. In an investor call shortly af ter Levin's departure, Philip Frost stated; 'Since Levin's arrival, the board and management saw eye to eye when formulating the strategy. . However, differences of opinion arose between us as to how the strategy will be implemented. In the last few weeks we had talks with Levin and decided that it would be better for our ways to part.':o

Other insiders reported that the problems for Levin ran much deeper, not least a failure to understand the unique lsraelicharacter of Teva. As Eldad Tamir, from an Israel-based investment group stated:

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Levin's short tenure 'Levin entered a difficult situation. The need for a cultural and communicational connection to Israeli society is critical for Teva. This company is among the cornerstones of the local industry and its products can be found in every home. . . . Teva had an open relation- ship with its investors, employees and Israeli society. Instead of continuing the cultural tradition they brought in someone else, and it didn't work. There was no conti- nuity for the rootedness. Everything became cold and alienated. Teva needs a local leader.'n

'Since 2007, your Board has churned through three different Chief Executive Officers, running the only one with the global pharmaceutical experience, which we think is critical to the position, out of town within 18 months of being on the job. Any investor should be gravely concerned that an experienced lead executive could be dismissed over "slight differences" of opinion with the Board. We believe that these rapid changes in a short period of time have left the company with a complete lack of long-term strategic focus. While I recognize that you are fairly new to your position, I cannot ignore the fact that you were present on Teva's Board during some of the company's most turbulent and "dysfunctional" times. . . . Ten years of acquisitions and a flip-flopping strategy have left Teva with a smat- tering of assets in specialty, generics, biotech and consumer. You claim to want to "redefine the generics industry", but what faith can we have that you have any clear vision for the industry at all? And how can inves- tors be assured this "redefinition" will not be aban- doned for yet another new strategy?'''

On the announcement of his appointment, Teva's share price increased, major shareholders seeing Levin's strong pharmaceuticalbackground as a good fit for the company. Levin told journalists on his appointment;

& 'Teva is a company with a unique culture. In the time I have been here, I have had the opportunity to meet the leadership and talent that has made Teva the successful company that it is today. In my experience, Teva has some of the best people in the industry with a level of drive, determination and innovation that is second to none. . . . We will continue to be innovative by focusing not only on how we commercialize but also on how we discover, develop and manufacture - all of which start from the same point - world-class R&D.''

$

Erez Vigodman: a new/old strategy for Teva? After an extensive international search, a local leader, the Israeli turnaround specialist Erez Vigodman, became Teva's President and CEO in February 2014. He had joined Teva's Board of Directors in 2009. Shortly after- wards, following rumours of disagreements with the new CEO, Frost resigned and a new Chairman was appointed in his place: Yitzhak Peterburg, an lsraelicitizen who had

ALL CHANGE AT TEVA

The board of Teva replied that they rejected many of the statements in the letter and reiterated their interest in the purchase of Mylan.

Teva's strategic future?

I :i:i: zl * ilu;nile'::E:i+ expansion in generic pharmaceuticals through aggressive acquisition of competitor manufacturers, as originally laid down by Eli Hurvitz. With closely cooperating lsraeH Chairman and CEO, and a stock market eager for further growth, further inorganic growth in the coming years was anticipated. Time will tell, however, if Teva is able to follow the other part of Hurvitz's former strategy: rapid integration of new companies and consolidation and rationalisation of the manufacturing capacity. Notes and references 1. $1 - £0.6 : €0.75.

2. M. Kimes, 'Teva returns to roots after outside CEO faces "nuthouse" B/oomherg, 4 March, 2014

3. Teva, 'Teva to acquire Cephalon in $6.8 billion transaction ', press release, 2 May 2011

4. Teva, 'Teva completes acquisition of Cephalon ', press release, 14 October 2011

5. N. Kresge and R. Langreth, 'Teva bets on stem cells, cancer in $6.2 billion bid for Cephalon ', £3/oom6eng, 3 May 2011

6. S. Griver, 'Meet Jeremy Levin, the new head of drugs firm Teva ', ./ew7sh Ch/on/c/e, 17 May 2012.

7. B. Berkrot, 'Teva CEO promises to reshape, refocus company ', /?eufen. 11 December 2012.

8. D. Wainer, 'Billionnaire doctor prescribes small Teva deals for Israeli giant ', £3/oomheng, 5 March 2013.

9. T. Staton, 'Teva's ex-Ceo reportedly forced polygraph tests on board to plug media leaks', f7encePh.am?a, 5 November 2013.

10. A. Weisberg, 'Teva chairman: "the company is stronger than ever"', 30 October 2013, http://www.jerusalemonline.com/finance/teva-chair- ma n -the-com pa ny-is-stronge r-tha n-eve r-2 162 .

11. N. Zommer, 'Can foreign CEO make it here?', Hnefnews, ll March.

12. Teva. 'Teva proposes to acquire Mylan for $82.0C) per share in cash and stock ', press release, 21 April 2015.

13. Mylan, 'Mylan board unanimously rejects unsolicited expression of interest from Teva ', press release, 27 April, 2015.

14. M. de la Merced and C. Bray, 'Teva pharmaceuticals to buy Allergan's generics business', /VeK ' Honk 77mes, 27 July 2015.

15. Teva, 'Teva to acquire Allergan generics for $40.5 billion dollars creat- ing a transformative generics specialty company well positioned to win in global healthcare ', press release, 27 July 2015.

2013

CASE STUDY

Mondeliz International: 'Are you going to stick around, Irene?' Acquisition, de-merger, divestment and governance in the growth strategy of Mondeliz International Eric CassellsE

Teva buys Allergan's generic business

In a surprise move in July 2015, Teva announced that they were dropping the attempt to buy Mylan, as they had instead entered into a definitive agreement to acquire Allergan's global generic pharmaceuticals business for $40.5bn, with Allergan receiving $33.75bn in cash and $6.75bn in Teva stock. Under the agreement, Teva would acquire Allergan's globalgenerics business, including the US and international generic commercial units, a third party supplier, global generic manufacturing operations. the global generic R&D unit, the international over-the- counter (OTC) commercial unit (excluding OTC eye-care products) and some established international brands. The acquisition would mean that around 70 per cent of future turnover would be from the sale of generics.

The deal, the largest in Israel's corporate history. was generally welcomed by shareholders and stock market analysts: 'Allergan's business is more high-end [than Mylan]. It's a more interesting business . . . a profitable business and it's well managed,' said Gilad Alper, an analyst at brokerage Excellence Nessuah.i4

Yitzhak Peterburg said:

This case explores corporate strategy as it emerges over time, through the example of Mondeliz International. The origins of Mondeliz lie in the long-term growth strategy to create a global snacks business within what was the Kraft food group. The case focuses on the initial major acquisition of Cadbury PLC by Kraft as a means to achieve scale and global coverage in snacks, the subsequent de-merger from Kraft's slow-growing grocery business, and the divestment of the more volatile coffee business into an equity alliance ('JDE ') to allow the creation of a focused Mondeliz snacks business. All of these events occur against the backdrop of pressures to deliver against corporate forecasts built on expectations of growth in a volatile marketplace, and the pressures on the corporate managers dealing with activist and short-term investors is also considered in some detail.

The ChicagoBusiness.com line on 6 August 2015 was attempting to put Irene Rosenfeld in play, with the ques lion: 'Are Monde16z CEO Irene Rosenfeld's days numbered?' it followed a period of market speculation over whether Pepsico (or another competitor) would acquire Mondelaz, and the announcement of a 7.5 per cent stake acquisition in Monde16z by 'activist ' share- holder William Ackman and his Pershing Square Capital Management on 5 August. Come 23 December, Irene was very much stillin place at Mondelez, and CNNMoney nominated her as one of their top ten 'Best CEOS of the year ' for 'coping with activists'. A few days earlier in the UK. the arena of her bitter acquisition of Cadbury in 2009 10, the /ndepe/7dent newspaper profiled her as 'the ( . . . ) chocolate boss with a hard centre '.

entire Kraft group. In 2011, Kraft announced it would de-merge, with its North American grocery business retaining the Kraft name, and its larger international snacks and confectionery business being named Monde16z. Irene Rosenfeld chose to stay as the CEO of Monde16z.

Ms Rosenfeld is recognised as a powerful business- woman (ranked 17 in 2014 in Forbes' annual list of 'The World's 100 Most Powerful Women '). Less welcome recognition, perhaps, is her honourable mention in 2013 in F7columnist Lucy Kellaway's annual business Golden Flannel Awards, in the Chief Obfuscation Champion cate gory. Her profile in the /ndependenf (December 2014), however, notes her 'legendary ' reputation for attention to detail, an ultra-competitive streak derived in part from a sporting background, her boldness in making brave moves, and her willingness to 'face off . . formidable foes.' it also reports views that she can be 'remote and clinical '.

'This acquisition will result in significant and sustained value creation for our stockholders, reinforces our strategy, accelerates the fulfilment of a new business

model. strongly supports top-line growth and opens a new set of possibilities for Teva. Together with Allergan Generics, Teva will have a much stronger, more effi- cient platform to achieve our goals - both financially and strategically - with the right platform for future organic and inorganic growth."5

The rise oflrene Rosenfeld

Born in 1953, Ms Rosenfeld spent the first decade of her career accumulating degrees (including a PhD in Marketing and Statistics) from Cornell University. Af ter a brief spell in advertising. she joined General Foods, at the start of a 30-year plus career in the food and beverage industry. In time, General Foods was acquired by Kraf t, and Ms Rosenfeld has largely stayed within this one evolving group ever since. Arguably, her key career break came on the one occasion she ventured outside the Kraft group in 2004, to become chair and CEO of Pepsico's large snacks business - Frito-Lay. By June 2006, Kraft had wooed her back to become CEO of the

APPENDIX: Teva's operating data Transforming Kraft PLC

the acquisition of Cadbury

For the year ended 31 December Prior to the de-merger of the Kraft Corporation in 2011. Irene Rosenfeld was at the centre of one of the most controversial hostile acquisitions of recent decades. Between August 2009 and February 2010, Kraft fought a hard battle to acquire the UK confectionery giant, Cadbury PLC, eventually acquiring it for f11.5bn (€13.8bn, $17.3bn).: Cadbury was a pillar of the British

2015 2014 2013 2012 2011

US$m (except share and per share amounts)

Netrevenues Cost of sales Gross profit Research and development expenses Selling and marketing expenses General and administrative expenses Impairments, restructuring and others Legal settlements and loss contingencies Operating income

The case was prepared by Eric Cassells. of the Business and Management Department at Oxford Brookes University Business School. UK. It is intended as a basis for class discussion and not as an illustration of good or bad practice. © Eric Cassells. 2016 Not to be reproduced or quoted without permission.

Source: 2015 Annual Report of Teva Pharmaceutical Industries Ltd.

694 695

19.652 20,272 20,314 20,317 18,312 8,296 9,216 9,607 9,665 8,797

11,356 11,056 l0,707 l0,652 9,515 1,525 1,488 1,427 1,356 1,095 3,478 3.861 4,080 3,879 3,478 1,239 1,217 1,239 1.238 932 1,131 650 788 1,259 430

631 (1 1 1) 1,524 715 471 3,352 3.951 1,649 2,205 3,109

MONDELEZ INTERNATIONAL: 'ARE YOU GOING TO STICK AROUND, IRENE? MONDELEZ INTERNATIONAL 'ARE YOU GOING TO STICK AROUND, IRENE?

Table I cited that: 'The Kraft takeover of Cadbury has proved to

be an event which is likely to shape future public policy towards takeovers and corporate governance.'3 The report was highly critical of the behaviour of Kraft, and bloggers gleefully described MPs as 'fighting each other to lay into Kraft.' MP Lindsay Hoyle, at one point queried whether Kraft is 'remote, smug, and . . . duplicitous'.

The more measured tones of the Committee's report focused on two issues primarily:

1. Kraft made a promise (made during the takeover battle) to reverse Cadbury's recent announced decision to close its Somerdale factory and move that produc- tion to Poland. The promise (to reverse the closure) was subsequently withdrawn by Kraft less than three weeks after it took control of Cadbury, and production moved to Poland regardless. The Committee's formal conclu sign was measured but damning, opining that: 'Kraft acted both irresponsibly and unwisely in making its original statement . . . (and) has left itself open to the charge that either it was incompetent in its approach . . . or that it used a "cynical ploy" to improve lts public image during its takeover of Cadbury.':

2. The Committee also expressed their 'disappointment ' that: 'Irene Rosenfeld, the Chairman and CEO of Kraft foods Inc. did not give evidence in person. Her attendance at our evidence session would have given an appropriate signal of Kraft's commitment to Cadbury in the UK and provided the necessary authority to the specific assurances Kraft have now given to the future of Cadbury.':

Neither that refusal to attend, nor the manner of it reflected well on Kraft . . . '4

Kraft strategic priorities The importance of the Cadbury acquisition

Focus on growth categories to transform Kraft into a leading snack, confectionery and quick meal company. Expand its footprint and scale in growing developing markets.

:::=i:'£E:?:' £!::' b 7:a=;- '-: ..-'..-:.-;i;=' Cadbury oilers Kraft a complementary presence in developing markets, with Kraft strength and channels in Brazil, Chinaand Russia, and Cadbury in India, Mexico and South Africa.

Kraft's strength lay in traditional grocery channels, whereas Caan....- was well placed in 'instant consumption ' channels. '' ''"duly

The Cadbury acquisition as part of a longer-term strategy

Warren Buffet reduced his holding in Kraft from 9.5 per cent to nearer 6 per cent in the immediate aftermath of the bid. His comments at the time reflected the belief that bidders of ten overpay to the detriment of their share- holders, and that Kraft would suffer the 'winner's curse (of having paid too much for synergies that would take much longer to deliver, or of ignoring the real costs of post-acquisition integration).

On the release of Kraft's fourth quarter results for 2010, commentators believed that shareholders were still 'wondering whether they bit off more than they could chew when they put up f11.5bn for Cadbury last year.'5 Net profits had fallen 24 per cent to $540m in the quarter, reflecting the scale of integration costs, and a 'disap pointing ' 2.2 per cent rise in Cadbury's like-f or-like sales, well behind the 5 per cent sales growth that Cadbury had posted in its last period of independence. The deal had certainly not yet shown itself to be the transformational move that Ms Rosenfeld staked her reputation on. Kraft's next move to transform itself was less expected.

When interviewed on Bloomberg TV on 16 September 2010, Ms Rosenfeld re-affirmed that Cadbury was 'a critical piece of the puzzle we have been trying to complete.' On 4 August 2011, Kraft announced its inten bon to split into two separate corporations, and the crit- icality of the Cadbury acquisition became more obvious.

Kraft said these two businesses, 'differ in their future strategic priorities, growth profiles and operational focus.'s The lower-growth North American grocery foods business was to include brands such as Kraft cheeses, Maxwell house coffee and Capri Sun, with revenues of $16bn. At the same time, a more focused but globally spread snacks and confectionery business (including Trident gum, Oreo cookies, Milka chocolate and Cadbury) would have estimated revenues of $36bn, with over 100,000 employees in 80 countries. This snacks busi- ness was poised to take advantage of the perceived shifts in consumer behaviour towards snacking, rather than cooking two or three meals each day.

Within the confectionery arm of that global snacks business, Cadbury brands represented over 80 per cent of revenues. The rationale for the global snacks business remained that which drove the Cadbury acquisition; to move into higher growth segments as a 'snack, confec- tionery, and instant consumption ' company, and to increase footprint and 'white space ' synergies for 'iconic brands' in fast-growing emerging markets.

Increase presence in 'instant consumption ' channels as they continued to grow relative to traditional grocery channels in the established US and EU markets.

Pursue margin growth, through improved portfolio mix, reducing costs and investing in quality.

The higher exposure to confectionery of a post-acquisition Kraft would provide Kraft shareholders with an improved portf ono of higher-margin growth products.

business establishment and had a history as a benevo- lent employer, noted, for example, for pioneering employee pensions. The company was rooted in the communities it operated in (notably at Cadbury's head- quarters in Bourneville, south of Birmingham, where a model village was constructed after 1893 to show how employees could be better housed in the factory age).

Kraft's rationale for acquiring Cadbury was laid out in its bid offer documents (see Table I).

Kraft's bid did not attract the uniform support of its own investors. The largest shareholder in Kraft was Berkshire Hathaway, led by the prominent investor Warren Buffet, arguably the most influential and best- known investor in the world, and a favourite of the US financial news channels. On 16 September 2009, Buffet warned that Kraft must not 'overpay ' for Cadbury, expressing concern at the offer to Cadbury of an 'attrac- tive' EBITDA multiple of 13.9 times. Buffet was a long- term supporter of the Kraft corporation, holding 9.4 per cent of shares. More provocatively, perhaps, on Bloomberg's business news channel on 19 January, whilst describing Kraft CEO Irene Rosenfeld as a 'good person ', Buffet described the increased final takeover offer as a 'bad deal '. He dismissed the potential synergy benefits identified in Kraft's offer document, saying he was distrustful of unrealized benefits. He stated that, 'If I had a chance to vote on this, I'd vote no '. Referring to the proposed acquisition of Cadbury, he concluded, 'l feel poorer '. Kraft's shares fell two per cent on his inter- vention.2 Irene Rosenfeld was asked about Buffet's inter- vention on Bloomberg TV. Refusing to be drawn, she stated that she believed Buffet was evaluating the deal from the basis of existing cash flow and that he was ignoring the potential transformational synergies that were at the heart of the strategy to acquire Cadbury.

In addition to the 'transformational ' rationale put forward by Kraft for the deal, the offer documents iden- tified potential cost savings of $625m. The $625m was to come from savings and scale economies in procurement.

manufacturing, customer service, logistics and R&D ($300m), generaland administrative costs($200m), and marketing and selling costs ($125m). These savings esti- mates were in line with historic transaction experience for the sector at 6.5 per cent of revenues.

Resistance to the deal in the UK was led by the trade unions (concerned that up to 7000 jobs might be lost as

part of those 'savings'). by the nationalist heritage lobby (concerned by the impact on Cadbury's communities. and concern for national prestige with the loss of a large global corporation headquartered in the UK), and by Cadbury family members (concerned that a distinctive

'values-led ' corporation would be destroyed). Local and UK national governments also expressed their concern that Cadbury's base in the UK (including its R&D centres), and its status as a global leader in confec- tionery, might be subverted.

In the event, Kraft was forced to raise its offer for Cadbury by over 12 per cent (Warren Buffet's 'bad deal ') to secure the recommendation of the Cadbury board, and concluded the deal in late January 2010. Their case may have been helped in no small measure by the interven-

tions of short-term traders and hedge funds, increasing their aggregate holdings in Cadbury from about five per cent in August 2009 at the start of the bid, to an esti- mated 40 per cent by the end. Cadbury argued that the actions of these short-term arbitraging investors effec- tively de-stabilised Cadbury's defence. Concerns over their behaviour and interests were also raised by UK politicians during and af ter the acquisition.

8 $

g Indeed, during the proceedings, MPs simply demanded'where's Irene?' and lambasted Kraft's senior represent- ative at the hearing, Marc Firestone, as an 'apologist ' for her. calling her absence a 'sizeable discourtesy'.3 The Da/P ne/egraph newspaper quoted Ms Rosenfeld's robust response that: 'Attendance would not be the best use of my personal time.'

As to the commitments Kraft made to the BIS, in December 2010 a plan to shed 200 jobs at Cadbury's Bourneville plant was announced. At the same time, Kraft announced a £17m investment in research at its designated sole global 'Centre of Excellence for Chocolate ', now located in Bourneville. The BIS Committee revisited events in April 2011 to monitor Kraft's commitments. Concern was expressed at poor engagement between Kraft and the trade unions, and the perception that strategic decisions over the Cadbury brands were being made in Kraft's European headquar- ters in Zurich. More personal criticism followed for Ms Rosenfeld: 'In a repeat of our predecessors' experience, Irene Rosenfeld (. .) refused to give evidence despite repeated requests from us that she should appear.

©

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MONDELEZINTERNATIONAL 'ARE YOU GOING TO STICK AROUND, IRENE? MONDELEZ INTERNATIONAL 'ARE YOU GOING TO STICK AROUND, IRENE?

The de-merger took place on I October 2012 when the North American grocery business started trading as Kraft Foods Group Inc., whilst the global snacks business became Monde16z International, with Ms Irene Rosenfeld firmly at its helm. Benefits from the Kraft de-merger were to be 'evident in the first year '.' The Kraft Foods Group commenced trading on NASDAQ, and gained 2.99 per cent in the day's trading to reach $45.42. On the same day, shares in Monde16z International opened at $28.42, before softening to $28.01.

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analysts approved.:' Particular comments were made on Monde16z's focus on emerging markets, with their three. cluster priority strategy of targeting: first, the BRIC markets, followed by 'next wave ' markets (Indonesia Middle East and Africa), and finally 'scale ' market Oppor- tunities in Australia, Japan, Mexico and Central Europe. Whilst Cadbury had provided much-needed presence in the Indian market, strength in the Chinese market carne from the dominance of the Oreo cookie in the biscuit/ cookies market. In May 2013, it was reported that $600m was to be channelled into advertising and supply chain improvements in these markets over the following three years.

Writing about the wider 'packaged foods' sector in March 2014, Skelly:: noted that Monde16z (with 2.2 per cent global maket share) faced strong competitors in Nest16 (3.4 per cent), Pepsico (2.1 per cent), Unilever

(1.7 per cent), Danone (1.4 per cent), Mars (1.4 per cent) and others such as Kraft Foods, Kellogg, Genera Mills and Lactalis, all of which were aware of the impor- tance of the emerging markets. MondelQz's key strengths were seen as; a more even global distribution of their key brands (see Figure 1); owning nine globally recognised 'power brands' (see Figure 2); expertise and potential for 'cross-branding ' to leverage those power brands and fil in the market 'white space '; a strong supporting network of manufacturing and distribution facilities in Latin

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The name 'Mondeldz ' was coined by two of the compo ny's employees in response to a naming competition, a composite of Romance/Latin words for 'world ' and 'deli- cious'. It was chosen to evoke the global ambitions needed to take on the 'global titans' of Pepsico's snacks business, Frito-Lay, and Nest16 SA. The name was intended only as a 'small print ' label, with the famous brand names such as Ritz, Oreo, Cadbury and Milka taking prominence for consumers. Despite the intention that it was not to be a consumer brand, some queried the failure to spend money to use a professional naming agency, and others criticised the chosen name as having meaning only in the Mediterranean Latin countries of France, Spain, Italy and Portugal: 'l doubt that its connotations are going to be so obvious to English, German, Japanese, or Chinese speakers . . . it's saving grace is that it's lust a name for a corporate entity.''

The two main strands of the Monde16z strategy were laid out by Tim Cofer, European president at Monde16z International, speaking in October 2012: 'Forty-four per cent of our revenue will come from the emerging markets, benefitting from the growth there,' with Europe accounting

4 + Philadelphia

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0 1000 2000 3000 4000 5000 6000 7000 8000 9000 Retailvalue sales 2014(US$ million rsp)

figure 2 Monde16z billion dollar brands: retail value sales 2014 vs percentage growth 2013 bounce: Skelly/fu/onion/toc 2014.

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America, Asia Pacific, Eastern Europe, Middle East and Africa; and a strong position to exploit future biscuit growth in India. Set against these competitive strengths. however, they had weaknesses in the US chocolate confectionery market (where the historic rights to manu- facture Cadbury products lay instead with Hershey), a virtually complete reliance on sweet (rather than savoury) snacks, and greater exposure to volatile cocoa and coffee commodity prices.

The Monde16z power brands in the 'packaged foods' sector were concentrated in the two categories, confec- tionery and biscuits (see Figure 3). Monde16z was the

dominant manufacturer of biscuits in the world, with 18 per cent market share (six times larger than Kellogg in second place), and with four of the top five labels (Oreo, TUC, LU and Nabisco). With Cadbury, Milka and Trident, it also accounted for the largest 14 per cent global market share in confectionery

This narrowed product portfolio (by 'packaged food ' sector standards) was, of course, the very result of the de-merger, and in pursuing these higher growth busi- nesses, Monde16z had arguably increased its depend ence on the performance of the confectionery and biscuits markets. Within these categories, the heightened

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Market size 2014 (US$ billion)

600 700 800 50.000 100,000 150,000 200,000 250,000 300,000 350.000 400,000 450,000 500,000

Market size 2014(US$ million rsp) figure I Monde16z's balanced geographic portfolio 2014 and growth 2014 2019 by region /Vote: Bubble size shows company shares of region in 2014; range displayed 0.4-3.1%.

Source: Skelly/fu/onion/to/1 2014.

figure 3 Monde16z product category portfolio 2014 and growth prospects 2014-2019 by category /Vote: Bubble size shows company share of category in 2013; range displayed 0.4--18.0%

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MONDELEZ INTERNATIONAL 'ARE YOU GOING TO STICK AROUND, IRENE? MONDELEZINTERNATIONAL 'ARE YOU GOING TO STICK AROUND, IRENE?

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Middle East and Africae Pressure CookerSnack-f ood maker Monde16z International, after its split from Kraft Foods, has been under pressurefrom two activist investors to im prove perf ormance. $50 a share

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Austra lasia 2 Oct 2012: MondelQz Internationa splits from

21Jan 2014 Nelson Peltz is named a director in return for dropping

5 Aug 2015: Pershing Square Capital Management LP, headed by William Ackman discloses a 7.5% stake.

Western Europe

30,000 40,000 50,000 60,000 Market size 2014(US$ million rsp)

Figure 4 Mondeldz International Inc.: confectionery growth prospects by region 2014-19 /Vote: Bubble size shows region's proportion of Monde16z % value share in confectionery from 7.5% for Asia Pacific to 33.2% for Australasia Source: Skelly/funomon/foc 2014.

0 lO,ooo 20,000 70,000

importance of the emerging markets can be seen by, for example, the market growth prospects by region for confectionery (see Figure 4).

economic growth played directly against Monde16z's intended strategy and, for example, led to Monde16z's

revenue growth from the emerging markets slowing ta only 8 per cent in 2012, with operating income from these markets down 22 per cent. Further difficult years were recorded in 2013 and 2014, with Ms Rosenfeld noting in February 2014 that, 'frankly, we're very disappointed that our performance was below what we and our shareholders originally expected.'i2 Michael Silverstein of Boston Consulting Group hinted at this dilemma: 'Everyone knows the growth is there, but there is high year-to-year variability. One year of turmoil does not really break long-term trends. No company should be choosing to invest in developing markets for a short-term bump. It's about riding the IO-year doubling, tripling of market size.'::

by Nelson Peltz, discloses a 2.5% stake

20 2012 1'13 14 '15

How did Mondeliz fare in the emerging markets? Figure 5 Monde16z share price performance, October 2012 December 2015 bounce: WSJ Market Data Group

The risks inherent in running an international business had already been acknowledged by Kraft in September 2012, prior to the de-merger, where it was noted, for example, that reported earnings in 2013 for Monde16z would likely be lower than some forecasts due to the strengthening of the US dollar (Monde16z's reporting currency) against a basket of other international curren- cies. At the same time, Tim Cofer had suggested that Monde16z was 'well positioned to cope with volatile commodity prices'.

Revenues from emerging markets had been soaring by 23 per cent in 2011, as GDP in the BRICs countries increased by 6.9 per cent. With US GDP growing at only 1.8 per cent, the de-merger and divestment of Kraft's slow-growing North American grocery business from Monde16z made 'Ms Rosenfeld look genius'.:: The growth rating that Monde16z was attracting has, however, faltered in the short term, as emerging market GDP growth dipped to 5.2 per cent in 2013 (recovering to 5.3 per cent in 2014, before dipping once more to 4.4 per cent in 2015, with an estimate of 4.9 per cent for 2016). At the same time, the devel- oped world GDP (ied to some extent by the USA) showed slightly enhanced growth in the 2.0 to 2.4 per cent range.:; in addition, Mondeldz suffered from a poor competitive performance with the failure of expected sales growth in Brazil and Russia specifically, and sales of the key Oreos cookies brand faltering in 2013 14 in China. This change in the balance of

and margin improvement, the company runs the risk of becoming a target.':'

These comments were not new for 2015. This pres sure to improve operating margins and reduce overheads has been a near constant after Monde16z's de-merger from Kraft was completed, since it became clear that emerging market growth was more muted than expected. Whilst Warren Buffet reduced his exposure to Kraft in the wake of the Cadbury acquisition, one of the supporters of that deal has proved more persistent. Nelson Peltz (and his investment company, Trian Fund Management) liked the idea of a global snacks and confectionery business so much that on 17 July 2013 he announced his belief that Pepsico should acquire Monde16z(which he criticised for poor profit margins), merge it with its own Frito-Lay snacks subsidiary, and divest its own slow-growing soft drinks business (including its iconic 'Pepsi ' brands). Trian was a shareholder in both companies (at 2.5 per cent, the fourth largest Monde16z shareholder), but the initial reaction from the market and other Pepsico share holders was less than enthusiastic.

The intervention was unwelcome to Ms Rosenfeld, regardless, effectively underlining the questions about Monde16z's performance and seeking to put the company 'in play '. Peltz's campaign to persuade Pepsico to launch a bid for Monde16z persisted until January 2014, when,

under pressure, Monde16z offered him a seat on the board of the company. In exchange, Peltz dropped his campaign, his threat of a proxy fight against the board to put the company up for sale, and concentrated instead on trying to persuade Pepsico to sell its drinks business.

The manoeuvre of offering Mr Peltz a seat on the board seemed consistent with Ms Rosenfeld's strategy of trying to engage with activists without ceding authority to them in her words, keeping them 'inside the tent '. Mr Peltz was not a 'typical board member ', however, asking for detailed information about company spending by country, and interviewing Ms Rosenfeld about expected return on investment (ROI) data on large investments in global plant modernization.

Even as Ms Rosenfeld invited Mr Peltz onto the board, others were lining up to pressure Monde16z

management into further cuts. In April 2014, for example, Ralph Whitworth of Relational Investors LLC, stated he was joining Trian in pressing for better margins::5 'We're working behind the scenes to try to urge change there . Does the current management have the ability to get the job done? That's a question mark. If they don't, I think that you'll probably see some changes there.' When asked in interview to respond to Mr Whitworth's threat, Irene Rosenfeld responded that, 'l run this company for the benefit of

Investor pressures to improve profit margins Persuading all investors that a highly focused snacks and confectionery business, geared to the growth of the emerging markets, is a good investment, at the same time as results deteriorate, has not been a straightfor- ward task. According to data from the IVa// Sfneef Journo/ (see also Figure 5), Monde16z's shareholders had seen a 68 per cent total return in the period from October 2012 (the de-merger) to December 2015. The equivalent return for the Standard & Poor 500 index was 55 per cent. and sector returns were even less at 52 per cent. Investors looking to the promise of emerging market growth that failed to materialise appeared to want more. In a September report by Sanford C. Bernstein & Co., analyst Alexia Howard wrote: 'If Monde16z fails to live UP to the expectations of investors, or leaves money on the table with respect to the potential for further cost-cutting

700 701

MONDELEZ INTERNATIONAL: 'ARE YOU GOING TO STICK AROUND, IRENE? MONDELEZ INTERNATIONAL 'ARE YOU GOING TO STICK AROUND, IRENE?

a[[ of our shareho]ders, [and] I am p]eased by the progress we have made to date.':;

Out of all this (including the weaker results from emerging markets), Monde16z has, nevertheless, embarked upon a series of efforts, inter alia, to improve margin and shareholder value:

1. Introducing a share buy-back scheme, which has gradually increased to a plan to buy $13.7bn of shares by 31 December 2018.

2. Introducing a zero-based budgeting system, of the type championed by 3GCapital, and intended to produce $1.5bn of annual savings.

3. A further scheme to save $1.5bn through headcount cuts and supply chain improvements.

4. Consolidating its headquarters in Illinois. 5. Selling the corporate jet. 6. A series of budget cuts in order to maintain and

increase advertising budgets.

Brands . . . and route-to-market capabilities to drive sustainable revenue growth and improve market shares ' One of the examples of such incremental investment is the acquisition in July 2015 of an 80 per cent stake in Kinh Do, Vietnam's leading snacks and biscuits business. recognising the potential of the country's 90 million consumers.

Equally, it did not take long for some to propose Mondelez as a potential target for the synergy-seeking 3G Capital, and imagine a proposed (and possibly ironic) re-integration of its snack businesses with the wider foods and grocery businesses of Kraft Heinz. By 12 August 2015, Kraft Heinz had announced the first wave of synergies in its Kraft businesses, eliminating 2500 jobs from its 46,000 strong workforce in North America, and downsizing Kraft's Illinois headquarters.

margin more aggressively, reduce the number of suppliers, reduce its portfolio of products, reduce prices paid to retailers to stock product lines, and reduce adver- tising from a planned ten per cent of revenue to eight per cent. Ms Rosenfeld reportedly resisted the proposed new wave cutting, and, in particular, the advertising cuts that might impact revenue growth: 'all of our investors, even Nelson [Peltz], support an increase in advertising '.:' Ms Rosenfeld said that she 'chafed ' at the increasing pres- sure on her to further boost the stock price (share value) and profit margins quickly, while she is simultaneously trying to increase sales for the long term.and more investor pressure

shortly after Heinz's acquisition of Kraft (on 7 August 2015), Bill Ackman of Pershing Square Capital Management announced his 7.5 per cent stake in Mondelez, purchased for$5.57bn. Ackman rapidly got to work to further pressurise Monde16z's management with a reported agenda to either (i) grow revenues faster, (ii) cut costs more aggressively, or (iii) sell itself to the newly-formed Kraft Heinz or to Pepsico.

Within days of Pershing Capital's stake acquisition land its attempt to put a 'for sale ' sign up on Mondelez), Warren Buffett had, however, indicated that Kraft Heinz already had a significant post-acquisition integration task on its hands, and, more significantly, that poorer margins or not the biggest hurdle to any takeover of Monde16z is its 'rich valuation '. According to Bloomberg, in August 2015 Monde16z's enterprise value was already $92.4bn, with a value multiple of 17.1 times revenue. making it difficult for another peer company such as Pepsico, General Mills or Nest16 to contemplate a take- over bid.i9

Which leaves Pershing Capital's profit margin improve- ment agenda. It was assumed that, like Peltz and Trian, Ackman (or his nominee) would seek a seat on the Monde16z board to push for margin improvement initia- tives. According to Ackman's colleague Ali Namvar::' 'We think Mondeldz has by far the greatest cost saving oppor- tunity among its peers - . we think the whole industry is under change . . . 3G Capital is setting new benchmarks for efficiency, organizational structure and profitability.' The new benchmarks produced by 3G Capital's methods were believed by many to offer savings that could increase industry margins by up to eight per cent (Peter Brabeck-Letmathe, chairman of Nest16, quoted in FT. com).n Alexia Howard of Bernstein credits 3G with squeezing an extra seven per cent of margin out of Heinz between 2013 and 2015, 'more than twice Monde16z's own ambitions at the time.' Some of the most ambitious targets suggest Mondeldz could even pursue an oper- ating margin of 20 per cent by 2020.

Ms Rosenfeld met Mr Ackman directly on 21 September, where he urged her to improve operating

Whatever happened to Kraft Foods? (. is Warren Buffett up to?)

or, what Managing the activist shareholders

Despite the resistance to Mr Ackman's demands, Irene Rosenfeld did respond by ordering deeper cuts for 2016 operating budgets, and by accelerating savings originally planned for 2018. Responding to Mr Ackman's request to nominate a new board member to pursue his interests, she agreed to look for a 'proven cost-cutter ' who would be acceptable to both Ackman and herself. Ms Rosenfeld now claims to be on 'speed dial ' for other CEOS learning to deal with activist shareholders (keep them 'inside the tent ' and avoid proxy fights, is her main advice). She states that dealing with the detailed concerns of her two principal activist shareholders now takes up about 25 per cent of her time as CEO, to the extent that she was looking to appoint a new 'Chief Commercial Officer ' in late 2015, to focus entirely on the marketing and sales oversight she has previously undertaken as CEO. She reportedly told her senior management that she was 'doing everything in my power to handle the distractions so you can stay focused on the business.' She implies, however, that there is no ceding of authority to the activists: 'l'm frustrated by inves tora ' fascination with activists. I'm successfully running Monde16z for all shareholders without the activists help'.i ' The activities of the activist do seem to have some impact, however, as reported in the Wa// Sfneef ./ourna/'s in-depth study of Monde16z. From interviews with senior directors, they note the instance where, in seeking to hire a new director with a proven record to revive the global chocolate business, Ms Rosenfeld was told by the target executive that there was a 'cloud ' over Mondelez, and was

asked 'Are you going to stick around, Irene?'

The de-merged North American grocery business of Kraft found itself on the receiving end of an acquisition bid from H.J. Heinz, and succumbed on 2 July 2015, to become a major part of Kraft Heinz Co. This was a new company with about$28bn of annual revenue, with eight 'power brands' (each with global revenues of over $1bn each), and counting as the fifth largest food and beverage company worldwide.

Familiar names play a part in this story, as Heinz itself had earlier been acquired in 2013 by a consortium of Berkshire Hathaway (Warren Buffett's investment company) and 3G Capital. Whereas Buffett has been wel known in the US investment community over many years, 3G Capital has built up its reputation through a method- ology of acquiring consumer brand corporations (such as Budweiser and Burger King), and eliminating costs through the introduction of techniques such as zero- based budgeting, elimination of duplicate overhead expenses, and other 'synergies'. This joint investment partnership repeated 3G's pattern of margin Improve- ment with Heinz from 2013 15, before launching the larger deal to acquire Kraft Foods, promising potential savings of $1.5bn of cost synergies. This deal (largely based on a 'paper ' offer of shares in the new Kraft Heinz Co) would leave 3G and Buffett with a controlling 51 per cent stake of shares, and majority control of the board. Importantly, analysts also saw the potential to replicate this model of applying Buffett's financial engineering skills in acquisition, with 3G's ability to find cost-saving synergies integrating businesses throughout the sector:

with Buffet's cash-gushing Berkshire Hathaway as a linchpin investor and financier to the combined company, there's no telling where 3G may strike next. In a foods industry where companies like Pepsico, Campbell's Soup, General Mills and Kellogg are struggling and brand conglomerates like Proctor & Gamble are divesting assets, Kraft Heinz could emerge as an empire-building consolidator.'i8

Selling coffee

While these actions might be more typical examples of financial engineering, Monde16z has also moved deci- sively with the divestment of its coffee business(including such innovative brands as Milllcano) to form part of JDE, a joint venture with JAB Holding's subsidiary Douwe Egbert. The coffee business accounted for approximately 11 per cent of Monde16z's global revenues, and had Feta tively high margins and growth prospects. The coffee sector is potentially even more exposed to commodity pace volatility, however, and predictions of world short ages of coffee beans are potentially even more damaging than possible cocoa bean volatility for the chocolate business. In addition, it had been argued that Monde16z's global snacks supply chain would be more easily inte- grated without the coffee business, eliminating parallel activities and potentially leading to further cost savings.

This new venture created a clear number two pure play coffee competitor to Nest16 globally, with $7bn revenues, a number one market position in over 24 coun tries, stronger synergies and purchasing economies of scale. The deal with JAB Holding, provided $5bn in cash to Mondelez, whilst allowing Mondeldz to retain a 44 per cent equity interest in JDE. The transaction, intended to produce a stronger competitor to vie with Nescafe, also removes a 'volatile asset ' from Monde16z's balance sheet. The dealwas announced on 7 May 2014, and Monde16z's shares rose 8.2 per cent that day.

©

Notes and references 1. £l : €1.2 - $1.5. 2. Z. Wood, S. Carrell and R. Wachman, 'Buffett blasts Kraft bid for

Cadbury '. Guano/an, 20 January 2010. 3. House of Commons BIS Committee, 'Mergers, acquisitions and take-

overs: the takeover of Cadbury by Kraft ', 9th report of session 2009-10, London, Stationery Office, 2010

4. House of Commons BIS Committee, 'ls Kraft working for Cadbury?' 6th

report of session 2010-12, London, Stationery Office, 2011

MONDELEZ INTERNATIONAL: 'ARE YOU GOING TO STICK AROUND, IRENE?

5. A. Webb and A. Wilson, 'Was Cadbury a sweet deal for Kraft?', ne/egnaph,24 Apri12011

6. 'Kraft to split into two companies', BBC /Vows, 4 August 2011 7. E. Thomasson, 'Demerged Kraft unit sees consumers hungry for

snacks'. Healers, 2 October 2012. 8. S. Strom, 'For Oreo, Cadbury, and Ritz, a new parent company ', /VeK '

york ames. 24 May 2012. 9. S. Ahmed, 'Emerging markets key to Kraft spinoff's success', C/VBC, 2

October 2012. 10. A. Nieburg, 'Mantel analyst lauds Mondelez geographic choices',

Confectionerynews.com, 13 September 2012 11. Skelly/funomon/toC 'Mondelez International Inc. in packaged Food

World '. 2014. 12. L. Yue, 'Mondelez gets a lesson global economics'. Chicagobusiness.

com, 15 February 2014.

13. '2016 Macroeconomic outlook ', Goldman Sachs, accessed 8 July 2016. 14. M. Langley, 'Activists put Mondelez CEO Irene Rosenfeld on the Spot

bVa// SfreeZ' ./oc/rna/, 15 December 2015. '

15.D.D. Stanford, M. Boyle and C. Perry, 'Master blenders to buy h/ondelez coffee unit for $5B ', B/oom&erg, 7 May 2014. '

16. L. Whipp and S. Foley, 'Pressure on Mondelez to take a bit out of costs'. F7n.anc/a/ 77mes, 6 August 2015.

17. S. Neuwirth, 'Not so sweat: Cadbury owner Mondelez posts eighth consecutive quarterly revenue decline '. C/ZIHH.A4., 28 October 2015

18. A. Gaia, 'Why the Heinz-Kraft food merger is a rare kind of Warren Buffett deal ', Hordes, 25 March 2015

19. R. Collings, 'Mondelez too expensive for Nestle, General Mills to acquire?', TheStneef, 14 August 2015.

20. A. Gara, 'Bill Ackman didn't buy Mondelez just to dish it off to Warren Buffett and 3G Capital ', Hordes, 13 August 2015.

CRH plc: leveraging corporate strategy for value creation and global leadership Mike Moroney

Corporate strategy can be the driver of value generation, growth and development, notwithstanding a chal- lenging industry environment and a lean corporate centre. These issues are explored in this case study on CRH, which places acquisition-led corporate strategy at the heart of its value creation model.

In March 2016, CRH plc, the second largest building materials company in the world with a stock market valu- ation over €20bn (£16bn, $26bn): released financial results for 2015. Albert Manifold, Group CEO since the start of 2014, could reflect with satisf action on the first two years of his tenure. EBITDAZ was ahead strongly, margins continued to expand across the Group and 2015 marked the second consecutive year of improvement from trough levels of the severe global recession. In addi- tion, in a spin-off deal following the merger of two of the largest industry players, Lafarge and Holcim, CRH had acquired certain assets with a value of €6.5bn (the 'LH Assets'), the Group's biggest ever transaction. furthermore, the Group had initiated a programme of dynamic capital management, which had released almost €1.4bn in capital in two years from targeted disposals to fund future acquisition-led growth. Moreover, cost reduc tian initiatives in recent years had yielded cumulative annualised cost savings of over €2.5bn. At the same time, Albert Manifold and his management team were acutely aware of the many challenges that lay ahead in the next phase of CRH's development as the Group sought to realise its ambition of becoming the world's leading building materials company. Success would depend on CRH's corporate strategy, leadership and actions.

and architectural concrete products), 'lightside ' building products (for example, glass and glazing systems, construction accessories, shutters and awnings, fencing and network access products) and distribution (builders merchanting and DIY). Industry outputs have their own external, intermediate markets. However, building mate- rials also serve as inputs to higher-level and final prod ucts across integrated industry value chains. Sectors served are residential, industrial/commercial and infra- structure/public works. End-uses comprise new work in the early phases of construction activity and repair, maintenance and improvement (RMI) in later phases.

Core industry characteristics Building materials are characterised by several distin- guishing features. Cyc//ca//fy derives from the fact that construction cycles reflect general economic cycles. Construction/building materials cycles are longer in dura bon and larger in amplitude, while their timing varies between countries. In developing economies, construc bon demand tends to lead GDP growth, in contrast to a lagged relationship in mature economies. Cyclicality is most pronounced for 'heavyside ' prodt4cts such as cement, aggregates and concrete products. These prod- ucts involve intensive capital investment which is charac- terised by long-term, large-scale commitments and significant lead times, and for which additions to capacity are sizeable and occur only periodically.

Building materials manifest a dual mata/e/ilynam/c geographically based character. In developed markets (North America, Western Europe and Australasia) where the bulk of buildings and infrastructure is already in place, construction is stable with modest growth and is largely (late cycle) RMl-based. Population and public

The building materials industry The industry involves the extraction, manufacture and supply of building materials, products and services for construction activity. These Include primary materials lsuch as cement, aggregates, crushed stone, sand and gravel), ready mixed concrete (RMC) and asphalt prod- ucts), 'heavyside ' buildi ng products(for example, structu ral

This case was prepared by Mike Moroney, Lecturer in Strategic Management at the J.E. Cairnes School of Business and Economics National University of Ireland Galway. It is intended as a basis for class discussion and not as an illustration of good or bad prac tice. © Mike Moroney, 2016. Not to be reproduced or quoted without permission.

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CRH PLC: LEVERAGING CORPORATE STRATEGY FOR VALUE CREATION AND GLOBAL LEADERSHIP CRH PLC: LEVERAGING CORPORATE STRATEGY FOR VALUE CREATION AND GLOBAL LEADERSHIP

investment are the prime drivers of activity.: By contrast, in developing markets (Asia, Central and Eastern Europe. Latin America) and in some Western countries'at an earlier stage of economic development, construction output is high growth and predominantly new build, reflecting above average economic growth.

In general, building materials and products are common/f/es, have long life cycles, are similar across markets and largely stable over time, with price-based competition predominant. Production processes are standard. Technology is non-proprietary and, for some products, relatively unsophisticated. Innovation focuses on enhancing manufacturing processes, improving ease of product use and installation, and providing value- added services and solutions to customers.

Traditionally, the building materials industry is /rag- menfed. Production is linked to the location of appro- priate reserves, with proximity to the end market key. Because building materials and products are character- ised by a high weight to value ratio, high transport costs rapidly outweigh scale economies, with the result that the radius of economic activity and competition often can be 150 kilometres or less. Moreover, many markets are local in nature due to differences in building regula- tions, construction practices and product standards. Success is of ten determined by micro-market factors like locality, quality, reliability of service and price.' As a result, the industry developed over time as a large number of small/medium-sized firms, of ten family-owned and run.

==1=:'u:l:l T; ( l"ai:; household names) went out of existence, particularly in the UK. A number of large, of ten global, players emerged. especially in 'heavyside ' markets. Rationalisation was ongoing, as smaller, independent operators merged into larger groups. CRH was a leader in these developments Nonetheless, the underlying logic of fragmentation prevailed. Notwithstanding corporate activity, globally concentration ratios in 'heavyside ' markets such as cement, aggregates and asphalt were comparatively low. while a significant proportion of capacity remained privately held.

In 2016, the sector was recovering following the severe global downturn from 2007, which was unprece- dented since the 1930s in severity and extent and in its synchronized nature. In general the outlook was positive. US construction had enjoyed several years of growth. with sector output expanding at six per cent p.a. Af ter six years of consecutive declines6 European markets exhib- ited modest volume growth of over two per cent in 2015, although the picture was mixed across countries. In all markets, recovery was from a low base, presaging signif- icant upside potential. US construction output was still depressed relative to GDP, new build markets in Europe remained at trough levels7 and UK house-building and mortgage approvals were considerably lower than sustain- able demand.8 However, macro uncertainties continued to prevail. Economic growth in China, the engine of the global economy for two decades, was slowing. Recovery was likely to be gradual, evidenced by expectations for only modest rises in interest rates. Moreover, certain structural trends were not favourable, such as the shift to multi-f amily homes with lower building material

intensity.9

developed new geographic platforms in its core busi- nesses while taking advantage of complementary product opportunities. This has enabled the Group to achieve strategic balance and to establish multiple platforms from which to deliver superior, sustained performance and growth. Since its formation in 1970, CRH has deliv- ered annual Total Shareholder Return of 16 per cent. In 45 years of operation, the Group has undergone major growth through several phases of development;

e organic market penetration in Ireland (from 1970); . acquisition-led overseas expansion (from the late

1970s); e product focus, larger acquisitions (from the late

1990s); e developing value-based growth platforms (from the

early 2010s).

In general, change has been evolutionary, involving a managed, learning process of building, augmenting and layering competences.

(through builders' merchants and DIY stores). CRH's main product concentration was in primary materials and 'heavyside ' products (cement, aggregates, asphalt, RMC and concrete products).

Geographically, CRH is a top two building materials company globally and the largest in North America. The Group has leadership positions in Europe as well as established strategic leadership positions in the emerging economic regions of Asia and South America. In the long-term, CRH's businesses were underpinned by a high level of increasingly scarce reserves of materials totalling 20 billion tonnes. In aggregates, CRH's reserves were equivalent to over 80 years of production and were among the highest in the sector.n in 2014, CRH had 700 quarries/pits in the US and 400 in Europe.::

CRH strategy13

CRH's vision is to be the global leader in building mate- rials. To achieve this vision CRH had developed a Group- wide, integrated, multi-level strategy to create value and deliver superior, sustainable shareholder returnsProducts and markets

CRH served the spectrum of construction activity, deliv- ering superior building materials and products for use in housing, buildings, roads, public spaces, infrastructure and commercial projects. The Group manufactured and distributed a range of building materials products from the fundamentals of heavy materials and elements to construct the frame, through value-added products that complete the building envelope, to distribution channels which service construction fit-out and renewal. CRH was engaged in three closely related core businesses: primary materials Init including steel and timber); value-added building products (primarily 'heavyside ' concrete-based, with selected 'lightside '), and building materials distribution

Value-based strategic imperatives (see Figure 1)

Reflecting long-standing core values, strategic impera- tives guided Group action:

Continuous business improvement through operational, commercial and financial excellence, as manifested in return on net assets (RONA).

Disciplined and focused growth. Financial discipline maintained through working capital management and capital expenditure controls. Use of the Group's strong balance sheet, cash generation capability, active port- folio management and focused allocation of capital to achieve optimum growth

Strategic and cyclicaltrends Structurally, consolidation was ongoing (particularly in primary materials and merchanting) reflecting supply side concentration and significant merger and acquisition (M&A) activity. During the two decades to mid-2009, there were 20 large corporate deals involving total consideration of US$125bn at an average value to EBITDA multiple of l0.3 times,s financed mainly by borrowing. Major transactions largely ceased during the severe sector downturn of 2007 13 as firms reduced debt. However. there were several large deals involving industry leaders and ambitious medium-sized players. Over time, large international building materials compa- nies, including CRH, had leveraged strong local market positions and/or product competences to increase scale and to expand into other regions and areas of activity. There was also erosion of local differences between geographic markets, driven by institutional harmonica bon of regulations, standards and tendering, convergence in building practices, consolidation of customers and homogenisation of their needs.

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Profile of CRH

Headquartered in Dublin, Ireland, CRH is a top two, leading global diversified building materials group with annual revenues of €24bn in 2015, employing 89,000 people at over 3900 operating locations in 31 countries worldwide. CRH's prominence is recognised by many industry awards for corporate governance," financial reporting, investor relations, and excellence/innovation in environmental and safety practices.

CRH plc was formed in 1970 through the merger of two leading Irish public companies, Irish Cement Limited (established in 1936) and Roadstone (established in 1949). At that time, CRH was the sole producer of cement and principal producer of aggregates, concrete products and asphalt in the country, with Group sales of €27m, 95 per cent in Ireland. Since that time, CRH has

Expanding our balanced portf ono of diversified products and geographies

Figure I CRH vision and strategic imperatives Sot/nce:CRH plc.

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CRH PLC: LEVERAGING CORPORATE STRATEGY FOR VALUE CREATION AND GLOBAL LEADERSHIP CRH PLC: LEVERAGING CORPORATE STRATEGY FOR VALUE CREATION AND GLOBAL LEADERSHIP

in greenfield projects and acquisitions. Criteria for success included achieving vertical integration, adding to reserves and expanding regional and product positions. In developing regions, CRH sought premium entry platforms, involving an initial local or regional position in primary materials, backed by sizeable reserves. The acquired foot- print was usually in cement and of ten involved partner- ship with strong local established businesses, providing valuable learning for a relatively low investment. CRH targeted businesses with the potential to develop further downstream into integrated building materials business (often with national presence) capitalising on industriali- sation, urbanisation and population growth.

advisors in each of the six regionally focused divisions

These resulted in highly innovative ideas and exchanges of products, delivering significant synergies. There were also long-standing Group-wide best practice programmes (e.g. cement, development) in addition to more recent initiatives, such as in procurement and commercial excellence. Best practice was supplemented by bench. marking exercises and common systems platforms Divisions also sponsored formal systematic programmes to improve operational performance and increase effi- ciency in a range of areas, including health and safety, recycling and energy recovery.

Informal mechanisms underpinned performance. Corporate culture was nurtured and sustained constantly. The supportive team orientation was evident in informal mentoring, hands-on assistance and individual and team coaching within and across entities. Flexibility prevailed regarding hierarchy and job descriptions. Core values were continually reinforced through corporate folklore and subtle mechanisms including leading by example and clear norms of acceptable behaviour. Strong informal networks existed among managers, even between

far-flung regions of the Group's activities, arising from organisational mechanisms of interaction and from a social dimension to formal events (such as the annual Management Seminar).

time to assess suitability and strategic fit, and to know management and their evolving needs. Much effort was spent appraising the target of CRH's strategy, manage- ment, values and expectations, including up-front clarity on post-acquisition priorities. It was not unusual for CRH to walk away from a deal, on grounds of timing. price or compatibility. Sometimes acquisitions were completed at a later date.

To enhance best practice in deal execution, CRH had codified, in a classified, proprietary document, the best practice, knowledge and processes involved in making an acquisition, gleaned from many years of experience. This was full of collected wisdom and practical advice on deal-making. An experienced operational manager guided each acquisition team. At the appropriate time. a senior- evel 'ambassador ' was introduced to close the deal. Before completion, each deal underwent rigorous evalua- tion, including qualitative operational review, due dili- gence, strict cash flow testing and Board approval.

Traditionally, CRH's acquisitions shared many common characteristics:

medium-sized, private, of ten family-run businesses; geographic/product market leaders, with potential to enhance existing Group operations, fill a gap or provide a platform for growth; careful structuring of deals, often involving initia stakes with buy options (and/or joint ventures) in new regions/product areas; retention of owner-managers to ensure continuity and maintain human capital.

Post-acquisition integration to boost returns was rapid and well-practiced. RONA typically rose to the bench mark level of 15 per cent within two to three years from purchase.i9 Group financial, management information and control systems were implemented immediately. Revenue and cost synergies were captured through benchmarking, best practice programmes and targeted capital investment. The central expertise and coordina- tion of CRH's superstructure delivered procurement economies of scale, enhanced customer access and greater network density and synergies. Af ter three years, a formal look back review was carried out. Although more complex, the acquisition process for larger deals was similar in principle.

capacity to become the second largest building materials company in the world and the number two provider of aggregates globally. Strategically, the acquisition provided significant value creation potential and strategic fit with CRH's legacy businesses, providing four new regional platforms for growth in cement, aggregates and RMC. Moreover, the deal widened the Group's global footprint and was expected to have a considerable impact on CRH's future growth trajectory. Under the leadership of a specific committee of the Board, CRH immediately put in place a thorough plan for integration of the LH Assets.

In announcing its 2015 results, CRH reported consid- erable progress in relation to the LH Assets. The integra bon programme was largely complete, with both sales and EBITDA ahead of expectations. Moreover, arising largely from higher than anticipated process operating efficiencies, the Group upgraded its expected synergies over three years from completion of the acquisition from €90m to €120m. Going forward, external commentators estimated that €150m in synergy savings was within the Group's capability.:'

Corporate parenting

Senior management continually reinforced CRH's busi- ness model. Management training and meetings were used to restate key messages, from the perfor- mance-based 'right to grow ' strategic mantra, to the minutiae of operational best practice. Value-creating performance was buttressed by formal and rigorous measurement, evaluation and control processes, ensuring early intervention and appropriate corrective measures. Communications opportunities were exploited to the full. CRH's expertise in market and investor relations is repli- cated internally. The CEO and senior management team engage regularly with all employees through face-to-face meetings and communications technologies Including: emails, blogs, intranets, video, apps and other social media with a constant focus on values, performance, strategic priorities and knowledge share.

CRH operated a Group-wide management develop ment system to ensure systematic requisite exposure to the wide range of CRH's operations, particularly when managers were mobile, in their 20s and 30s. A key element was the management database, on which the core 500 managers in the Group were profiled formally. In addition, there were a variety of development programmes for managers, many of which involved inputs and presentations on strategy from senior manage- ment, including the chief executive. These included the Management Seminar, Development Forum, Leadership Development Programmes and Business Leadership Programme. Promotion, rotation and mentoring were also instruments of manager development. HR measures to ensure greater cohesion and consistency of policies were designed to foster coordination and a culture of interde- pendence.

Divisional and Group-wide mechanisms facilitated delivery of business model elements. Ongoing best prac- tice and knowledge exchange activities involved meetings by small teams of experts facilitated by technical

Outlook

For the first time in many years, the outlook for CRH for 2016 and beyond was favourable in a number of areas The macro-economic backdrop boded well for ongoing cyclical recovery and a return to peak levels of margins and returns. Moreover, the 'transformative ' Lafarge Holcim deal reinforced expectations for robust earnings growth arising from integration of acquired businesses. synergies and increased development opportunities from enhanced platforms. At the same time, financial disci- pline and prudent financial management highlighted CRH's commitment to restore debt metrics to normalised

levels. Market expectations reflected a fall in the Group's net debt/EBITDA ratio from a post-deal high of 3.5x to 1.8x by 2016 year-end. Importantly, CRH retained its firepower for further transactions, with an estimated capacity to spend €12bn on acquisitions over five years.zi Albert Manifold and his management team knew that achieving the Group vision of global leadership in building materials would require sustained delivery on al fronts.

Acquisition-led expansion

Acquisitions were the engine of corporate growth and development. Historically, acquisitions accounted for 70 per cent of CRH's profit growth (with organic growth contributing one quarter, and currency movements the remainder).:' Traditionally, CRH's acquisitions were bolt-on in nature (three to four deals per month at an average value of less than €20m) augmented from time to time with larger deals where there was compelling value and a strong strategic rationale. In general, CRH acquired on favourable terms, reflecting the Group's 'valuation discipline '. Purchase price/EBITDA multiples ranged between 6 and 8.

CRH's rigorous and comprehensive acquisition strategy was singular in conception and execution and had 'proven very difficult to replicate'.i8 For identification of prospects, CRH resourced multiple development teams spread across the Group seeking opportunities and main- taining contact with an extensive database of potential targets accumulated over 45 years. At any one time, dozens of acquisitions were under active consideration, ensuring a steady deal flow. Each purchase gave rise to further opportunities, in other markets.

Courtship in these deals involved a patient and often long process of familiarisation and coaching. CRH took

Notes and references 1. €1 : £0.8 : $1.3. 2. Earnings before interest, tax, depreciation and amortisation 3. J.P. Morgan Cazenove, 'On the turn. We initiate on the sector ', 21 April

2011, P. 128. 4. Bank of America-Merrill Lynch, 'Cement Handbook: Time for more