1. 1 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #1 Suppose you own shares in a company. The current price per share is £25. Another company has just announced that it wants to buy your company, and will pay £35 per share to acquire all the outstanding equity. Your company’s management immediately begins fighting off this hostile bid. QUESTIONS: Is management acting in the shareholders’ best interests? Why or why not? Agency Problem

2. 2 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #1 Solution  The goal of management should be to maximize the share price for the current shareholders.  If management believes that it can improve the profitability of the firm so that the share price will exceed £35, then they should fight the offer from the outside company.  If management believes that this bidder or other unidentified bidders will actually pay more than £35 per share to acquire the company, then they should still fight the offer.

3. 3 Dr Kevin Campbell, Corporate Finance 2011  However, if the current management cannot increase the value of the firm beyond the bid price, and no other higher bids come in, then management is not acting in the interests of the shareholders by fighting the offer.  Since current managers often lose their jobs when a corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers in situations such as this. Homework Exercise #1 Solution

4. 4 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #2 In 2009 the US company Kraft launched a takeover bid for the UK chocolate company Cadbury. Though Cadbury’s management initially resisted the bid, they eventually recommended acceptance and Cadbury was acquired by Kraft in 2010. TASK & QUESTIONS: Research the background to the bid using the Internet (eg FT.com). Do you believe that Cadbury’s shareholders benefitted from the takeover? Do you believe that Kraft’s shareholders benefitted? Why or why not? Agency Problems

5. 5 Dr Kevin Campbell, Corporate Finance 2011 September 7 2009 Homework Exercise #2 Solution

6. 6 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #2 Solution

7. 7 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #2 Solution

8. 8 Dr Kevin Campbell, Corporate Finance 2011 The outcome? Homework Exercise #2 Solution

9. 9 Dr Kevin Campbell, Corporate Finance 2011 Someone’s not happy … Homework Exercise #2 Solution Warren Buffett has blasted the controversial takeover of Cadbury by Kraft, and revealed that he would block the deal if he could. The veteran investor, whose Berkshire Hathaway group owns 9.4% of Kraft, claimed the US food group has blundered in its pursuit of the British chocolate producer. Appearing on CNBC, Buffett said he "felt poor" following Cadbury's decision to accept Kraft's £11.9bn cash-and-share deal. "If I had a chance to vote on it, I'd vote no, but I don't get a vote," said Buffett, who added that he "has a lot of doubts" about the takeover. Kraft has agreed to pay 500p in cash plus 0.1874 of new Kraft shares for each Cadbury share. Because the share component is less than 20% of Kraft's existing share capital, a shareholder vote is not required. Buffett is particularly displeased that Kraft is paying partly in new shares because he feels they are undervalued – a point he first made publicly to Kraft chief executive Irene Rosenfeld earlier this month. "I like Irene. She's done a good job in operations … she could be a trustee in my will. I just don't want her to do this deal," said the 79-year-old. Buffett is also unimpressed that Kraft sold its pizza business to Nestlé to raise cash for the Cadbury bid. He said this was done in an "enormously tax-inefficient way" that cut the underlying value of the deal from $3.7bn (£2.3bn) to $2.5bn. Shares in Kraft fell 2.2% in pre-market trading on Wall Street after Buffett made his remarks, eroding both the value of Kraft's bid for Cadbury and his own stake in the company. SOURCE: Graeme Wearden, The Guardian Wednesday 20 January 2010

10. 10 Dr Kevin Campbell, Corporate Finance 2011 … and now? Homework Exercise #2 Solution

11. 11 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #3 In 1999, the UK company Cadbury bought Wedel, the Polish chocolate company. After Cadbury’s acquisition by the US company Kraft in 2010, Wedel was sold to the Japanese conglomerate Lotte Group to meet European Commission requirements. TASK & QUESTIONS: Research the background to this transaction using the Internet (eg FT.com). Why did Kraft have to sell Wedel? Who benefitted from this transaction? Agency Problems

12. 12 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #3 Solution Why did Kraft have to sell Wedel?  To comply the European Commission Merger Regulation that prohibits excessive market concentration arising from mergers, ie: Regulation (EC) No 139/2004 Merger Procedure  See the full judgement Case No COMP/M.5644 - KRAFT FOODS / CADBURY at: http://ec.europa.eu/competition/mergers/cases/decisions/m5644_20100106_20212_en.pdf

13. 13 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #3 Solution Excerpt from: Case No COMP/M.5644 - KRAFT FOODS / CADBURY (p20) Market shares of the parties and their main competitors at the retail level

14. 14 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #3 Solution Excerpt from: Case No COMP/M.5644 - KRAFT FOODS / CADBURY (pp 20-22) Tablets: “Post transaction, the market share of the merged entity will be [60-70]% with a substantial increment (Cadbury [20-30]%) and competitors are significantly smaller than the new entity (Jutrzenka below [5-10]%, Ferrero [0-5]% and Nestlé [0-5]%).... the large majority of customers and competitors have raised concerns with regard to the transaction given the very high combined market share of Kraft and Cadbury post transaction and their very strong tablet brands. Respondents explain that the transaction will allow Kraft to reinforce its already very strong position and negotiation power in the tablet market which may lead to less promotional activities and to higher prices for customers..... For the reasons set out above, the Commission concludes that the notified concentration raises serious doubts as to its compatibility with the common market on the Polish tablets market.”

15. 15 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #3 Solution

16. 16 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #3  The shareholders of Lotte Group have benefitted from the acquisition of Wedel because it was a forced auction which gave Kraft little bargaining power  The price paid by Lotte Group is most likely lower than would be paid in a conventional takeover  They have gained a prestigous brand and enabled the group to diversify its business Who benefitted from this transaction?

17. 17 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #3 … the future? SOURCE: http://www.confectionerynews.com/Financial/Lotte-set-to-expand-Wedel-plants-in-Poland-report

18. 18 Dr Kevin Campbell, Corporate Finance 2011 Homework Exercise #3 … the future?