Question

1. Are Kraft and Heinz underperformed or over-performed, when compared to their industry peers or market performance? Explain.

2. Explain if Kraft and Heinz pre-deal performance affects the M&A decision.

Answer 1

Ans) The merger of Kraft and Heinz that took place in the early 2015, was highly watched out for, as the company turned out to be the fifth largest beverage company in the world and the third largest in the United nations with world annual sales of around 26.2 billion dollars in 2017. Today if we compare the company's performance with its peers, we will be able to see that even the earnings of its per share is 20% lower than of its competitors.

Several reasons can be taken into consideration, many analysts believe that due to the total concentration on cost cutting, the company started losing on its quality of taste and was incapable of keeping its customers intact. In the year 2019, it reported a huge loss in the month of Feb, due to the writedown of its Kraft a d Oscar Mayer brands, slashed its dividend and disclosed an SEC probe into its accounting. The company has seen a downfall of over 60% in its share price during the past 2 years, including the recent drop of around 26%. The main concern of the company remained profit maximization and was unable to live upto the expectations, due to the decline in its quality, acquisitions and so on. Thus, it is clearly evident that the company seems to have underperformed until now, plus the windows seems to have been sealed shut for any sorts of mergers.

2) Yes, the president deal performance does in a way affect the M&A decision. Berkshire along with the Brazilian investment firm 3G capital had acquired Heinz in partnership, thus they had a big role to play in the merger. It was pretty evident that the the deal deal seemed to be overvalued and that the effective price of the stocks in the deal were not the kind a value investor could have calculated. Thus the the cost cutting which was one of the basis of the deal, in order to increase the profits looking at the strength of the company's brands was considered to be the key to match up to the high price that was paid off in order to complete the acquisition.