Philip Morris Companies And Kraft, Inc.Case Solution
Detailed Restructuring plan
The company’s Board of Directors and its management decided to find any other way to face this issue. Goldman, Sachs and board of directors were collectively working on developing a recapitalization plan, in order to increase the value and significance of the company more than the bid of $90 per share. The plan was expected to result in a higher total value of $110 per share. The distribution in cash and securities in $98 per share. Along with that, it would receive a cash distribution and securities to retain the common stock. In return, the shareholders would have to pay less taxes, which would be possible if Kraft accepts Philip’s offer after Phillips make another offer to acquire the company at the same restructuring plan. This plan will also increase the company’s sales by up to $6.8 billion and $3.0 billion debt. Implementation of this plan will allow the company to increase its profitability by up to 80%. This plan will help the company in developing profitability, and restructuring will have almost $12.4 billion debt. It is also a link between the employees’ compensation and the company’s performance. This restructuring plan will help the company in creating a higher value for shareholders, but it is not limited to this, as any other suitable and sound offer is also welcomed. Moreover, Kraft has rejected the offer of almost $11.8 billion cash made by Philip Morrisand it rather proposed a $13.2 billion restructuring because this will ultimately result in the maximization of the shareholders’ wealth and the target of $100/share may also be achieved. This will mainly consist of a payment of $84 per share in cash and also $14 will comprise of a share in junk bonds. Lastly, the remaining value is being regarded as a post-restructuring stock, which will have a value of almost $12/share.
Hence, this represents that Kraft became successful in achieving the bid of almost $106/share by Philip Morris. Apart from this, Philip Morris has also agreed to make a dividend payment of almost $84/share. This offer will also prove to be beneficial because of the availability of potential synergies between the two companies.
Negotiation & Mr. Hamish
The negotiation technique used by Hamish was about long term planning, as he first discussed the issue that Philip Morris first directly approached the lawyers and investment bankers. He pointed out that the company needed to point out these things initially and should have worked hard to plan for long term. He also said that these things should have been decided in meeting and he emphasized on the shareholder’s value as well.
It is clear that it will be necessary whenever the company is willing to bring improvements in the efficiency of the firm and to bring an increase in its cash flows and profitability. This is done by the companies normally when there are chances of being taken over by another major firm operating in the same or different sector; however; it has sufficient experience and resources to pursue the process of merger. On the other hand, the process of restructuring is defensive and it comes into existence because of the market control.
After Analysis in appendix 2, we have concluded that the share price of Kraft is undervalued in the market; and its actual worth is $108. Philips Morris is offering $90/share to the shareholders of Kraft, which is lower than the intrinsic worth.
As the CEO of Philip Morris; I would have revise the security analysis of Kraft as Goldman Sachs & Co (investment banker) commented that Kraft’s share’s worth is more than $90. As per Kraft’s structuring plan in which it sells some portion of its business to repurchase its shares from the market at $110, which is a good plan as by doing so; the concentrated risk will reduce. Moreover, the food industry offers an upside potential in future due to an increase in the population.
Mr. John Richman
If I were the CEO of Kraft; I would have analyzed the feasibility and returns which this diversification would have brought. I would have also conducted a cost analysis, after which, I would have proceeded the conduction of a detailed analysis and calculation, to further discuss this with the CEO of Kraft. Along with that, I would have also offered the Kraft’s CEO to go for right valuation and then do acquisition at right price, alongside which, I would have askedKraft to participate in those areas where the company was efficient and vice versa. As per the available information on the case; it can be seen that John Richman was trying to receive a higher price for the company to make its future prospects much better. As a result, Goldman Sachs and Kraft entered into an agreement to go through the restructuring process. This process had the tendency to ultimately result in the highest price being proposed by Philip Morris……………………
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