The purpose of this Case Analysis Report is to advise Philip Morris on the Acquisition of Kraft Inc.
Kraft is a food-focused company with many well known brand names. In 1987 net sales were $9.9 billion which was an increase of 27% over the previous year., and net income increased by 11% to $435 million. This follows an earlier attempt to diversify where in 1980 Kraft merged with Dart Industries and then acquiring Hobart Corporation in 1981. However, by the end of 1986 Kraft had returned to a food-focused strategy.
Philip Morris is a company that is dependant on the tobacco industry. Most of Philip Morris’ income is from its Marlboro, Benson & Hedges, and Virginia Slim cigarette brands. Though tobacco sales …show more content…
[for more information about the restructure, please refer to Appendix A-2]
We must now evaluate the counterproposal ourselves. for tables and charts refer to Appendix B]
• APV Method is used since it is very difficult to estimate using CVM model when the capital structure is changing throughout the forecast period.
• APV Method: To forecast the FCFs we used the Sales forecast for 1989-1998 given in Exhibit 12 and forecasted another balance sheet for the restructure plan. We then forecasted the income statement and calculated FCFs based on these figures.
• Hamada’s Equation: since we assume the firm is 100% equity financed, the cost of equity is the WACC.
• Interest Payments are forecasted in Exhibit 12 of Case Study.
• Using the APV method we calculate a share price of $21.10 for Kraft’s restructuring plan.
Philip Morris’ Options
With everything that has occurred thus far, Philip Morris now has the following options;
Increase their bid - This is a very possible course of action. However, too high a bid could negate any value. Thus, the maximum bid should be kept a secret as to maximise the potential synergies for Philip Morris.
Negotiate - This is unlikely as Kraft has stated that they are unwilling to negotiate unless the bid is increased. A golden parachute may be negotiated to appease