Most corporate mergers and takeovers are not built to last.
About 60 per cent of them fail to achieve their objectives 鈥 something to keep in mind when a company in which you鈥檝e invested announces a blockbuster merger or acquisition.
A recent conspicuous example of merger failure disclosed last week is the pending split-up of Kraft Heinz Co. into two companies, a mere decade after the megamerger that created the company. Kraft Heinz explained last week that the company is too complex and unfocused and will split in two.
Revenue growth has stalled for years at Kraft Heinz, whose stock has lost about 70 per cent of its value since the company was formed in 2015.
Analysts place the blame on obsessive profit maximization 鈥 relentless cost cutting together with keeping prices high to protect profit margins at the expense of revenue growth.
Profit management rather than product management has seen fewer new-product breakthroughs at Kraft Heinz than at peer companies and innovative startups.
One of Kraft Heinz鈥檚 planned spinoffs will consist of its North American grocery business, including Oscar Mayer meats, Kraft Singles and Lunchables.
A recent dismal GDP report, falling exports and a hard-hit Canadian manufacturing sector, writes
The other will be a global purveyor of condiments, spreads and sauces, including Heinz ketchup, Kraft Mac & Cheese, and Philadelphia Cream Cheese.
At the time of the 2015 merger, investors were told that the combined entity鈥檚 greater economies of scale would accelerate sales to a greater degree than Kraft or Heinz could achieve on their own.
The merger would expand Kraft Heinz鈥檚 geographic reach into fast-growing emerging markets. And the merged company would have greater clout with grocers in negotiating favourable product placement in stores.
The message to Kraft Heinz investors now is almost the mirror opposite.
Sheer size turns out not to be a success formula.
The two scaled-down spinoffs will make more efficient use of capital, Kraft Heinz says, and they will have smaller geographic footprints, enabling them to better understand changing consumer preferences.
鈥淭his move will unleash the power of our brands and unlock the potential of our business,鈥 Carlos Abrams-Rivera, Kraft Heinz鈥檚 third CEO in a decade, said in a statement last week.
Berkshire and 3G Captital created a giant, convoluted company
Wall Street has voted non-confidence in the breakup. Kraft Heinz shares fell sharply on the news of the split-up, posting a one-day drop of almost seven per cent last Tuesday.
Kraft Heinz was created by Warren Buffett鈥檚 Berkshire Hathaway and Brazilian investment firm 3G Capital, the controlling shareholder of Tim Hortons parent Restaurant Brands International.
Berkshire and 3G teamed up to acquire H.J. Heinz Co. and Kraft Foods Group Inc. and then combined the two firms, creating the world鈥檚 fifth-largest food company.
Ten years later, it appears that the co-architects of the merger succeeded only in combining two slow-growth food companies into a larger, more convoluted slow-growth food company.
In its first year, Kraft Heinz posted revenues of about $28 billion (U.S.) Last year, its revenues were $25.8 billion. Sales have been flat for several years.
3G Capital gave up on Kraft Heinz, selling its last remaining shares in the company in 2019. That leaves Berkshire as the largest shareholder, with a 27.4 per cent interest.
A candid Buffett acknowledged in the late 2010s that the merger had gone sideways, and that Berkshire had overpaid for the assets. It took a multibillion-dollar writeoff on Kraft Heinz at the time.
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3G Capital, for its part, confessed it was unaware in 2015 of the fading appeal of Kraft Heinz鈥檚 pantry of famous but aging products.
Kraft Mac & Cheese, launched in Canada in 1939 soon after its introduction in the U.S., is among Kraft Heinz鈥檚 newer brands.
Other Kraft Heinz standbys are older, such as Oscar Mayer (launched in 1883), Maxwell House coffee (1892), Philadelphia Cream Cheese (1880), Jell-O (1897), and Velveeta (1918).
The Kraft Heinz conglomerate brought under one corporate roof almost 200 brands across about 55 categories in approximately 150 countries.
The resulting bureaucratic sclerosis won鈥檛 be cured by the breakup, most observers believe.
Among them is Buffett. He objects to the split up, in which he lacks a vote. Two Berkshire appointees to the Kraft Heinz board left the company in May.
The proposed breakup 鈥渄oesn鈥檛 create value,鈥 Buffett told the Wall Street Journal last week. 鈥淚t does not do a thing for what the ketchup tastes like.鈥
Consumers have been moving to cheaper, private label goods
The planned spinoffs will still be multibillion-dollar food conglomerates and will face the same growth constraints as Kraft Heinz.
Even before the current cost-of-living crisis, consumers were moving away from brand names to cheaper private label goods. And they have been shifting from processed foods to healthier, more natural options.
In announcing the breakup, Kraft Heinz said the spinoffs will focus on 鈥渢aste elevation.鈥
For the spinoffs to thrive, they鈥檒l have to do more by taste elevation than Kraft Heinz鈥檚 recent light-bulb moment in adding higher quality cookies and crackers to Lunchables to boost sales 鈥 something a smarter company would have done in the first place.
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