Is Cadbury heading for a meltdown following the Kraft takeover?
Peter Crush, June 07, 2010
It's six months since Irene Rosenfeld , CEO of Kraft, successfully bought Cadbury - and she still hasn't bothered to pay it a visit. And while there are positive signs the US-giant appears to take the culture of Cadbury seriously, those involved in the negotiations still believe its future hangs in the balance. Peter Crush reports on a firm in limbo
Is Irene Rosenfeld the world's most unpopular CEO? The boss of Kraft, the mastermind behind the controversial £11.5 billion hostile takeover of Cadbury, has attracted an amazing amount of vitriol. Unions hate her - Unite has branded her ‘incompetent' over pledges to protect Cadbury's 400-strong Somerdale factory (a promise quickly rescinded no sooner had the ink dried on the deal). Her new staff hate her, (especially when it was revealed Rosenfeld pocketed a 40% pay rise, to $17 million, for brokering the deal). And, last, but by no means least, government has hardly warmed to her either. Former business secretary Peter Mandelson performed a U-turn to say government should have the power to protect companies deemed to be in the national interest. Meanwhile, a very dim view was taken when, instead of jetting to London herself, Rosenfeld dispatched her corporate affairs director to face the music in front of an all-party Commons business select committee in March that wanted to get to the bottom of things. A recipe for how ‘not' to buy a company? You bet it is.
So, six months on, and with the errant CEO still not yet gracing the UK workforce with her presence, what are commentators saying about the future of Britain's favourite chocolate maker, and is there an HR lesson in this for us all?
While acquisitions expert Jonathan Chocqueel-Mangan discusses the problems he sees, and hears the views of HRDs (see page 28), it must be stressed that Kraft and its PR agency, Edelman, which was hired to manage Kraft's ‘post-recession relations', have rejected all our attempts to hear its side of the story. Cadbury has also refused to speak to us.
Chocqueel-Mangan points out that the majority of the Cadbury board has stayed. And, as one HR director in the chocolate sector, who wants to remain anonymous, told HR: "While their [Kraft's] big mistake was the handling of the factory closure and they seem to have no sense of how UK media works, I have to say they have managed to
keep a lot of Cadbury people. We have received very few Cadbury CVs."
That said, the big three - chairman Roger Carr, chief executive Todd Stitzer and chief financial officer Andrew Bonfield - all resigned hours after the deal was sealed and veiled comments from a steady stream of other big-name departures point to a clutch of disillusioned executives who have no faith in the promise of a common culture.
Cadbury's corporate affairs director, Alex Cole (who is understood to have refused positions offered to her), said she was leaving in March, with an ambiguous "I wish Kraft all the best in living up to its vision of a business that's more delicious than ever". Geoff Whyte, commercial director Cadbury Africa, Middle East, (and Sunday Times' Marketer of the Year), left the company at the end of April. He cited family reasons, but 11-year veteran and executive board member of Cadbury India, Cadbury's Asia-Pacific head for chocolates Sanjay Purohi, was far more candid. "It is with a heavy heart [but] I am quitting," he said. When Cadbury's marketing executive, Phil Rumbol, the man responsible for the ‘Gorilla' also threw in the towel, turning down a Kraft pan-European marketing role, he simply said: "Now is an opportune time to leave the business."
The only public appearance Cadbury's HRD, Richard Doyle, has made so far has been at the select committee hearings at the end of March. At the time the press was reporting Cadbury staff were being told their pay would be frozen for three years unless they agreed to opt out of the firm's expensive final-salary pension scheme. Doyle told the baying MPs there would be no further compulsory redundancies among manufacturing employees and no plant closures in the UK for the next two years. He added "senior management in Kraft had given the [pension] trustees a commitment to supporting pension arrangements, though there may well be ongoing changes to the pension scheme in order to make it affordable. We, Cadbury, have announced some changes and are in the process of consultation."
It all sounds slightly puffy, and the select committee didn't like it either: "We note Kraft's assurances over compulsory redundancies plant closures for the next two years. However, a guarantee for a longer period would have been welcome. Any back-tracking on these commitments will be a serious breach of trust. We recommend the Department for Business, Innovation and Skills monitors Kraft's compliance with these commitments. If it is serious about them, Kraft will have nothing to fear from such scrutiny."
Invited to the select committee proceedings was Chris Bones, Cadbury's former group organisation effectiveness and development director from 1999 to 2004, and he tells HR magazine that very little has really been learned. "The game played with the Somerdale factory was completely unnecessary, especially the raising of hopes, and then dashing them. It was a really bad thing to do particularly because this two-year promise of no job losses is a white elephant. My contacts at Cadbury tell me they still expect redundancies to start the second the two-year period expires - they have to happen because to fund the deal Kraft needs to save £700 million a year. Kraft is playing a PR game. It will have said it met its commitments, but it will have damaged itself as a potential employer. If it knows it is going to cut people's jobs, why not give them a year and a half's notice period, then they can start planning now for life outside Kraft?"
Historical precedent does not cast Kraft in a good light. It closed the Terry's factory in York after buying it in 1993, despite promising to keep it open. "Kraft is managed radically differently from Cadbury," adds Bones. "Cadbury's people will find the Kraft way incredibly uncomfortable," he says. "The challenge for Kraft will be just how much of its own culture it is prepared to change; it will have to change to Cadbury's [way], not the other way around."
But there is one rare supporter of Kraft: Sean Trainor, former head of internal communications of Network Rail and BNFL. Although he admits Kraft has real "integrity issues", the fact it recognises this is "a good thing," he says. He adds: "It actually stands as good a chance as anyone in getting it right", noting that while the York factory closure sets a pattern, when Kraft bought Danone two years ago, it was again criticised for taking over a great national institution. "It promised not to close biscuit manufacturing facilities in France for at least three years," he says. "Kraft has not only delivered on this promise but added to its commitments - having recently announced plans to invest 15 million euros in a new innovation centre for biscuits, positioning France at the centre of innovation. It's a great example of asset building, not asset stripping." He also believes it will honour Cadbury's Fair Trade credentials (one area in which Kraft has been seen as different from Cadbury).
Kraft-Cadbury has actually appointed an internal communications agency - JWT Inside - the internal comms arm of ad agency JWT. At the moment, though, it is tight-lipped about what exactly it is up to. But most recently there has been more positive news. In May, Kraft announced it was closing its Cheltenham HQ and relocating to Cadbury's Uxbridge and Bourneville head offices, with plans to make Bourneville a centre for R&D. Analysts believe this signals a long-term commitment to Cadbury workers.
Nick Bunker, president of Kraft Foods (UK), said: "The business rationale [for the move] is compelling", adding it was a "a vote of confidence" in the UK. He explained: "Having our R&D, customer service and support functions working side by side will enable us to share more insights and act more quickly." In an unusual nod to staff feelings, he also had this to say for himself: "The past few months have been an uncertain time for all employees. I am incredibly proud of what our people have achieved and I am confident that we have a phenomenal future together."
Trainor believes companies typically buy other companies for either their people or their brands. While the people element appears to be gathering some positive momentum, he believes the primary objective is to secure the brands, and not, as Bones predicts, to end up de-merging later down the line. Certainly, while there was initially great public outrage at the takeover, consumers seem to have quickly forgotten how upset they were. According to its Q1 sales (announced in May), like-for-like sales for Cadbury were up 8% (ahead of the 3% growth in Kraft). Rosenfield says: "Everything we've seen so far has only reinforced our decision to acquire Cadbury." Cadbury was also recently named the most trusted brand in food and drink.
But Unite, the union representing employees at Cadbury, says while the public has forgotten, the situation is still live within the company, and observers should be under no illusion about the severity of issues between staff and management outside the PR-friendly statements. Speaking to HR magazine, Jennie Formby, Unite's national officer for the foods and drinks industry, confirmed the next meeting with ‘Krafbury' management was on 17 May (as HR was going to press), and she is in militant mood: "The closure of Kraft's HQ is clearly the beginning of the cull we think will take place," she said. "So far I haven't formerly had meetings with Richard Doyle; he's not actually dealing directly with the guarantees we are seeking, which are primarily around terms and conditions. Kraft says it needs to pay down its debt; we say not at the expense of pay and conditions."
Among Unite's list of demands is an extension to five years of the two-year promise to make no closures and redundancies; a guarantee of no diminution of pension benefits or increases in contributions for five years; a commitment that Kraft will fund any pension deficit and that it will fully share its business plans with the union - demands Trainor believes no company would (or even could) ever agree to. Not that this has deterred Unite; in fact it feels badly mistreated: "It was extraordinary when the two-year promise not to close factories came at the committee hearing," says Formby. "That was the first time anyone had heard of it - yet we were supposed to be in talks at the time. It was clearly a stunt for the MPs. If you look at the history of Kraft, the way it does things is by shedding jobs," she says.
Formby has confirmed she had just learned Kraft is attempting to "introduce lower rates of pay and holiday conditions for new starters", something HR magazine has been unable to corroborate. She says: "This confirms how opportunistic Kraft is. Once you create a two-tier workforce, it will create huge problems in the future. We just want to have meaningful discussions. At the moment, it doesn't seem to be willing to do this, but we live in hope."
Clearly these bickering sides are still, after six months, just as locked- horns as they ever were. Can the two cultures of these chalk and cheese companies really be melted together, for a smooth, silky relationship? Gallup partner Christian Hasenoehrl says employees of merged or acquired companies look "for trust, stability, confidence and compassion in their leaders". He adds: "With 50% of ‘failed' M&As typically attributed to poorly planned integration, cultural integration must be planned for." Maybe these two cultures cannot mix; maybe they shouldn't mix; maybe they won't mix. HRDs should all take note, though - if you were there, what would you do? HR
The integration of the leadership team is critical
So what is likely to be going on inside Kraft? What will bring the Cadbury leadership team on-side and persuade it to commit to delivering what Kraft has persuaded its shareholders is a robust financial rationale for the acquisition?
Having seen a range of global post-merger acquisitions up close, one thing is clear: there is no such thing as a ‘merger of equals', so having a clear and pragmatic approach to integrating the new leadership team is critical to start the wider post-merger integration programme. Compromises are often made when forming the top team to satisfy shareholder demands and to be seen to be paying due respect to the acquired culture. However, once the deal is done, the next layers of leadership need to be appointed and this is where a more considered and rational approach can be applied.
Bruce King was VP International HR for computer company Wang during the acquisition of Ollivetti, which pre-deal had required meetings with the Italian finance ministry: "As soon as the deal was completed, the CEO, CFO, the VP of marketing and I all got on a plane and went to meet as many people as possible. But we didn't do any set interviews; we conducted a series of business reviews because we wanted to see them in their business environment. That way we got to know them and they got to know us," King says. When Wang was itself taken over a few years later, King, now a consultant, found himself on the other side. "Our new owners never really understood us - and that's what ruined the deal." Today, neither organisation exists.
Kraft has to act quickly, and openly. Staff want to be told what is going to happen. In one example, of a global technology merger, an announcement was made that every appointment would be based ‘purely on a meritocratic basis'. The reality, however, was that whichever of the two companies was the bigger in each country provided the general manager of the merged entity. Trust in the new company leadership was already lost.
According to research by Jeffrey Krug, from the University of Illinois, target companies can expect to lose up to 40% of their top management team within two years after acquisition. Executives who stay often lose status and autonomy and view their company's acquisition as detrimental to themselves both personally and professionally.
But as well as the structural issues around the leadership team, there are other ‘softer' problems to deal with. The most obvious ones relate to culture. Few successful post-acquisition programmes involve overt team-building workshops within the first six months. As one pharmaceutical CEO says:
"Keep the interactions business-focused - and avoid the opportunity for belly-aching." Invariably the leadership team is developed most effectively by involving them in specific business planning activities focused on, for example, new branding or customer experience. Eventually, as this team begins to come to terms with its new make-up, there is a need to spend time getting to know each other properly.
Catherine Connolly is global HR director at TNS, part of WPP, a global media firm that has grown predominantly through acquisition. She says: "It is important everyone appreciates and celebrates the strengths of both company cultures, especially that of the acquiree. A new culture will be created and both companies can bring good things to that."
In the successful cases we have seen, the creation of the leadership team is led by the CEO. But the HR director also needs to be the true business partner of the CEO at this time. Connolly says: "It takes a brave CEO to get beyond just hitting ‘synergy targets' to set time aside to develop the leadership team early on. But if they do, the HRD needs to be able to step up to that challenge."
Building a leadership team following an acquisition is an important, if painful, process that sets the tone for the wider integration programme. Writing in The Daily Telegraph just before the Kraft deal closed in January, Sir Dominic and Sir Adrian Cadbury said: "In the context of a bid, the high percentage that fail to live up to the claims of the bidder are well documented. The risks of relative failure in takeovers are therefore clear. Those risks are considerably increased if the bidder fails to win the loyalty and support of the employees on whom the continuing fortunes of the enterprise depend."
Jonathan Chocqueel-Mangan is a director of Tyler Mangan
For more on the topic visit hrmagazine.co.uk