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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 21184  
Subject: Kraft-werks Date: 6/19/2011 4:24 PM
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I looked at Kraft and did not like the Cadbury deal much.


A lot of people didn't like the deal that much, For what it's worth—which probably isn't much—I have a different take on Kraft and the Cadbury acquisition; whether I'm right, time will tell.

This is my reasoning: First off, the Buffett factor. People tend to agree with him because he's usually right. He pretty much publicly insulted Kraft's CEO, Irene Rosenfeld, for her "stupidity" in agreeing to pay-up to acquire Cadbury, and, the way she agreed to pay for it — that is: partly with what Buffett considered to be undervalued Kraft shares.

It's interesting to note that Irene Rosenfeld was mentored by James Kilts, who was the last CEO of Gillette who agreed to sell the company to Procter & Gamble. It's crossed my mind that Buffett was drawn to Kraft partly because he's on record as thinking of Kilts as an exceptional CEO. In fact, I believe he said that if Kilts decided to come out of retirement and run a company again, sight unseen, he (Buffett) would invest in that business — quite an endorsement.

Buffett has a history of overreacting (IMO) to the actions of people he has had a high opinion of, if he thinks that they somehow let him down. It's crossed my mind that this might be a case in point, though deeply nestled in his subconscious. Hey, if you've bought a big chunk of common stock and you think the CEO you had faith in has let you down, they've let you down. Though, Buffett is somewhat selective about this; Moody's almost gets a free pass.

Let's face it: Warren Buffett is essentially a skinflint, although his superior intellect steers him not to be (and maybe a call to 1-800-Charlie Munger sometimes helps). A case in point would be Berkshire's recent acquisition of Burlington Northern. Coca-Cola was another case in point when value investors couldn't understand why he was backing up the truck in the '80's. (1980's that is, not the stock price.) Which conveniently brings us back to Cadbury's.

It has been suggested that what Buffett saw in Coca-Cola was a great company, selling at a reasonable price. What was so great about Coke was the moat that the brand represented. More to the point, the intangible value of the brand isn't carried on Coke's books: something of great value, though in plain sight, is hidden from myopic accounting types who deconstruct financials looking for bargains.

The same thing, more or less, is true of Cadbury. This is something that seems to have passed Buffett by and there's probably a good reason for it. Buffett is as American as apple pie; as far as you can get from a metro-sexual living on one of the coasts. In his gut, his view is confined to the good ol' U.S of A. This is confirmed by pronouncements like an "all out bet on America," etc. As with his inherent skinflint like nature, he sometimes overcomes it: his intellect sometimes wins over his U.S.centric outlook as far as finding good deals abroad. My hypothesis is that because Cadbury isn't a domestic company that he has first hand knowledge of, and grew up with, he's missing the depth and width of Cadbury's moat, because just like Coca-Cola it's not plain to see in the financials, and, K10s are Buffett's self proclaimed favorite reading material. Is it as likely that he would have scolded Kraft for paying up a little more to acquire Hershey? Well, Cadbury is much of the rest-of-the-world's Hershey.

Going way back Cadbury has been a British institution and chocolate is one of that country's favorite drugs. Although now veiled in the mists of history, Britannica did indeed rule the waves. The British Empire—including India, Canada, Australia, and large parts of Africa—was extensive, and everywhere the British went, Cadbury went too. The British Empire ran it's course but after the British went home, on the whole, Cadbury stayed. All over the world generation upon generation have grown up with Cadbury products. Old habits die hard.

Presumably what Irene Rosenfeld, Kraft's CEO, saw in Cadbury was a stable and predictable business with a moat worth much more than could be gleaned from its 10K alone, which was going through a bit of a hard time with a competitive advantage that would help right the ship. What she also saw (presumably) was their world-wide distribution channels that she could piggy-back Kraft products on. Both counts, from Kraft's point of view, held dormant value which would likely be awakened over time. Paying a few dollars more, rather than walking away from a once in a blue moon opportunity, was probably the smart thing to do. But, as I began: time will tell.

Perhaps a little credit is due Irene Rosenfeld for understanding and knowing her own company better than Buffett does, and having a vision for its future. Ironically, one of Buffett's best buys ever was chocolate: See's Candy.

kelbon
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Author: LeKitKat Big gold star, 5000 posts Top Favorite Fools Feste Award Nominee! Feste Award Winner! Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6501 of 21184
Subject: Re: Kraft-werks Date: 6/19/2011 11:50 PM
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nice deconstruction of Buffett. Better than Snowball :)

Seriously good analysis of Buffet's USA-istic tendencies and perhaps some bias against Cadbuy

I just happened to follow along on the CAD story as it was a newsletter pick and it was a company struggling to stay relevant. Even after the spin-off of Dr Pepper/Snapple it never did much.

The history of going where the UK went is pretty fascinating.

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