Kraft Heinz Merger Analysis

This assignment analyzes the Kraft Heinz merger by examining the market capitalization of Heinz and Kraft individually before the merger. It then calculates the combined market capitalization of Kraft Heinz post-merger. The analysis demonstrates how the equation PV (Acquirer) + PV (Target) < PV (Combined Firm) holds true in this case, showcasing the value creation potential of mergers and acquisitions.

CORPORATE FINANCIAL
MANAGEMENT

Contents
Solution 1:.............................................................................................................................................3
Solution 2:.............................................................................................................................................5
References...........................................................................................................................................10

Solution 1:
Part a.
Following the information provided:
Particulars Amount
Capital Investment 220000
Salvage Value 40000
Life of the Machine (years) 3
Sale units 6000
Growth in sale unit 10%
Sale Price 60
Growth in Sale Price 5%
Variable Cost 36
Growth in Variable Cost 3%
One time Fixed Overhead Cost 60000
Inspection Charges incurred at the end of year 2 3000
Working Capital Invested 30000
Recoverable Working capital 80%
Cost of Capital 12%
Tax Rate 15%
CALCULATION OF NET PRESENT VALUE
Particulars 0 1 2 3
No. of Units - 6,000 6,600 7,260
INITIAL CASH FLOWS
Capital Investment -2,20,000 - - -
Working Capital Invested -30,000 - - -
Net Initial Cash Flows (a) -2,50,000 - - -
OPERATING CASH FLOWS
Sales - 3,60,000 4,15,800 4,80,249
Variable Cost - -2,16,000 -2,44,728 -2,77,277
Depreciation - -60,000 -60,000 -60,000

Fixed Overhead Paid - -60,000 - -
Inspection Charges - - -3,000 -
Profit Before Tax - 24,000 1,08,072 1,42,972
Tax @ 15% - 3,600 16,211 21,446
Profit After Tax - 20,400 91,861 1,21,526
Cash Flow after Tax (PAT +
Depreciation) - 80,400 1,51,861 1,81,526
Net Operating Cash Flows (b) - 80,400 1,51,861 1,81,526
TERMINAL CASH FLOWS
Salvage of Machine - - - 40,000
Working Capital Recovered - - - 24,000
Net Terminal Cash Flows (c ) - - - 64,000
Net Cash Flows (a+b+c) -2,50,000 80,400 1,51,861 2,45,526
PV Factor @ 12% 1 0.892857 0.797194 0.711780
PV of Cash Flows -2,50,000 71,786 1,21,063 1,74,761
Net Present Value 1,17,609
Therefore, the net present value of the project is $117609.
Part b.
As we know Capital Asset Pricing Model is a Single factor model and Arbitrage Pricing
Model is a multi-factor model (Sherman, 2011). The APT model incorporates various non-
corporate factors in its analysis, whereas CAPM involves only the difference between the
market and actual return. The factors involved in APT model are not defined; they can be
anything, any element which can affect the price of the security. APT has a broad set of
factors whose affect can be incorporated while calculating the price, whereas CAPM ignores
the affects of these factors. This is why multivariate models are used to overcome the CAPM.
(Rosenbaum et al., 2013)

Solution 2:
Part a:
Mergers and acquisition is an organic growth strategy which is opted by the corporate. The
organic growth strategies such as internal expansion are a tad complicated procedure, but
merger takes less time (Snow, 2011). Though the process of merger is less time consuming, it
is expensive, as the acquirer firm is required to pay a premium to the acquired firm. The
management of the acquired firm is responsible to justify and explain the need for premium.
Mostly, the premium involved in mergers is due to synergies created.
As discussed the process of merger is expensive, but still people go for it because it has many
advantages. The process of merger brings together the strengths of entities promoting higher
growth. It also helps to create monopoly, which results in decreased competition and better
bargaining position. There are a lot of rules and regulations which in some cases can be
fulfilled by collaborations only, therefore mergers helps to satisfy these also. In the process of
merger one non-branded partner may get recognition by merging with a branded entity,
creating recognition of the former entity. Last but not the least the process of merger helps to
create synergy. Synergy is the extra value which is created by merging of two or more
entities. Merger helps to strengthen the entity by utilising the positive attributes and reducing
the negative. This results in better operating and financial environment for the entity to work
in and hence results in synergy creation.
Synergy is the potential or additional value that is expected to be generated as a result of the
merger. It is the most used rationale for the purpose of analysing a merger plan. But lack of
information and improper application of synergy calculations may lead to wrong conclusions.
(Bainbridge, 2012)
Few of the major reasons why synergy is generated are listed below:
- Economies of Scale: Due to large scale production as a result of merger, the cost per unit
declines, resulting in economies of scale.
- Better Pricing Power: Since the merged entity now has more resources and more
market share, it will be in a better position to enjoy the pricing power in the market.

- Complimentary Resources: where a big innovative firm with ample of resources
merges with a small firm with very limited resources, then the small firm enjoys the
resources which was not yet available to them.
- Utilisation of surplus funds: the funds which are idle and not being used can be used to
complete the buy-out in a merger, providing greater returns,
- Tax Benefits: whereby in the process of merger a profit making company acquires a loss
making company in order to generate tax shield, then the tax benefits can be availed by
the merger entity.
- Managerial Efficiency: there is a probability that the acquired firm would have been
mismanaged, after the completion of merger, better expertise and managerial efficiency
of the acquiring company, helps to manage the acquired company. (Filippell, 2011)
Mergers are also of various types. They have been discussed as below:
- Horizontal Merger: These types of merger take between the companies which belonh to
same industry and are at the same stage.
- Vertical Merger: this type of merger takes place between the companies which belong
to same industry but different stages. For example, an oil refilling company merging with
a company involved in the business of oil marketing.
- Concentric Merger: this type of merger takes place between companies belonging to
related industries. For example, a banking company merging with a insurance company.
- Conglomerate Merger: this type of merger takes place between companies of totally
different industries.
Synergy can be of various types too. In a merger, benefit generated in any area will be
termed as synergy. Synergies can be of following types:
- Cost savings synergy: we have already discussed above how economies of scale can be
achieved form the process of merger. Due to economies of scale the cost per unit
declines. Decrease in the cost results in higher revenue and profits which then results in
higher market value of the company. Hence generating synergy for the newly formed
entity.
- Revenue Synergies: revenue synergies are increase in revenue for the merged entities.
The revenue generated by the merged entity is more than the revenue individually
generated the participating entities. In our discussion below we will see a practical
example of how two merged entities have resulted in revenue synergies. The merged

entities have more resources which are put to use more efficiently which results in these
types of synergies. (Harrison, n.d.)
- Market value synergies: this is due to boot strap effect. Under this type of synergies the
market capitalization of merged entities is much more than the market cap of individual
participating entities. Difference between these figures is the amount of synergy created
form merger.
In the following discussion we have discussed the real life merger of two major food
companies Heinz and Kraft food groups. After the merger the merged company Kraft Heinz,
became the world’s fifth largest food and Beverage Company. This was one of the biggest
mergers which resulted in generation of high synergies for the resultant company. We have
shown below the revenue synergy created by the merger.
(All Figures in million $)
Sales Kraft
Particulars 2014 2013 2012 Total Sales Average Sales
Sales 18,205 18,218 18,271 54,694 18,231
Sales Heinz
Particulars 2014 2013 2012 Total Sales Average Sales
Sales 11 12 12 34 11
Sales Kraft Heinz
Particulars 2017 2016 Total Sales Average Sales
Sales - 19,355 26,487 45,842 26,195
Synergy= Sales Kraft Heinz-Sales Kraft-Sales Heinz
Synergy = 26195-18231-11
= 7953
Therefore, we see that the merger resulted in synergy amounting to $7,953 million.

Before the merger, 605 of the revenue of Heinz was generated from sales from regions other
the North America, whereas 98% of Kraft revenue was generated from North America.
Therefore merger gave Kraft the scope for expansion in international markets (Galpin and
Herndon, 2014). Also, when the merger was about to take place it was estimated that it
would result in cost savings of $1.5 billion per year. The cost synergies were expected to
realise from economies of scale. The economies of scale would help them have better
bargaining power which will provide them higher operating margin. Also, other cost
reducing strategies were to be implemented in order to achieve cost synergies such as closing
down of inefficient units, reduction in headcount, etc. Therefore, we see that the expected
plan of the management of Kraft came through and helped them realise the revenue synergy
of $ 795 million.
Part b:
We have already discussed that the merger of these two companies resulted in generation of
high synergies for the resulting company. We will now show calculations which will support
the above statement. Also we will prove that the equation of PV (Acquirer) + PV (Target) <
PV (Combined Firm) is being satisfied by the said merger (Halibozek and Kovacich, n.d.).
Below are the figures stating the market price per share of the companies and the number of
shares of the companies before and after merger. The market capitalisations of the companies
are calculated in order to arrive at the present value of the companies before and after
acquisition. All the figures below are in million $ except for share price, which are per unit.
Share price of Kraft
Year Share Price No. of Share
2012 44.15 592.76
2013 53.91 596.23
2014 62.66 587.33
Average Share Price 53.57
Average Number of Shares 592.11
Share price of Heinz
Year Share Price No. of Share
2012 57.68 110.87
2013 72.50 109.83

Average Share Price 65.09
Average Number of Shares 110.35
Share price of Kraft Heinz
Year Share Price No. of Share
2016 87.32 1,216.48
2017 77.76 1,216.48
Average Share Price 82.54
Average Number of Shares 1,216.48
Calculation of Market Capitalisation
Particulars Heinz Kraft Kraft Heinz
No of shares 110.35 592.11 1,216.48
Share price 65.09 53.57 82.54
Market Capitalization 7,183 31,721 1,00,408
Therefore we can see that market cap of Heinz was $7183 million and that of Kraft was $
31721 million before merger. After merger, the market cap of the merger entity resulted in $
100408 million. The equation PV (Acquirer) + PV (Target) < PV (Combined Firm) is hence
satisfied.
The present values of the entities are calculated by taking into consideration the market price
of the shares and the number of shares outstanding at the year end. The value of the firm is
then calculated and compared.

References
Bainbridge, S. (2012). Mergers and acquisitions. New York: Foundation Press.
Filippell, M. (2011). Mergers and Acquisitions Playbook: Lessons from the Middle-Market
Trenches. John Wiley & Sons.
Galpin, T. and Herndon, M. (2014). The complete guide to mergers and acquisitions. San
Francisco, Calif.: Jossey-Bass.
Halibozek, E. and Kovacich, G. (n.d.). Mergers and Acquisitions Security. Burlington:
Elsevier.
Harrison, C. (n.d.). Make the deal.
Rosenbaum, J., Pearl, J., Perella, J. and Harri. (2013). Investment Banking: Valuation,
Leveraged Buyouts, and Mergers & Acquisition. John Wiley & Sons.
Sherman, A. (2011). Mergers & acquisitions from A to Z. New York: Amacom.
Snow, W. (2011). Mergers & Acquisitions For Dummies. John Wiley & Sons.