Background:

Philip Morris (PM) acquired General Foods Corporation (GF) as a first step towards its diversification plan. Further to this acquisition, PM acquired Kraft Inc. (KI) in December 1988. With these acquisitions PM became the worlds largest consumer product company.

Philip Morris & Corporate parenting

After more than 100 years of existence, PM attributed more than 70% of its sales and 90% of its profit to tobacco. However by 1980s the ill effects of tobacco were proven and as a result the domestic cigarette market was deteriorating. Considering the better margins and past success, PM was a cash rich company and had strong market position. However, market was skeptical about the growth due to mounting evidence smokings adverse health effects. Considering the market pressures and available cash, PM started with its diversification plan to become a corporate parent than just a tobacco company. Exhibit 1 explains how decision to corporate parenting and new market entry helped PM. Although PM was generating good revenue and profits through tobacco business, it was a good decision to diversify into other businesses. Such diversification not only reduced the revenue risks but also allowed PM to be associated with other product and that helped them to improve the brand image. Getting into Food business was in line with its strategy of stay close to home and it allowed it to get a better grip on its new business. Another decision that helped PM to successfully acquire companies in food industry was that it took time to learn about the industry. PM did not try to change everything or change the complete management with its own management right after acquisition. Rather it allowed acquired company to function and took time to understand the industry and operations in that industry. Further to its first acquisition, where PM learned about the industry, it acquired Kraft to get hold of market leadership. The second acquisition seemed in line with C3 model and extended its corporate parenting advantages. Further Exhibit 2 explains how food industry was attractive when PM decided to enter the industry.

Merger of Kraft and General Foods

As PM acquired Kraft after acquiring GF, it was better to merge both the companies so that maximum benefit of corporate parenting could be achieved. I believe the success of this merger can be attributed to following Richmans statements at the time of acquisition were assuring to Kraft executives and they were excited about the merger. Such attitude makes it easy for corporate parent to combine the two companies.

PM chose people from food industry to run this merger and did not try to force tabacco people into the system. This was comforting to both the companies as executives were reporting to people who understood their issues and working conditions. PM cultivated a transparent reporting structure (management without surprise) and maintained balance of reporting and working. i.e. less meetings to just report the conditions. This merger was more like two companies operating under one umbrella with significantly different (less overlap) product lines. This merger seems like a running two identities in parallel rather than two identities merging into one. Rather than deleting the part of companies it increased the size of companies and gave space to both the identities. Slowly and efficiently it changed the processes of the companies. PM realized the importance of window of opportunity to change the work culture and acted accordingly. However it ensured that these changes are slow enough to keep up with the operations. PM did not try to force the synergies on this merger. Rather it took time to understand the synergies and used internal committees to figure out the synergies. PM was fortunate to achieve more synergies than anticipated. This allowed them to reduce the post-merger performance pressure and use these synergies to their advantage. Post-merger structure allowed every pre-merger business unit (BSU) a new space. Very few business units were merged into other business units and there was less deletion of business units. This allowed a position for personnel in their own business units. PM took time and understanding to set up the new organization structure. At the same time it gave performance of personnel priority over base organization association. Such attitude gives confidence to performing talent. Synergies: since this merger generated significant synergies that were not anticipated before, it helped the merger to create even more value. The table 1 in the case clearly identifies synergies worth $ 175 mn and it is said that these were a positive surprise.

Benefits of Kraft, Inc

Kraft and GF were significantly different and each had its own benefits. Kraft had a strong presence in International market. Its international sales were more than 20% of the total sales. This strong presence allowed the merger to create a strong international presence. The post-merger division for international sales i.e. KGF international showed a significant growth (about $6061 mn by year 1990 from $4124 mn in 1988) Kraft had a stronger brand image than GF and this helped the merged identity to get more shelf space Krafts R&D regarding fat free products helped the merged identity to launch new products that generated significant revenue for the merged identity. Most of the senior positions were taken by Kraft people based on performance. Thus we can conclude that Kraft also brought significant management talent to the merged identity. Kraft brought in many product lines that were already market leader or had significant market share. This saved marketing spend and efforts for the new identity to create market leaders.

PM as a corporate Parent
The main contribution of PM in this merger is how PM handled the complete merger process. PM maintained its distance from the merger. It did monitor the progress of merger through top management meetings but it never tried to force its tobacco division management talent onto the merged identity. PM created the new organization structure that allowed space for both organizations and at the same time optimized the synergies by deleting unnecessary common elements. PM had significant experience in developing and maintaining the distribution channels and same was used to maintain the distribution of KGF PM chose better incentive scheme for KGF that was result oriented Based on the synergies mentioned in the case PM clearly passes the better off test for this acquisition.

KGF contribution to PM
Kraft brought in significant identifiable assets to the PM balance sheet i.e. from ~ 9000 mn in 1987 to ~ 25000 in 1988. Kraft allowed the merged company to increase its revenue significantly. Along with Kraft the merged identity had revenues of ~23,000 mn in 1989 compared to Tobacco revenue of ~18000 mn. i.e. first time PMs major revenue contributor was food division. This allowed PM to change its brand image from Tobacco Company to a corporate with diverse businesses. KGF allowed market to trust PM more. The P/E ratio for PM steadily increased after this acquisition. KGF allowed PM to build a company in food industry. Together with Kraft it allowed to earn better results for its earlier investment. As KGF revenue is growing and KGF is becoming major revenue contributor, its distribution network is growing and would start assisting PMs tobacco business

Future Path
Now that the merged identity has settled a bit with all minor changes have been implemented, PM should start focusing on bigger changes. It should start with the distribution channel as that would be the most important for the company. It should standardize the distribution channels such that for all external purposes company is seen as one identity i.e. KGF. It should have common inventory and distribution channel management systems that could fulfill retailers JIT demands After the distribution system it should resolve other issues such as sales force PM should ensure that the merged business has one single IT operating systems I believe the organization structure is working out well at this moment and that should not be touched until other major changes are finished.

PM has shown a good performance in integrating the food business and also developed its experience in mergers. Thus, as it did in 1990 when it acquired Jacobs Suchard, it should continue acquiring related business to expand its footprint in food industry. KGF should invest more in the R&D to get products that more health conscious and give more value to todays informed consumers.

Exhibit 2: Industry analysis Food Industry Rivalry among the existing firms

Since the raw material required for this industry was basic agriculture and dairy produce, supplier power was comparatively low as many suppliers were available for food industry.

The main barrier to entry was a strong distribution network. Considering the time required and efforts to develop such networks were high, the barrier to entry were moderate to high for this industry

Rivalry although competition was strong, companies were able to maintain their margins and grow indicating no price war behavior

The food products were easy to replace and that required brands to carry a wide range of product line. Overall substitutes were easily available

Since food is essential part of the life, consumers will buy the products as long as good quality is provided. Overall buyer power is low in this industry.

Exhibit 1: C 3 Model Corporate strategy

- PMs existing business were not attractive enough for expansion -PM wanted a new market entry but with stay close to home strategy -PM decided to go for complementary nontobacco consumer Product Company - New acquisition will allow PM to diversify its revenue sources and grow fast Consonance - It will allow PM to restructure its business to associate with other industry than Tobacco

-PMs idea behind acquisition was to use Corporate advantage Use its cash effectively in new industry to get synergy in personnel and experience rather through diversification better returns than other benefits in manufacturing or and revenue risk brand identity etc. reduction Coordination Coherence

- As experience and cash rich corporate, PM could allocate its resources in the acquired companies - PM had experience in consumer product (Tobacco) for more than a century - PM had people that were successful in running a corporation that it could leverage for new businesses -PM had an infrastructure that could be leveraged for new business.