Harvard Case - Philip Morris Companies and Kraft, Inc.
"Philip Morris Companies and Kraft, Inc." Harvard business case study is written by hard S. Ruback. It deals with the challenges in the field of Finance. The case study is 21 page(s) long and it was first published on : Mar 29, 1989
At Fern Fort University, we recommend that Philip Morris Companies proceed with the spin-off of Kraft, Inc. This strategic move will unlock shareholder value by separating the two distinct businesses, allowing each to focus on its core competencies and pursue growth opportunities independently. The spin-off will also provide greater flexibility in capital allocation and financial strategy for both companies.
2. Background
This case study examines the strategic decision facing Philip Morris Companies in 1997: whether to spin off its food and beverage subsidiary, Kraft, Inc. Philip Morris, a tobacco giant, had acquired Kraft in 1988, creating a conglomerate with diverse business interests. However, by the late 1990s, investors began to question the value of this conglomerate structure, favoring focused companies with clear strategic direction.
The main protagonists in this case are:
- Philip Morris Companies: A global tobacco conglomerate seeking to maximize shareholder value and navigate a changing market landscape.
- Kraft, Inc.: A leading food and beverage company with a strong brand portfolio and established market position.
- Investors: Seeking higher returns and a clear understanding of the value proposition of each company.
3. Analysis of the Case Study
This case can be analyzed through the lens of corporate strategy, specifically focusing on the portfolio management of diversified businesses. The key question is whether the combined entity of Philip Morris and Kraft is creating more value than the two companies would generate independently.
Financial Analysis:
- Financial statements analysis: Examining the financial performance of both Philip Morris and Kraft reveals significant differences in growth potential, profitability, and risk profiles. Kraft, with its consumer staples business, enjoys more stable earnings and lower risk compared to Philip Morris's tobacco business, which faces regulatory and health concerns.
- Valuation methods: Applying valuation methods like discounted cash flow (DCF) analysis and comparable company analysis can help estimate the intrinsic value of each company separately. This analysis can reveal whether the combined entity is trading at a discount or premium to its intrinsic value.
- Capital budgeting: The spin-off would allow both companies to pursue independent capital budgeting decisions, allocating resources more efficiently to projects aligned with their respective growth strategies.
Strategic Considerations:
- Core competencies: Philip Morris and Kraft operate in distinct industries with different core competencies. Separating them allows each company to focus on its core strengths and develop specialized strategies.
- Growth opportunities: The spin-off provides greater flexibility for both companies to pursue growth opportunities in their respective markets. Kraft can focus on expanding its global footprint and developing new product lines, while Philip Morris can explore new markets and technologies in the tobacco industry.
- Risk management: Separating the two businesses allows for more effective risk management. Kraft's lower risk profile provides investors with a more stable investment option, while Philip Morris can focus on mitigating risks associated with the tobacco industry.
4. Recommendations
We recommend that Philip Morris Companies proceed with the spin-off of Kraft, Inc. This recommendation is based on the following key actions:
- Develop a detailed spin-off plan: This plan should include the legal structure, tax implications, and timeline for the separation. It should also address the allocation of assets, liabilities, and employees between the two companies.
- Communicate the spin-off to stakeholders: Philip Morris should communicate the rationale for the spin-off to investors, employees, and other stakeholders. This communication should highlight the benefits of the separation and address potential concerns.
- Prepare both companies for independence: Both Philip Morris and Kraft should be prepared to operate independently, with separate management teams, financial strategies, and corporate governance structures.
5. Basis of Recommendations
This recommendation is based on the following considerations:
- Core competencies and consistency with mission: The spin-off allows both companies to focus on their core competencies and pursue strategies aligned with their respective missions.
- External customers and internal clients: The spin-off provides greater flexibility for both companies to address the needs of their respective customer bases.
- Competitors: The spin-off allows both companies to compete more effectively in their respective industries, free from the constraints of a conglomerate structure.
- Attractiveness: The spin-off is expected to unlock shareholder value by allowing each company to trade at a higher multiple based on its individual performance and growth potential.
6. Conclusion
The spin-off of Kraft, Inc. represents a strategic opportunity for Philip Morris Companies to unlock shareholder value, enhance operational efficiency, and position both companies for long-term growth. By separating these distinct businesses, Philip Morris can create a more focused and agile organization, while Kraft can pursue growth opportunities in the food and beverage industry.
7. Discussion
Other alternatives considered include:
- Maintaining the conglomerate structure: This would have continued to face investor skepticism and limit the growth potential of both businesses.
- Selling Kraft to another company: This would have resulted in a significant capital gain for Philip Morris but would have also limited its future involvement in the food and beverage industry.
Risks:
- Market reaction: The spin-off may initially be met with uncertainty from the market, potentially impacting the stock prices of both companies.
- Integration challenges: Both companies may face challenges in integrating their operations and establishing new corporate governance structures.
- Regulatory hurdles: The spin-off may face regulatory scrutiny, potentially delaying the process.
Key assumptions:
- The market will recognize the value of the spin-off and reward both companies with higher valuations.
- Both companies will be able to successfully integrate their operations and achieve their respective growth targets.
- The regulatory environment will not pose significant obstacles to the spin-off.
8. Next Steps
The following steps should be taken to implement the spin-off:
- Develop a detailed spin-off plan: This plan should be completed within the next six months.
- Communicate the spin-off to stakeholders: This communication should be initiated within the next three months.
- Prepare both companies for independence: This process should be completed within the next twelve months.
The spin-off of Kraft, Inc. is a significant strategic decision for Philip Morris Companies. By carefully planning and executing the separation, Philip Morris can unlock shareholder value and position both companies for long-term success.
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Case Description
Gives students the opportunity to explore the effect of substantial free cash flow on corporate acquisition and operating strategies. Students are also given the opportunity to extract information from the common stock prices of the participating firms. A variety of valuation techniques are employed to assess the plausibility of a restructuring plan.
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