Hostile Takeovers Explained – The Kraft-Cadbury Case

In the world of mergers and acquisitions, not every deal is a warm handshake across a boardroom table. Some are more like a boardroom brawl. Welcome to the world of hostile takeovers — where acquisition is pursued not with consent or tender offer, but with power, proxy votes, and strategic pressure.

What Is a Hostile Takeover?

The term sounds aggressive — and that’s exactly what it is.

• Hostile = aggressive, without approval
• Takeover = acquisition of control

Put simply, a hostile takeover happens when one company tries to acquire another without the approval of the target company’s board of directors. Instead, the acquiring company goes directly to shareholders or uses tactics to gain control.

Let’s break it down with a hypothetical example:

Suppose Company A wants to take over Company B. It acquires 15% shares and lobbies minority shareholders to assign them proxy votes, gaining control of another 35%. Now holding 50% effective voting power, they can bypass the board and force a sale or strategic decision like merging with another company. If the board opposes, it doesn’t matter — the shareholders have spoken.

Sounds dramatic? Now let’s look at how this played out in real life with a sweet twist: the Cadbury-Kraft deal.

Case Study: Cadbury vs Kraft – A Chocolate War

In 2009, American food giant Kraft Foods (now known as Mondelēz International) launched a hostile takeover bid for British chocolate legend Cadbury. This wasn’t just a business move; it became a national debate in the UK, invoking emotional, ethical, and political reactions.

The Setup

• Cadbury was a proud, independent UK brand with a strong heritage and loyal consumer base.
• Kraft made a £10.2 billion offer — the Cadbury board rejected it outright, citing undervaluation.
• Kraft wasn’t ready to walk away. Instead, it began a classic hostile takeover strategy.

How the Hostile Takeover Unfolded?

Kraft employed a shareholder-centric approach, bypassing Cadbury’s board and directly appealing to shareholders with an improved offer:

Step-by-Step Breakdown:

Tactic	Description
Initial Stake Purchase	Kraft acquired a small stake in Cadbury to establish legitimacy and voting rights.
Public Offer	Kraft made a formal offer to all Cadbury shareholders, even after board rejection.
Sweetened the Deal	Kraft increased the offer price to win over skeptical investors.
Shareholder Pressure	Major shareholders, motivated by profit, supported Kraft’s bid, weakening Cadbury’s defensive stance.
Proxy Voting & Board Pressure	As shareholder support grew, Cadbury’s board was forced to reconsider the deal.

Eventually, Cadbury succumbed to the pressure, and in early 2010, Kraft successfully acquired Cadbury for £11.5 billion.

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Why It Was Hostile?

The key element of hostility wasn’t drama — it was the lack of initial consent from Cadbury’s board. Kraft didn’t follow the usual path of mutual agreement:

• No joint boardroom deal
• Direct pressure on shareholders
• Strategic financial offers and media campaigns

The moment shareholder votes crossed 50%, Kraft gained effective control. Once 75% acceptance was achieved, the acquisition was finalized.

What We Learn (For CA Final AFM)?

This case demonstrates the power of shareholder activism, the mechanics of hostile takeovers, and the fine line between strategic acquisition and aggressive expansion.

It is very important for the Acquiring company/firm to determine the maximum value of the Target Company/Firm, so as to know the maximum price it can offer to the shareholders of the Target Company.

Often, the purchase consideration by the Acquirer Company is paid in the form of exchange of its own shares in lieu of the shares of the Target Company, however, Kraft had to pay cash consideration as part of the acquisition of Cadbury — but not 100% as the board of Cadbury fought for the same.

Key Takeaways:

1. Hostile ≠ Illegal: It’s a legitimate (though aggressive) M&A route.
2. Shareholder Power Rules: Boards can resist, but voting rights determine fate.
3. Proxy Battles Matter: Convincing minority shareholders is a powerful tool.
4. Price is Persuasion: Increasing offer prices can flip sentiment.
5. Ethical & Strategic Fallout: Even if legal, hostile takeovers often attract public scrutiny and regulatory tension.

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Defensive Strategies Against Hostile Takeovers (As per CA Ashish Kalra)

Divestiture

• Break up large business units into smaller independent entities.
• Reduces attractiveness of the company to the acquirer.

Crown Jewels

• Sell or transfer the most valuable assets (crown jewels) to reduce acquisition appeal.
• Especially effective when key assets make the company desirable.

Legal Strategy

• Seek court orders to block or delay the hostile takeover on valid legal grounds.
• Refusal to Transfer Shares: Deny the registration or transfer of shares to the hostile acquirer, subject to legal validity.

Tactical Strategy (White Knight)

• Invite a friendly/accommodative company (White Knight) to acquire or merge instead of the hostile bidder.
• Example discussed: Oberoi Group sought support from Mukesh Ambani.

White Squire Strategy

• Offer a large block of shares to a friendly investor who doesn’t want control but will prevent hostile acquisition.

Pac-Man Strategy

• Target company makes a counter-bid to acquire the hostile acquirer (Pac-Man Defense).
• Useful if the target company is financially strong.

Corporate Charter Amendments

• Amend Articles of Association to require supermajority (e.g., 80%) for key decisions like mergers.
• Makes hostile acquisition legally harder.

Golden Parachute

• Offer hefty severance packages to top executives if they’re removed due to takeover.
• Discourages acquirer due to high cost.

Silver and Tin Parachutes

• Provide termination benefits to mid-level and lower-level employees.
• Increases total acquisition cost and complexity.

Poison Pill Strategy

• Issue convertible debentures or preference shares that dilute ownership if takeover occurs.
• Makes acquisition economically unattractive.

Greenmail

• Buy back shares from a potential hostile acquirer at a premium to remove the threat.
• Often negotiated directly with the greenmailer.

Put Option Strategy

• Debt holders have a right to sell back bonds if control changes.
• Triggers a liquidity crunch, discouraging acquirers.

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Final Thoughts

Hostile takeovers, like the Kraft-Cadbury saga, offer rich lessons in strategic finance, shareholder rights, corporate governance, and ethical boundaries in business. For CA Final students, this is not just theory — it’s real-world finance in action.