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CASE STUDY: The Philip Morris-Kraft Merger; Why Bigness May Not Matter - New York Times

Business Day
By CLAUDIA H. DEUTSCH Published: October 23, 1988

CASE STUDY: The Philip Morris-Kraft Merger; Why Bigness May Not M

The case study method of teaching business requires students to study a corporation and suggest ways to solve its prob same approach, but with a twist: The subject is the proposed Philip Morris-Kraft merger, and the ''students'' - in this ca analysts and consultants - were asked to predict the results.

Less than a week ago, the hottest topic in the food industry - and on Wall Street - was Grand Metropolitan's $5.2 billio Company. Now it is all but forgotten, dwarfed in both size and interest by what is happening at the huge tobacco-cumMonday, the Philip Morris Companies made a surprise $11.5 billion bid for the Kraft Company. And three days later, R target of a proposed $17 billion leveraged buyout by an investor group led by its own executives.

In terms of size, the RJR deal dwarfs both of the others. But in terms of potential impact on the food industry, the Phil would raise the most dust. If the RJR buyout goes through, the result will probably be a smaller company, as the invest their debt. But if Philip Morris lands Kraft - and there are few people betting against it - the merged company will be a

Through its General Foods subsidiary, Philip Morris already owns such brands as Maxwell House coffee, Jell-O and Bi Kraft acquisition would give it a huge dairy presence as well, with such well- known brands as Breyer's, Sealtest, Break The combined company would be the world's largest consumer goods company, displacing Unilever, the British-Dutch in sales last year, seemed to have a lock on the top spot.

The prospect makes some economists bemoan what they see as yet another nail driven into the coffin of anti-trust enf means that the American food industry is finally recognizing that, to compete with foreign giants in global markets, it m concentrated than it now is.

But once the hoopla has died down, will the merger make a difference to anyone other than Philip Morris and Kraft sha

Probably not, at least in the short term. Kraft is a profitable company, and Hamish Maxwell, Philip Morris's chief exec leaving well enough alone. Indeed, he has already promised that he will not break up Kraft, fire its employees, or even Illinois to New York, Philip Morris's home.

The combined company will certainly have formidable clout among supermarkets. But then, General Foods and Kraft, exert heavy influence in their own right. Their product lines do not overlap much, so the merger is unlikely to yield pro merged company will have a powerful distribution network, particularly for fresh foods, but few food industry executiv sort of anticompetitive effect. Even small supermarket chains, which are very dependent on big manufacturers for coo price promotions, do not expect much change. ''The merger just won't have much impact,'' said Oscar A. Smith Jr., own Inc., a $37 million chain in Baltimore.

The one group that seems likely to be affected most by the merger - and, in fact, by any merger of this size - is the man Combined companies do not need more than one accounting firm, and often whittle down the number of advertising a and executive recruiters that they use. Executive recruiters, in fact, are particularly hard hit by megamergers, in that th prevents them from recruiting candidates from companies they already work for. That sort of arrangement is usually w basis. But if Philip Morris wants to, it can probably make General Foods and Kraft off-limits to any recruiter with whom

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CASE STUDY: The Philip Morris-Kraft Merger; Why Bigness May Not Matter - New York Times

would severely hamper that recruiter in doing a search for, say, Campbell Soup or Heinz.

Right now, academicians, food industry executives and service-sector people are pondering the ramifications of a com Kraft. Following are some of their early conclusions. Herbert M. Baum: President, Campbell USA.

I'm tickled pink that this is happening. The biggest food conglomerates were Nestle and Unilever, and they are both fo give us an American- owned food company that would be the biggest of them all. I'm chauvinistic about America, and

And it doesn't really change anything as far as competition goes. There was absolutely no difference in the marketplac over General Foods. And General Foods and Kraft are so big anyway that I can't see how it would make a difference in If they keep the two companies separate managerially, then really nothing has changed. And if they do try to combine take them two years before the executives could even find their new offices.

That doesn't mean the merged company will not be an awesome competitor. Over the last three, four years Kraft has a distributors, and that is a strength that really supplements General Foods as it pushes into refrigerated products. If the more stores and can get there faster than us, we'll have a problem. But then, Philip Morris had fresh foods distribution Meyer subsidiary's business in deli meats. And we are in the bakery business, through Pepperidge Farm, so we unders mentality, too.

Food industry consolidation is good for the consumer. You tend to think that the lessening of competition drives price Manufacturers like us throw our marketing dollars at in-store promotions and price reductions. Well, the bigger the co has to throw against price reductions. And even if their combined dollars drove other American companies out of, say, the Japanese or the Koreans or some European country will find a way to come here and do it cheaper. The global econ companies to keep prices low. It's been predicted for years that someday there will be four or five food companies in th bad. Two would be bad; five or six would not.

I wouldn't want to see Washington try to stop this merger. Not many of their products overlap, so it isn't minimizing c of the store. And after all, we may be in a position someday to buy someone very big. Walter Adams: Professor of econ University, and author of ''The Bigness Complex.''

During the Reagan Administration the antitrust laws have been subjected to a systematic policy of euthanasia. That is antimerger law, the Clayton Act, Section 7, which simply hasn't been enforced. We're seeing corporate marriages betw 500, and that means that corporate dinosaurs are free to roam the Darwinian jungle.

There is an opportunity cost to playing the merger game. It is in the form of factories that are not built, R. & D. that wa not created. A merger doesn't create any new values, any new real capital. It consists of an exchange of pieces of paper York Stock Exchange.

From the point of view of building a strong American economy, this sort of merger seems little short of madness. Com buying up other companies, and the 1980's divesting the companies they bought. So today Philip Morris acquires Kraf oops, that was a mistake, we'll get rid of Kraft. What has been done for the American economy?

There is a theory of antitrust that says don't take any action unless there are predatory practices. That's wrong. The me field will intimidate existing competitors and discourage potential new competitors. We prohibit people from carrying street; we don't wait for them to shoot someone. That's why in 1967 the Justice Department wouldn't let Procter & Gam

The way to fight the Japanese and the newly industrialized countries is to build state-of-the-art facilities that can stand this in the steel industry. Time was when the West Coast steel market for products like rods and bars and structural sh

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CASE STUDY: The Philip Morris-Kraft Merger; Why Bigness May Not Matter - New York Times

Japanese; today it's dominated by independent mini-mills. The mini-mills have said they don't need protection from f presumably efficient because of their size, have been asking for ''temporary'' protection since 1968.

The Philip Morris-Kraft merger will send a signal to the corporate community that it can continue merging to its heart' the beat is looking the other way, even though a strong American economy may require that we do exactly the opposite game. Katheryn R. Harrigan: Director of Strategy Research Center, Columbia Business School.

I don't think such mergers are bad for the American economy at all. The antitrust laws as they were interpreted histori correct. In 1890 we were a growing economy; today, we are a mature industrialized economy, operating in a global en constitutes monopoly now? You have to define the boundaries beyond the continental United States.

And all of the European companies are over here with their shopping carts now, frantic over 1992 and looking to acqui These guys have deep pockets and patient capital. And if we have too much foreign ownership, ultimately, the innovat will occur someplace else. We don't want to become a nation of drones; we want the thinkers within our boundaries.

Companies like Philip Morris can see it coming, and that's why they are getting together now. Industries like food still do. There are too many firms doing the same thing to be effective at moving food from the farm through processing an on a global basis. Mergers like this improve allocated efficiency. I don't think we're having a significant loss in the choi offering consumers a choice. But if you are more efficient you can pay better wages to employees, and keep prices from

This is not just economy of scale, this is economy of scope. It is natural for a food company to want many brands in its every little nuance that the customer wants. If it can deal with just a few suppliers and distributors yet sell a large numb product to consumers at lower prices. Lynn Tendler Bignell: Principal, Gilbert Tweed Associates.

Every time there is a merger, competition for business becomes more intense, because there are fewer clients to go aft recruit from. We need to cover our backs a lot more than we had to in the past. You see a lot of recruiters turning into f consultants, at least partly in hopes of strengthening the bond with the client so that if the client is acquired, this one fi

Off-limits policies are a problem for any recruiter. I don't understand how specialty practices are going to survive in a c company - and there are several - specializes in recruiting, say, consumer products marketing people, then every big m companies from whom to recruit. And a merger like this one can be a real problem for anyone who has assignments fr Foods or Kraft.

This kind of megamerger changes the competitive picture for generalist recruiting firms. In the past, the big firms main talent for and from huge companies. But with mergers putting so many companies on their off-limits list, their ability resources to large companies is growing limited. So they are going after small companies, after the not-for-profit secto that smaller firms used to have to themselves.

But in one sense the whole mergers and acquisitions trend has been good for all of us. Executives have no idea who wi tomorrow, and that has made all of them far more receptive to headhunters' calls than they were in the past. John M. M analyst, Prudential-Bache.

Consolidation is a very healthy trend in the food industry. Unless your name is Paul Newman, you can't get into the su spending $100 million to develop a new brand and push into new categories. To compete effectively you have to be big

The beauty of the food companies used to be that they sold to a highly fragmented industry. But there have been a lot o supermarkets have been gaining power over the food companies via scanners and ways they can measure profitability mergers like this one might again place the leading food manufacturers in a position of dominance. The merged comp shelf space they want, often without paying slotting allowances, payments they often have to make just to get products

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CASE STUDY: The Philip Morris-Kraft Merger; Why Bigness May Not Matter - New York Times

This merger again signals the value of No. 1 brands today. The value of a steady earnings stream has increased and no stream like a good consumer brand. And a steady earnings stream is what you need to make debt payments.

This merged company will have close to 10 percent of the $230 billion domestic food industry. And, since Kraft domin refrigerated foods sector of the supermarket, this merger will make General Foods strong not only in the dry and froze but in the refrigerated part too. More than 40 percent of Kraft's earnings came from refrigerated products, and that's w This gives General Foods the distribution system it needs in that sector.

This is an industry where only the strongest can survive, and those companies with No. 1 brands and leading positions returns. This is an environment where the strongest get stronger and the weak get weaker. Combining these companie that already exists. Kenneth Peskin: Chairman and chief executive, Supermarkets General Corporation.

In the retail business, we have to look at everything from the perspective of our customers. And do you think most of t Morris owns General Foods? My suspicion is, no. What customers are interested in is brands like Maxwell House or P

There really is no way this merger will be harmful to those brands. If it turns out just to be a big financial deal, its impa Morris is spending an awful lot of money buying Kraft, and it's going to be driven to get a return for that money. Wellreturns, and I think Philip Morris will encourage more product innovation and more aggressive marketing of brands. K company, and now it is likely to offer even better support to retailers, in the form of assistance with displays, guarante such. And I love the idea of Kraft helping General Foods distribute some of its products.

I've heard people talk about how such huge companies can force retailers to give them better shelf space, or how big re suppliers with taking their goods off the shelves. The idea that a retailer can say it is not going to stock a brand that the ridiculous. And the idea that General Foods or Kraft or any combination of the two will make us think that our relation important than our relationship with the customer is equally silly.

In fact, I think the merged company will be responsive to retailers' suggestions. We are strong believers that everythin freshness-dated, and that tricky coupons - ones where the customer has to write things in to get a discount - don't mak to us now, because they have so much at stake.
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