Certain cycles are immutable. There’s night-and-day, for starters. There’s also birth-to-death. Then there’s the whole notion of the economic cycle, even though that does vary in each new incarnation. And when it comes to finance, there is acquisition and divestiture — otherwise known as the feeding trough for bankers.
Action (in either direction) is the sustenance of the M&A banker — and it comes with a rotating rationale for building companies and then breaking them apart. Today, conglomeration is crucial. Tomorrow, a focus on “core competency.”
This week’s candidate in one of Wall Street’s favorite games: Kraft Foods (KFT). After years of building up the joint, today the company announced a 180-degree turn. What was crucial yesterday is evidently no longer important.
Kraft says it plans to split the company into two parts — one-third North American Grocery and two-thirds Global Snacks. They’re using that old chestnut, the sum-of-the-parts analysis, to justify the move. Which is, of course, totally contradictory to their stated plan as of a year ago. It’s just basic hypocrisy, people.
Here’s what Kraft CEO Irene Rosenfeld said in 2010: “I kind of like the combination of some very strong cash generating businesses [and] some very nice growth businesses…”
Now, just a year later — a time of the exact same economic uncertainty — Rosenfeld clearly feels much differently. Rosenfeld now thinks that they should separate the slow-growing cash-flow-generating grocery businesses from the fast-growing, money-hungry snack businesses. Push the debt onto the grocery folks, and you’ve suddenly got a hot snack seller growth story!
The market has cheered the news, sending Kraft shares up Thursday in defiance of an overall swoon. According to the Wall Street Journal, a Kraft spokesman had this to say: “We have been evaluating this type of transaction over the past several years, and analysts and investors have also suggested this.” Wait, what? They had been evaluating this “type” of transaction while they continued to buy other companies, including the early 2010 purchase of Cadbury? Can’t these people figure out whether they want to bulk up or slim down?
The Journal also pointed to other recent players in the divestiture game. Oil giant ConocoPhillips (COP) recently decided that vertical integration makes no sense. It should actually be split into two companies — one that produces oil, and one that refines it. According to the Journal, chief executive Jim Mulva thinks the company’s core businesses would be more competitive and highly valued as separate companies. So building it up was a bad idea, in other words.
Back to Kraft. Of course analysts had “suggested this.” That’s called setting up banking dollars, people. And this is only the latest in a long history of structural rearrangement for Kraft: After decades of acquisitions and divestitures, the company was merged with Nabisco Holdings by Philip Morris (now Altria (MO)) in 2000, before being spun out in an IPO in 2001. In the years that followed, it sold its sugar confectionary business Wrigley before buying British confectionary Cadbury for nearly $20 billion last year (against the wishes of its most notable shareholder, Warren Buffett). In between there were countless other shopping sprees and fire sales — enough to fund an army of well-paid bankers. (The lucky winners of the latest jackpot are Centerview Partners, Evercore Partners (EVR), and Goldman Sachs (GS).)
This time around, though, I’m more inclined to think that the Kraft executive team has decided on the age-old way to keep their jobs for another 18 months—by initiating a a large-scale restructuring. What board in their right mind would fire an executive in the midst of something so crucial?
Barclays analyst Andrew Lazar put out a quite thoughtful (and lengthy) piece on the rationale behind the move. He’s not entirely sure it’s the right thing to do—his prediction for stock prices of the two companies is $23 for the growth half and $16 for the cash cow half—hardly more than the $35 target he had for the combined company. So, wait. This transaction doesn’t need to happen from an obvious money standpoint? It’s not like the “market” doesn’t “understand” the Kraft “story.” Oh, don’t be naïve. This isn’t about the market, the story, or even shareholders. It’s just a bunch of bankers and executives doing their thing. No surprise there.