Final PDF to printer Mondelēz International’s Diversification Strategy case 9 in 2017: Has Corporate Restructuring Benefited Shareholders? JOHN E. GAMBLE Texas A&M University–Corpus Christi Mondelēz International was among the world’s largest range of the company’s shares in 2011 was relatively snack foods makers with seven billion-dollar brands unchanged from that in 2007 when it became an including Cadbury, LU, Milka, Cadbury Dairy Milk, independent company after a spin-off by the Altria Trident, Nabisco, and Oreo. The company’s brand Group (formerly Philip Morris). Some of the lack- portfolio in 2017 included another 44 well-known luster growth in its share price could be attributed to brands such as Triscuit, Toblerone, Wheat Thins, the economic slowdown that began in 2007, but the Ritz, Philadelphia, Nilla, BelVita, Chips Ahoy!, and company’s upper management and its board believed Tang. Even though some of its brands had histories the underlying cause of its poor market performance dating over 100 years, the company had come into was a corporate strategy that was not sufficiently existence only in 2012 after a corporate restructur- focused on growth. ing at Kraft Foods. Kraft Foods Inc. was the world’s The company implemented a corporate restruc- second-largest processed foods company in 2012 with turing in 2012 to create a high-growth global snacks annual revenues of more than $54 billion in 2011. The business and a high-margin North American gro- company’s global lineup of brands included Maxwell cery business. The new snacks-oriented company House, Oreo, Cadbury, Chips Ahoy!, Honey Maid, would include all of Kraft Foods’s business units and Dentyne, Velveeta, Cheez Whiz, Oscar Mayer, and brands in Europe and developing markets, plus its Kraft. In all, the company had 12 brands with annual U.S. snacks business and would be named Mondelēz revenues exceeding $1 billion each and approximately International. Mondelēz (pronounced mohn-dah- 80 brands that generated annual revenues of more Leez) was a newly coined word that drew on “mun- than $100 million each. The majority of Kraft Foods’s dus,” the Latin root for the word world, and “delez,” brands held number-one market shares in their prod- which was meant to express “delicious.” The creators uct categories, which created strong business units in of the name added “International” to capture the North America, Europe, and developing markets. global nature of the business. The remainder of the Even though Kraft Foods’s business units pro- company’s Kraft Foods North American business duced strong profits, slow growth in the processed unit would become known as Kraft Foods Group foods industry in North America and parts of Europe upon completion of the spin-off. had restricted the company’s ability to deliver increases in shareholder value. In fact, the trading Copyright © 2017 by John E. Gamble. All rights reserved. gam27636_case09_335-345.indd 335 01/16/18 11:57 AM Final PDF to printer 336 Part 2 Cases in Crafting and Executing Strategy By 2017, Mondelēz International had success- Drawing focus on the need for improved performance, fully achieved its internationalization goals, with activist investor William Ackman took a $5.5 billion 76 percent of its revenues generated outside the stake in the company in July 2015. Ackman believed United States in 2016. But the United States remained that management should dramatically improve the the company’s largest market, making up 18 percent, company’s performance or that the company should be 21 percent, and 24 percent of its sales in 2014, 2015, a candidate for acquisition by a better-performing indus- and 2016, respectively. No other country accounted try rival. Ackman increased his stake in the company for 10 percent of Mondelēz’s sales. in January 2017 to 6.4 percent of outstanding shares. However, the overall effectiveness of the corporate A summary of Mondelēz International’s financial per- restructuring was questionable with the company’s formance from 2012 to 2016 is presented in Exhibit stock performance largely tracking the S&P 500 and 1. The performance of the company’s stock perfor- its revenues in decline. The company’s income from mance between July 2012 and July 2017 is presented continuing operations grew from 2014 to 2015, but only in Exhibit 2. because of a $6.8 billion pretax gain from the spin-off of its coffee business in France. Absent a large asset sale in 2016, the company’s operating income fell from $8.8 bil- Company History lion in 2015 to $2.6 billion in 2016. The company’s total Mondelēz International’s marquee brands all had net revenues had declined from $34.2 billion in 2014 rich histories that began with the efforts of entrepre- to $29.6 billion in 2015 and to $25.9 billion in 2016. neurs who were inspired to launch new businesses EXHIBIT 1 Financial Summary for Mondelēz International, Inc., 2012–2016 (in millions, except per share amounts) 2016 2015 2014 2013 2012 Continuing Operations Net revenues $ 25,923 $ 29,636 $ 34,244 $ 35,299 $ 35,015 Earnings from continuing operations, net of taxes 1,659 7,291 2,201 2,332 1,606 Net earnings attributable to Mondelēz International: Per share, basic 1.07 4.49 1.29 1.30 0.90 Per share, diluted 1.05 4.44 1.28 1.29 0.88 Cash Flow and Financial Position Net cash provided by operating activities 2,838 3,728 3,562 6,410 3,923 Capital expenditures 1,224 1,514 1,642 1,622 1,610 Property, plant and equipment, net 8,229 8,362 9,827 10,247 10,010 Total assets $ 61,538 $ 62,843 $ 66,771 $ 72,464 $ 75,421 Long-term debt 13,217 14,557 13,821 14,431 15,519 Total Mondelēz International shareholders’ equity 25,161 28,012 27,750 32,373 32,276 Shares outstanding at year end 1,528 1,580 1,664 1,705 1,778 Per Share and Other Data Book value per shares outstanding $ 16.47 $ 17.73 $ 16.68 $ 18.99 $ 18.15 Dividends declared per share 0.72 0.64 0.58 0.54 1.00 Common stock closing price at year end 44.33 44.84 36.33 35.30 25.45 Number of employees 90,000 99,000 104,000 107,000 110,000 Source: Mondelēz International, Inc., 2016 10-K. gam27636_case09_335-345.indd 336 01/16/18 11:57 AM Final PDF to printer Case 9 Mondelēz International’s Diversification Strategy in 2017 337 EXHIBIT 2 Performance of Mondelēz International, Inc., Common Shares, July 2012–July 2017 (a) Trend in Mondelēz International’s Common Stock Price Stock Price ($) Year (b) Performance of Mondelēz International’s Stock Price versus the S&P 500 Index +% +% Mondelez Stock Price +% ) = +% +% +% S&P +2% cent Change ( +% Per +% −% Year that could provide consumers with value and support the newly created Kraft Foods Group for every three for their families. But Mondelēz International, as a shares of Kraft Foods Inc. owned by the shareholder. corporate entity, resulted from the 2012 spin-off of At the conclusion of the spin-off, Kraft Foods Inc. Kraft Foods’s North American grocery business to changed its name to Mondelēz International, Inc. shareholders. Under the terms of the proposal, each and its ticker symbol became MDLZ. The KFT ticker Kraft Foods Inc. shareholder received one share of symbol was retired after the transaction. Shares of gam27636_case09_335-345.indd 337 01/16/18 11:57 AM Final PDF to printer 338 Part 2 Cases in Crafting and Executing Strategy the newly formed Kraft Foods Group would trade drops, Clorets breath-freshening gum, and Trident, under the ticker symbol KRFT. Dentyne, and Stride chewing gum. Kraft Foods’s broad portfolio of brands resulted By 2011, Kraft Foods remained the world’s second-­ from a series of mergers and acquisitions dating to largest food company, with revenues of $54.4 billion. 1928 when Kraft Cheese Company merged with Phe- The 2012 restructuring was designed to create a high- nix Cheese Corporation, which was the maker of Phil- growth global snacks business and a high-margin­ adelphia cream cheese. The proliferation of brands North American grocery business. Kraft Foods owned by Kraft accelerated in 1988 when Philip Group began its operations with about $19 billion in Morris Companies purchased Kraft for $12.9 billion. 2011 revenues and retained all of the company’s busi- Philip Morris’s acquisition of Kraft was part of a ness operations and brands in North America such corporate strategy focused on diversifying the com- as Kraft macaroni and cheese dinner, Capri Sun, and pany beyond its well-known cigarette business that Miracle Whip salad dressing. Mondelēz International included the Marlboro, Virginia Slims, Parliament, began its operations with about $35.8 billion in 2011 and Basic brands. At the time of the acquisition of revenues and included the U.S. Snacks ­divisions and Kraft, Philip Morris had already acquired brands all Kraft Foods ­businesses in Europe and develop- such as Oscar Mayer, Tang, Jell-O, Crystal Light, and ing markets in Eastern Europe, Asia/Pacific, Middle Post cereals through the 1985 acquisition of General East/Africa, and South America. Foods for $5.6 billion. The addition of the company’s It was expected that the new company could Nabisco brands came about through Philip Morris’s achieve industry-leading growth by competing in $18.9 billion acquisition of that company in 2000. high-growth categories with ample opportunities Kraft Foods’s return to independence began in 2001, for product innovation. Mondelēz would focus on when Philip Morris (renamed Altria Group in 2003) its powerful, iconic global brands such as Cadbury, began the divestiture of its non–tobacco-related busi- Milka, Toblerone, Oreo, LU, Tassimo, and Jacobs in nesses to protect those business assets from tobacco all international markets, while selectively promoting litigation.