Failed mergers: Re-learning Old Lessons

The FT’s ‘Big Read’ on Kraft Heinz’s failed bid for Unilever contains many lessons for senior executives and their advisers about the dangers of mega-mergers.
Paul Lewis
Feb 23, 2017

The highly-leveraged, US$143bn offer, that would have created the world’s number two consumer goods company, breached many of the fundamentals that underpin any effective merger.

From the start, crucial signals were missed. The initial meeting between Unilever CEO Paul Polman and Alexandre Behring, chairman of Kraft Heinz, was not as friendly as the latter believed. Early misunderstandings between corporate leaders typically sours the deal later on, often when it’s too late to stop it. In this instance it was particularly important given that Warren Buffett, who formed part of the buying group, avoids hostile bids.

In a true merger, as opposed to a hostile acquisition, both sides must see the benefits—especially when a target company is so much larger than its acquirer. But the deal logic appeared one-sided: much of its justification lay in the scope for ‘rationalising’ Unilever’s packaged foods business. As the FT reported, one person close to Unilever observed: ‘The deal made perfect financial and strategic sense for them, but absolutely none for us.’

Politically tone-deaf There was an important political dimension that was also missed. A transaction this size would inevitably attract official attention, and likely job cuts was hardly going to endear Kraft Heinz to the UK authorities. Kraft’s UK reputation was already tarnished, after it acquired chocolate-maker Cadbury in 2010 and broke explicit promises on investment and jobs. Perhaps more important—though apparently unnoticed by the US-based dealmakers—was the changing political mood, post Brexit, that has made the UK Government less disposed to foreign control, especially of one of Britain’s largest and oldest corporations.

But the most vital M&A lesson that has to be learnt—and one too often ignored during heady boardroom takeover discussions—is that of clashing company cultures. Paul Polman is known for his focus on longer-term growth over short-term profit, investing in its brands and promoting environmental sustainability. The company has long seen itself—and business generally—playing an important role in broader society. Kraft Heinz’s private-equity partner 3G is known for slashing costs and jobs to raise profit margins, which critics say starves businesses of essential investment.

Kraft Heinz did heed one lesson from the long history of failed M&A deals: when the red signs were flashing, it pulled out quickly. After all, there will surely be other deals to pursue.

Paul Lewis

Editorial Director at Headspring