Philip Morris/Kraft

9 Pages Posted: 21 Oct 2008

See all articles by Richard Brownlee

Richard Brownlee

University of Virginia - Darden School of Business

Frederick Garner

affiliation not provided to SSRN


This case requires students to prepare a pro-forma consolidated income statement and a pro-forma consolidated balance sheet to reflect the acquisition of Kraft by Philip Morris, accounted for as a "purchase." It also asks students to consider the income-tax consequences of the acquisition at both the corporate and shareholder levels.




On October 17, 1988, Hamish Maxwell, chairman and chief executive officer of Philip Morris Companies, Inc., placed a call to John Richman, chairman and CEO of Kraft, Inc., indicating that the next morning Philip Morris would commence a cash tender offer for Kraft shares with the intent of acquiring the company. The proposed transaction totaled $ 11.4 billion and would represent the second largest U.S. business combination to date, behind only Chevron's $ 13.3 billion acquisition of Gulf. Mr. Richman was shocked; only a few days earlier, the two men had attended a trade association meeting during which Mr. Maxwell had not even broached the subject. Although Kraft had instituted a number of poison-pill devices in anticipation of an unfriendly takeover, it had never expected the forthrightness of so formidable an acquirer as Philip Morris. In response to the news of the tender offer, Kraft stated that its board would meet to consider the offer and make a decision, but its primary goal was to remain independent.

Philip Morris/Kraft Combination

Philip Morris's acquisition of Kraft would create a company with over $ 38 billion in total sales and $ 20 billion in food sales, supplanting Unilever NV as the world's largest consumer-products company. Kraft, with its fast growth and strong profitability, was considered to be one of the world's premier food companies. The company was a market leader in natural and processed cheese, salad dressing, ice cream, and barbecue sauce, and it held a host of well-known brand names: Parkay, Miracle Whip, Velveeta, Breyers, Light'n Lively, and Philadelphia Cream Cheese. In addition, in just a few years, Kraft had built the second largest food-service company in the United States, giving it valuable access to the institutional food market.

Philip Morris considered Kraft a perfect fit with its own General Foods (GF) subsidiary, acquired for $ 5.2 billion in 1985. That Kraft was staffed with some of the industry's best management talent was very evident in the company's continued success in building its worldwide food franchise. Kraft brands were mostly complementary rather than directly competitive with those of General Foods, but it offered GF many opportunities to capitalize on Kraft's strengths. For example, as a result of its emphasis on dairy products, Kraft owned one of the industry's largest refrigerated distribution systems. In addition, with GF's Oscar Mayer brand, a combined company would hold the predominant share of the fast-growing freshly prepared foods market. Kraft's extensive food-service business would also improve GF's access to the institutional market.

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Keywords: acquisitions, assets, financial accounting, balance sheet, financial accounting, income statement, owners' equity

Suggested Citation

Brownlee, Richard and Garner, Frederick, Philip Morris/Kraft. Darden Case No. UVA-C-2071, Available at SSRN:

Richard Brownlee (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4800 (Phone)


Frederick Garner

affiliation not provided to SSRN

No Address Available

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