Kraft's Sugar Rush

Irene Rosenfeld hasn't been around Kraft Foods' (KFT) suburban Chicago headquarters much lately. The door to her wood-paneled office is kept closed. Her desk is bare. Rosenfeld has grabbed her leather folders of meticulously compiled research and is traveling to London and around the U.S. in Kraft's Gulfstream (GD) jet. These trips weren't supposed to be urgent or secretive, but they've become both as Rosenfeld scrambles to reassure shareholders that her surprising $17 billion hostile bid to buy British candymaker Cadbury (CBY) will be good for them.

Rosenfeld, 56, has led Kraft since 2006 and has worked there for almost her entire professional life. She can be pretty persuasive. Early on she told her bosses that commercials for Kool-Aid should be aimed at kids (not mothers), and that Jell-O could be made modern with new flavors. In the late 1990s, she turned around Kraft's business in Canada; troubled as it was when she arrived, the first thing she had to do was show skeptical colleagues that an American could understand Canadian consumers. As chief executive, she has won most employees' cooperation for a wrenching reorganization. "When she is trying to persuade you of something, she will be relentless in coming back with facts and showing you she has the support of other people," says John Bowlin, who ran Kraft North America in the mid-1990s. "She will be totally emotionally and intellectually committed to her idea."

Now Rosenfeld must summon all of her powers as she takes on her biggest marketing challenge yet: selling the Cadbury deal to shareholders. Her task is all the more difficult because she has alienated her biggest shareholder and one of the world's most influential investors, Warren Buffett.

So confident was Rosenfeld of the deal's potential to transform Kraft into a global juggernaut that she told investors on Dec. 18 she planned to issue new stock to help pay for the purchase. The subtext: She might be willing to raise her original $17 billion bid, which Cadbury management had complained was too low. But Buffett didn't like the idea of paying more. On Jan. 5 he issued a press release warning Rosenfeld not to sell more stock or increase her price, even if other bidders emerge. It was an unusually public smackdown for an investor used to operating behind closed doors. Rosenfeld and Buffett declined to comment.

Now, to save the deal, Rosenfeld is traveling the world to placate two groups of shareholders: Kraft's, who are increasingly worried that she'll pay too much, and Cadbury's, who are being told she's offering too little. She has until Jan. 19 to make her final offer, and until Feb. 2 to persuade them all. Win or lose, says former Kraft CEO Robert S. Morrison, the Cadbury affair "will be defining for her career."

Kraft is the world's No. 2 food company after Nestlé (NSRGY), selling $42 billion worth of Kraft Macaroni & Cheese, Oreos, Oscar Mayer cold cuts, and hundreds of other brands each year. It is the product of two decades of dealmaking. Philip Morris International (PM), seeking to broaden its reach beyond cigarettes, bought General Foods (which had among its brands Jell-O, Minute Rice, and Kool-Aid) in 1985, succeeded in a hostile takeover of Kraft in 1988, merged the two companies by 1995, and five years later bought Nabisco.


During the 1980s, General Foods, which was based in Westchester County, N.Y., had a reputation as an intellectually challenging workplace where debate was encouraged. It was here, in 1981, that Rosenfeld got her start in market research. She had spent most of the previous decade at Cornell University completing an undergraduate degree in psychology, an MBA, and a PhD in marketing and statistics. Her thesis adviser, Vithala R. Rao, recalls that even though she was working and pregnant she was determined to finish her dissertation on how consumers make decisions about purchases. "She knew a PhD would give her an edge in the business world," says Rao. "And her husband was getting one. They were a little competitive."

When Rosenfeld presented her bosses at General Foods with research showing that Kool-Aid should be marketed directly to kids, the pitch won her a job working on the brand full-time. It was an unexpected turn for a researcher. After a presentation at one of her first meetings with Grey Advertising, Rosenfeld was so excited that she applauded. Back then, junior employees were expected to stay silent. "We were all so shocked and amused by her reaction," says Carol Herman, who worked at Grey and remains a close friend of Rosenfeld's.

As Rosenfeld came up through the ranks at General Foods and Kraft—eventually overseeing the Nabisco integration and serving as president of Kraft North America—she developed a reputation as a tough and insistent boss. She would call people with ideas, however big or small, late into the night. Conversations about kids turned into discussions about Kraft products. "I can't tell you how many midnight talks we had about Minute Rice and Stove Top stuffing," says Herman, who worked on various accounts for Kraft through the 1990s. Says James M. Kilts, a former Kraft president who later ran Gillette: "Irene didn't need a lot of advice. That's why I liked her. She was giving me the right answers." Yet her intensity and self-confidence didn't always endear her to colleagues. One former executive recalls a time when Rosenfeld provided helpful insight into a business she had once managed. When the executive offered to return the favor, Rosenfeld took a pass.

In 2001, Rosenfeld suffered her first big professional setback when a contemporary, Betsy D. Holden, was appointed co-chief executive alongside Roger Deromedi. Rosenfeld stayed on almost two more years, then left to join Frito-Lay (PEP), a Kraft rival more global in its outlook and more local in its decision-making. "Irene thought about the marketing agenda and innovation much more aggressively" than the company was used to, says Indra Nooyi, the CEO of PepsiCo (PEP), which owns Frito-Lay. "She was fearless in what she did."


Rosenfeld gave every impression that she was committed to Frito-Lay for the long term. But when Kraft asked her to return as CEO in June 2006, she jumped. The dual leader experiment had failed; Kraft was faltering amid high commodity prices, increasing competition from private labels, and a misplaced focus on cost-cutting. She told Kraft's nearly 100,000 employees that the company had lost its heart and soul and needed to "rewire for growth." In a speech at Cornell in 2007, Rosenfeld described her return to Kraft. "The staff was tired, raw, disillusioned," she told the audience. "My slogan was, 'let's get growing.' It's not a warm and fuzzy strategy." She replaced half of her executive team and half of those in the next two levels down. She reorganized the structure of the company, changed how people receive their bonuses, and told everyone "to stop apologizing for our categories and make them more relevant." She concluded her talk: "Sometimes I lie awake thinking, 'Should we?' And then I think, 'How can we not?' "

Rosenfeld wasn't alone in wanting change—activist investor Nelson Peltz was demanding it. She learned that engagement and conciliation were the best ways to handle powerful dissenters. When Peltz pushed her to sell some brands, she did, unloading Veryfine fruit juice and Post cereals. And when she asked him not to purchase more than 10% of the company, he agreed.

Peltz was also a big investor in Cadbury Schweppes, and he persuaded the British food giant to sell its soft drink division in 2008 and become purely a candy company. That would set the stage for Rosenfeld's eventual hostile takeover bid and provide Cadbury its philosophical defense: It didn't want to lose focus on its core business by becoming part of a conglomerate.

As the Great Recession took hold, Kraft should have thrived. But even though consumers ate at home more often and ingredient prices fell, the company was forced to cut prices to compete with private label products. Kraft stock, which went public at $31 a share in 2001, fell as low as $21 last March. (It has been hovering at about $29 this year.) The company introduced items such as Bagel-fuls, bagels stuffed with Philadelphia cream cheese. The products did well, but not well enough to have a major impact. Rosenfeld also devoted considerable resources to creating premium toppings for Kraft's DiGiorno frozen pizza, and frequently pointed to the brand's success.

With the recession abating, Rosenfeld started thinking of ways to transform the company. "She wanted to capture the imagination of the world about what Kraft could be," says Shelly Lazarus, chairman of ad agency Ogilvy & Mather Worldwide, which works with Kraft. Rosenfeld began studying the possibility of buying Cadbury, which sells Trident gum and chocolate in 60 countries and has sales of about $8 billion. It's a fast-growing global business with high profit margins.

Eventually she fixed on a price, and in early August decided to approach Cadbury Chairman Roger Carr with an offer. On Aug. 28 she met with Carr in London to lay out her plan. "She was brisk, efficient, delivered her proposal and left quite quickly," says Carr. The two haven't spoken since, he says.

They have, however, exchanged a few letters. In the first, which Carr sent to Rosenfeld the next week, he called the offer "derisory." Then on Labor Day, Rosenfeld announced Kraft's bid in a news release on the corporate Web site, hoping to win over shareholders directly. She spoke to several British newspapers about her admiration for Cadbury and the great promise of a merger. In a video interview posted on the Kraft site, she expressed her enthusiasm for Cadbury's products in a way only a marketer could appreciate: "I am a heavy, heavy user of Trident gum and, on a seasonal basis, I love those Cadbury eggs." But after receiving no encouragement from the candymaker, Rosenfeld launched a hostile bid on Nov. 9. "We believe that our proposal offers the best immediate and long-term value for Cadbury's shareholders and for the company itself compared with any other option currently available, including Cadbury remaining independent," she wrote in the formal offer.

Meanwhile, Rosenfeld was juggling another deal that would determine how much Kraft could spend for Cadbury. In early 2009, Nestlé made a surprise offer to buy DiGiorno and the rest of Kraft's pizza business. Rosenfeld concluded that selling the unit made sense: Frozen pizza wouldn't do well outside of North America, and within the company it was an isolated brand. Next she had to persuade the board. "It was a difficult decision. But once we got our heads around the strategic and financial rationale for the deal, it became clear," says Perry Yeatman, a Kraft spokeswoman. Closing the sale proved difficult; it wasn't until Jan. 5 that Kraft announced it would sell the pizza business to Nestlé for $3.7 billion. Some investors thought the price was too low. But the deal would give Rosenfeld the cash she'd need to pursue Cadbury. And there was another benefit: Nestlé, Kraft's main rival for Cadbury, said it wouldn't bid.

Whatever sense of relief Rosenfeld might have felt didn't last long. On the same day, Buffett went public with his concerns, calling Rosenfeld's proposal to issue more shares a "blank check." He noted that while the company had bought back shares at a price of $33 a piece in 2007, it would be selling the new shares for the Cadbury transaction for far less. He did say, though, that he would support an offer that "does not destroy value for Kraft shareholders." Other investors share Buffett's skepticism. "What is she wasting our money for?" asks John Kornitzer, founder of Kornitzer Capital Management in Shawnee Mission, Kan. "To chase after these guys is ridiculous." Alice Schroeder, a former Wall Street analyst and author of a biography of Buffett who also writes a column for Bloomberg News, says even if Rosenfeld had consulted with Buffett it might serve his purposes to take a public stand. He can take credit for reining her in and defending shareholders. "No matter how this turns out, Warren looks great," she says.

Rosenfeld, however, is under attack from all sides. On Jan. 12, Carr released a stinging "defense document" on Cadbury's Web site, saying "the bid is even more unattractive today than it was when Kraft made its formal offer." Kraft called the argument "underwhelming." Carr responds: "I think the clarity with which we reviewed Kraft's own record must have been disturbing for them and illuminating for our shareholders."

Kraft shareholders will vote on whether to issue more stock on Feb. 1; the next day Cadbury stockholders will vote on the offer. Rosenfeld spent Jan. 12 with Cadbury investors in the U.S. before jetting to London to talk with Cadbury shareholders there. Some refused her visit, says Carr. While Rosenfeld remains determined to make Kraft bigger and more global, finding a price for Cadbury that works for everyone might be impossible. "Rosenfeld has made it clear that she's disciplined, that she won't overpay," says Donald Yacktman, president of Yackt- man Asset Management, a longtime investor. "I guess we'll find out how much she really means what she says."

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