Fortune's Most Powerful Businesswomen

Yesterday morning, I caught a few minutes of CNBC's typical shallow business reporting. The segment featured Fortune's 2011 edition of their annual 'most powerful women in business' rankings.

Kraft's Irene Rosenfeld (CEO since June 2006) has, according to the magazine, replaced Pepsi's Indra Nooyi (CEO since 2007) at number one. Nooyi slipped to second place.

Nearby is a two-year price chart for Rosenfeld's Kraft, Nooyi's Pepsi and the S&P500 Index.

Kraft isn't such a bad call over the recent period. It's up 30% over the period, although I think the Cadbury acquisition, which fueled it (late 2009-early 2010), was largely unnecessary. After all, as I wrote in this post, all Rosenfeld did was buy it, then combine the two firms' confectionery businesses and announce a spin-off. It's not too much of a stretch to suggest that much of Kraft's/Rosenfeld's recent outperformance was from Cadbury, not her own organic businesses.


In effect, she overpaid for Cadbury's growth, then added Kraft's similar units for a spinoff. Which could have been done separately, as I originally suggested. Now she's spinning off the part which appears to have driven the combined firms' outperformance of the S&P.

Pepsi's Nooyi, though, is clearly struggling. How does such failure make her a powerful business woman?

The second chart shows the same three price series over the past five years, since Rosenfeld owns that track record entirely, and Nooyi owns most of Pepsi's for the period.

While Nooyi's performance is relatively less-worse than the other two, Rosenfeld's is, not surprisingly, less good. The Cadbury acquisition turned things around for Kraft, which means, in effect, that if you held the shares when Rosenfeld took over Kraft, you saw a loss nearly the same as the S&P.

So from a longer, more accurate historical perspective, neither of Fortune's top two most powerful businesswomen have managed to significantly outperform the S&P. They barely beat the index, and destroyed value for their shareholders.

And Fortune celebrates these two women CEOs? What- as role models?

Why?

Regarding The Tyco Split

In Tuesday's post concerning Netflix and its apparent preparation for a split into two companies, I neglected to mention the companion disintegration story of the day: Tyco.

Long associated with the excesses of its senior management and CEO, Dennis Koslowski, Tyco was restructured in the wake of his departure. Now, the remaining businesses under the Tyco umbrella are splitting yet again.

It strikes me as odd that the general sentiment greeting Tyco's announcement was positive, calling some pundits to compare it to Irene Rosenfeld's dismantling of the Kraft conglomerate she just mashed together only a few years ago.

Why is it that those two are good de-conglomerations, but Netflix's more clear-cut separation of businesses isn't?

Furthermore, not to miss an opportunity to drive this point home yet again, how can investors embrace such unbundling of needless conglomeration, yet fail to push GE's CEO Jeff Immelt to finally split that firm into its natural, individual constituent parts? And save investors the pricey headquarters functions which include Immelt's own lavish compensation package?

The Kraft-Cadbury Break-Up- I Take A Victory Lap

I could scarcely believe what I heard and read in the past day or so concerning Irene Rosenfeld's new plan to split the Cadbury-dominated snack foods of the post-merger Kraft from its groceries business.


I wrote these two posts, here and here, in September of 2009 and January of 2010, respectively.


Consider this passage from the first linked post,


"Stitzer's focus, via that strategy, becomes more evident with the next passage. The piece then quoted Cadbury's CEO again,



"I think scale works to a [point]," he said. "There's a confectionery buyer in retailers and I think you can focus on that buyer, and if you can offer chocolate, gum and candy, I think that's an advantage. What more can you offer to the confectionery buyer in the grocery store? They don't necessarily and are not generally responsible for anything but confectionery."


Putting these two views together, one what seems to be a really non-delusional, focused, in-touch CEO. One that understands his direct customers, the retail food merchant's buyers.


With them in mind, he's built Cadbury out within the scope of his current customers' pervue. But he rightly notes that Kraft primarily markets to other buyers, albeit within the same grocery store.


After the requisite administrative costs are shed, what then? What organic, post-merger accounting growth will be realized?


If anything, Stitzer is really making the case, by omission, for another approach entirely.


Why doesn't Kraft offer to sell its confectionary businesses to Cadbury for stock, and a seat (or however many make valuation sense) on the British firm's board?


That way, Kraft gets the value of scale within confectionary products, but avoids the curse of oversized conglomeration. Irene Rosenfeld's management team can focus on food products, while reaping the benefits of Cadbury's economies of scale within their category. In time, subject to deal terms, Kraft can sell its stake in the market, or to Cadbury, for a premium, while relinquishing board presence.


It argues for Cadbury's management to handle the commonly-held confectionary businesses, not for Kraft to get a larger collection of assets to mismanage."


And, then, this one from the second linked post,

"I still believe, as I did last September, that both parties would have benefited from Rosenfeld's selling Kraft's businesses which resemble Cadbury's, to the latter, taking equity in exchange.



Cadbury is simply a better management team than Kraft. If anything, I guess Cadbury shareholders should thank Stitzer and the board for getting top pound for the company, and walking away with cash after selling whatever Kraft paper they receive, while Kraft will be stuck trying to make this dubious tie-up pay off."

Funny how that worked, isn't it? A former Cadbury shareholder could soon repurchase the old Cadbury, plus some similar Kraft businesses, with the premium they received.

However, looking at the nearby price chart of the S&P500 Index and Kraft for the past two years, it appears that Kraft actually outperformed the Index. Probably on account of Cadbury, since Kraft was underperforming the Index for the five years prior to the acquisition, and still headed downward.

According to this morning's Wall Street Journal article, Rosenfeld had the idea to buy Cadbury, bundle the snack businesses, then split Kraft, as long as several years ago.

Even if true, this is corporate ego and obsession with power at its worst. The story would mean that Rosenfeld squandered Kraft shareholder money on the Cadbury premium, and on investment bankers, just to get to the point of now spending more money to split up the swollen Kraft.

Wouldn't it have been simpler and cheaper in the first place to have just approached Cadbury's Stitzer about such a combination? Rosenfeld could then have declared a special stock dividend of Cadbury shares received for the Kraft snack businesses sold the the British confectioner.

To believe that Rosenfeld's approach made more sense is to be caught up in the sort of wilderness of mirrors which can occur in large corporate managements. A lot of extra expense and effort just to allow Rosenfeld to appear to be the empress of a larger set of businesses, only to separate them once more.

One thing is true, though. According to my proprietary equity research, splitting the slower-growth grocery businesses from the higher-growth snack businesses will, indeed, allow the latter to deliver a consistently higher total return to their shareholders. The combination has certainly punished the latter, while investors price Kraft to an average that accounts for the former.

Thus my point that it made no sense to effectively destroy or mix value from Cadbury into Kraft in the first place.

The Kraft-Cadbury Deal

Back in late September, I wrote this post concerning Kraft's pursuit of Cadbury. At the time, I thought little of the proposed merger, and highlighted Cadbury CEO Stitzer's insightful comments regarding institutional food buyers of the two companies' products.

This morning's news of Kraft's increased bid, for which it won Cadbury's board's approval of the deal, was probably unavoidable. But it's too bad for the assets of British confectioner.

Consider, first, the comparative equity prices of the two firms, and the S&P500 Index, over the past five years. Including the last four months during which Kraft has been stalking Cadbury.

If anything, Kraft has continued to fail to distinguish itself, probably also paying a price for what most investors evidently see as a mistaken acquisition play.

I find myself in agreement. Despite the Journal article's quote from Pershing Square hedge fund founder Bill Ackman endorsing the deal and predicting a wonderful performance outlook for the larger Kraft, I just don't buy it. There are too many potential pitfalls.

For one, there is the obvious bugaboo of trans-Atlantic culture clashes.

Next, you have a processed food purveyor with admittedly mediocre brand management skills, judging by past equity performances, hoping to excel by paying full price for a brand-sensitive business, confectionary.

Then you have the undeniable fact that Cadbury has done a better job earning total returns for its shareholders than has Kraft during the latter's CEO, Irene Rosenfeld's tenure.

Then there's the size issue. Kraft was only treading water with the S&P before this deal. What do you think will happen when it experiences the increased size and complexity of managing the merged firm, plus having to get to work improving Cadbury's performance to pay for the merger? It's really doubtful that things will get better at the merged Kraft. More likely is the larger American firm's mediocrity infecting and affecting Cadbury, pulling its performance down to that of its acquirer.

I still believe, as I did last September, that both parties would have benefited from Rosenfeld's selling Kraft's businesses which resemble Cadbury's, to the latter, taking equity in exchange.

Cadbury is simply a better management team than Kraft. If anything, I guess Cadbury shareholders should thank Stitzer and the board for getting top pound for the company, and walking away with cash after selling whatever Kraft paper they receive, while Kraft will be stuck trying to make this dubious tie-up pay off.

I wonder what Buffett will do with his Kraft shares now?

Cadbury's Stitzer's Key Customer Insights

Tuesday's Wall Street Journal featured an article detailing a supposed "softening" of Cadbury CEO Todd Stitzer.



However, buried deep within the story were two refreshing and insightful quotes by Mr. Stitzer. The first was,



"I completely respect the fact that we would be attractive to someone else, but the world of large conglomerates has passed," he said. "Shareowners recognize that focused businesses, and focused in an area that has commercial and operational synergies, is a very good space to be."



This is a rare, honest admission for a CEO. Granted, Stitzer's Cadbury is the prey, not the hunter. So it's self-serving. But it's also true. Contrast his candor with both parties' words in the recent Dell-Perot Systems deal.



This was followed by the article's noting,


By buying individual confectionery brands, Mr. Stitzer said Cadbury has tried to grow bigger within the category, rather than by teaming up with a bigger food company.



Stitzer's focus, via that strategy, becomes more evident with the next passage. The piece then quoted Cadbury's CEO again,



"I think scale works to a [point]," he said. "There's a confectionery buyer in retailers and I think you can focus on that buyer, and if you can offer chocolate, gum and candy, I think that's an advantage. What more can you offer to the confectionery buyer in the grocery store? They don't necessarily and are not generally responsible for anything but confectionery."



Putting these two views together, one what seems to be a really non-delusional, focused, in-touch CEO. One that understands his direct customers, the retail food merchant's buyers.



With them in mind, he's built Cadbury out within the scope of his current customers' pervue. But he rightly notes that Kraft primarily markets to other buyers, albeit within the same grocery store.



After the requisite administrative costs are shed, what then? What organic, post-merger accounting growth will be realized?



If anything, Stitzer is really making the case, by omission, for another approach entirely.



Why doesn't Kraft offer to sell its confectionary businesses to Cadbury for stock, and a seat (or however many make valuation sense) on the British firm's board?



That way, Kraft gets the value of scale within confectionary products, but avoids the curse of oversized conglomeration. Irene Rosenfeld's management team can focus on food products, while reaping the benefits of Cadbury's economies of scale within their category. In time, subject to deal terms, Kraft can sell its stake in the market, or to Cadbury, for a premium, while relinquishing board presence.



The nearby price chart for Cadbury, Kraft and the S&P500 Index shows an interesting picture. Over the period, though moving in similar patterns, Cadbury has substantially outperformed Kraft. In fact, Kraft ended down, in absolute terms, about even with the index, while Cadbury managed to have gradually, consistently bested Kraft's performance.

It argues for Cadbury's management to handle the commonly-held confectionary businesses, not for Kraft to get a larger collection of assets to mismanage.

Granted, Irene Rosenfeld has shown promise. But as I noted in this post from early 2007, Kraft has been plagued by management lethargy for years.

Looking at the price chart again, while mystified how Kraft could have a stock price prior to 2007, when it was part of Altria, I can't help but think that my idea would be better for shareholders of both firms than Ms. Rosenfeld's attempt to take over Cadbury.

The New Kraft Foods

Yesterday's Wall Street Journal's Marketplace section featured an interview with the CEO (as of last June) of Kraft Foods, Irene Rosenfeld.

The genesis of the piece is Kraft's imminent spinoff from Altria, and an analysts' conference for Rosenfeld, on that occasion.

By all indications, Ms. Rosenfeld is a capable and sensible businesswoman. What is troubling is the simplicity and classic nature of her prescription for fixing Kraft.

Essentially, she arrived, toured the company's facilities, talked to employees, and conducted ground-level, personal visits to customers and their kitchens throughout the world.

Here's what the Journal had to report,

"Ms. Rosenfeld concluded the nation's largest food maker- whose household-name products range from Jell-O to Maxwell House coffee to Velveeta cheese- had lost sight of how its offerings fit into consumers' lives. Deep cost cutting had eaten into Kraft's product quality, eroding the strength of some brands and causing the company to lose market share. Workers were afraid to speak up when they saw problems.

Today, at an analysts' conference....Ms. Rosenfeld plans to unveil a new strategy to reignite Kraft's growth as it gets ready to spin off from Altria Group Inc. Instead of just selling meal components, Kraft will make more complete meals like prepackaged salads and ready-made sandwiches with its Oscar Mayer meats and Planters nuts."

This all sounds great. Except for one thing. Where was this strategy for the past several years? What was the board at Altria doing for the past five years or so, while Kraft slipped into the coma from which Ms. Rosenfeld intends to wake it?

How sad that a leading brand name in American consumer packaged foods simply lost the salient skill of such vendors- staying close to the consumer and her/his habits and needs. Nearly thirty years ago, when I was a graduate student at Penn, we were constantly regaled with tales from our consulting marketing professors of the various new products and consumer research being conducted at their clients, who were typically large US packaged goods purveyors.

As a little consumer behavior aside, Ms. Rosenfeld refers to something that has remained true for over thirty years. Back in the day, one of my marketing professors, Jerry Wind, related how research revealed that completely prepared foods didn't score as well with consumers as 'mostly' prepared foods did. For instance, instant cake mixes didn't use powdered eggs, so consumers could add fresh eggs and feel that they prepared the cake.

Today, Ms. Rosenfeld relates how they leave the consumer to zap a product in the microwave, to give the illusion of a freshly-cooked meal that, in reality, was essentially already prepared in the box.

Still, while Ms. Rosenfeld seems like the real McCoy when it comes to marketing and new product/growth development, isn't it sad that this conventional wisdom of more than three decades is now required as major surgery on a fallen consumer brand portfolio? This is the true failure of corporate governance.

Why didn't Altria's board ask questions about growth and new product introductions? Why didn't they ask what the impact of the ready-to-eat food assortment at 7-11 had to do with Kraft's demise?

How many tens of millions of dollars do you think were paid to inept, under-performing heads of the Kraft unit under Altria?

Well, the silver lining for me is that, perhaps in four more years, I'll be able to invest in Kraft, when Ms. Rosenfeld leads it to performance that qualifies it for my equity portfolio selection criteria.