Did Kraft Heinz Make a Mistake by Announcing a Corporate Split? The Answer Might Surprise You.

Key Points

• Warren Buffett helped fund the merger of Kraft and Heinz to create Kraft Heinz.

• The Kraft Heinz combination hasn't worked out as well as hoped for.

• Kraft Heinz is now planning to break itself apart, and Buffett has suggested he's disappointed by the decision.

• 10 stocks we like better than Kraft Heinz ›

Kraft Heinz (NASDAQ: KHC) is planning on becoming two businesses, which is a somewhat shocking end to what has been an interesting saga. At least one prominent investor isn't pleased with this decision, though.

That investor, Warren Buffett, is the CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), which happens to be Kraft Heinz's largest shareholder, and his opinion is a big deal.

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Is Kraft Heinz making a mistake?

The saga of Kraft Heinz

Kraft Heinz is one of the world's largest consumer staples companies. It owns a portfolio of iconic packaged foods brands that most people know, including Kraft Mac & Cheese and Jell-O, among many others. Since food is a life necessity, companies like Kraft Heinz are generally considered reliable businesses that hold up well, regardless of the economic or market environment.

Image source: The Motley Fool.

That said, even iconic brands get tired, so packaged-food companies like Kraft Heinz are always looking for ways to reinvest themselves and keep costs in check. This is where the story really begins, because the merger that created Kraft Heinz brought together Kraft and Heinz with the main goal of cost-cutting. Berkshire Hathaway supported that merger and is the combined company's largest shareholder as a result of the pairing.

There's just one problem -- the merger didn't go as well as hoped for. Yes, there was corporate bloat that needed to be eliminated. But originally, the focus was so heavy on cost-cutting that investing in brands took a back seat. When it became clear that Kraft Heinz was falling behind its competition, the board of directors changed the company's leadership. The new CEO started investing more heavily in innovation and marketing and sold off brands that were no longer seen as desirable.

This is typical behavior in the packaged-food space, as companies try to adjust along with consumer tastes. However, it wasn't enough to fix the problem. Kraft Heinz still had a lot of brands that weren't resonating with consumers.

The final solution?

This leads to the recent turn of events, in which the company appears to be throwing up its hands and giving up on the Kraft Heinz merger. Splitting the company in two, as is the plan, is not going over well with investors, and that list includes Warren Buffett.

The Oracle of Omaha had already labeled the Kraft Heinz deal a mistake, having previously stated that he overpaid for the investment. But now, his comments are even more notable, as he believes the split won't actually solve the problems the company faces.

That's as damning as you can get from Buffett, who generally keeps his specific stock opinions to himself. The market reaction, which was a swift drop in the stock price, also made it pretty clear what investors generally thought of the idea of a corporate split-up. Technically speaking, it will be a spinoff, with investors getting shares in a new company.

Data by YCharts.

As is often the case, management is saying that both of the new businesses will benefit from having focused management teams. There's a certain logic to that, since the separation will simplify the business structure.

However, two struggling businesses aren't necessarily better than one, which is Buffett's big takeaway. It's hardly clear that this fixes anything and looks more like corporate engineering than anything else.

Investors should tread with caution

If bringing Kraft and Heinz together couldn't unlock value, why would separating them create value? That's the question you need to ask yourself as you consider Kraft Heinz's latest move. Buffett is pretty clear in his opinion that the company's problems run too deep for a split-up to turn either of the resulting businesses around.

Does that make this decision a mistake? The answer has yet to be determined, of course. But what's almost certain is that the company's near-term priorities are likely going to be focused more on the split than on fixing its underlying business. Kicking the can down the road, which is what this decision looks like, rarely works out well for anyone.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.