Cadbury's Key Ingredient: Gum

Link to the Article:

http://www.businessweek.com/bwdaily/dnflash/content/sep2009/db2009098_895785.htm

Summary:

This article describes the increasing global market for chewing gum, and the attempts by Kraft to purchase Cadbury by putting a 30%+ premium on the company's value, and offering them $16.7 billion US dollars. Cadbury is a prime target for many confectionery companies as the global gum market has increased in value, from being a $16 billion industry in 2004 to being a $23 million industry in 2008. Cadbury currently controls approximately 29% of the global gum market with its ownership of Trident, the world's best-selling chewing gum and best-selling sugar-free gum, is a key player in the gum industry and would be a great acquisition for any confectionery company.

Topics From Syllabus:

1.7 - Growth and Evolution
- External Growth

4.1 - The Role of Marketing
- The Market
- Market Share

4.3 - Product
- Branding
- Product Differentiation

Applying Business Theory to the Article:

1.7 - Growth and Evolution

In this article, there is evident indication that companies are looking to grow, specifically Kraft. Kraft is willing to pay a 30%+ premium on Cadbury, meaning it's willing to pay over 130% of the market value of Cadbury to buy it out, specifically offering Cadbury $16.7 billion. This offer, however, was refused by Cadbury, the reason being that Cadbury thought the offer was too low.

Cadbury was offered so much money by Kraft because, as mentioned above in the summary, the global gum industry has grown and is continuing to grow, meaning there will be even more money in the industry. Looking at the figures provided in the article, since Cadbury owns almost 29% of the global gum market share and the industry is worth as much as over $23 billion, Cadbury makes a hefty sum of money each year. Because of this, Kraft laying down a 30%+ premium for acquisition of Cadbury, although seemingly a lot of money, is actually an insignificant amount compared to the amount of money generated through Cadbury's gum sales. Since Cadbury is also a worldwide famous chocolate supplier as well, there will be much additional income from that. The gum, however, is the prevalent reason that Cadbury would be an amazing asset to any confectionery company, as "gum accounts for roughly 14% of the global confection market, but its retail value is on track to rise by 4.8% this year, while chocolate and non-chocolate sugar confectioneries are growing at a slower pace, 4.1% and 3.5%, respectively" as stated in the article. Simply put, the gum industry is growing at a higher predicted rate compared to chocolate and non-sugar confectionery, and hence it would be an excellent option to buy into for company growth and expansion.


For more information, look to Alex Hum's blog for the continuation of this thrilling acquisition story.