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.
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Hi Lloyd. Cool article.
ReplyDeleteI like that we chose similar articles that can build off one another, and in the same aspect as well; my article was about Hershey's and Kraft's fighting to take over Cadbury and it was also very much related to Growth and Evolution of a business. It helped me understand my article because if you take a look at it, it shows a very biased perspective and doesn't tell the whole story. Actually I was under the impression that Kraft didn't want to pay Cadbury what it was worth, so thanks for enlightening me on that.
Now, if Cadbury is so successful that 130% of their companies worth is nothing compared to the amount they bring in on their own annually, why doesn't Cadbury stay independent, or perhaps rather than being bought out, look to the option of merging with Kraft's or Hershey's so that they can still be successful under their own name?
Food for thought! (Pun very much intended.)
Hi Alex. Cool comment.
ReplyDeleteOf course, the idea of long term gain is very appealing to a company, but there are lots of extraneous circumstances that can prove otherwise- for example, if the economy falls, then the company value may drop a lot as well. Using a more industry-specific example, if the candy industry fails to do as well as projected in both the near future and the distant future, the company may actually lose money due to stock not being sold, or other factors as well. Hence, the idea of receiving a lump sum of money can be extremely appealing as well to the directors of a company that make the decision. In some ways, it's like gambling at an extremely low risk (in comparison to actual gambling, where you're expected to lose)- by not selling the company and looking to expand and make even more money, they run more potential risks, as when companies get larger, they need to hire more workforce, put more money into research and development for new products, and of course, generate more income as well as more products are being sold. Using the gambling analogy again, selling for current market value and a nice hefty premium while the industry is doing well is analogous to trading in all the chips after winning a tidy sum at the blackjack table. Of course, and I reiterate, there IS the projected numbers saying the company will do even better in the x number of years ahead, but sometimes the large premium is a better, more secure option than the potential risks that indefinitely follow Cadbury holding onto their chips after raking a fair sum in.
But of course, it's up to a company to determine what they are willing to sell for, and how much they're worth (future success considered as well, of course, to make an estimate on how much of a premium they're willing to accept as a fair payment).
On a somewhat unrelated (to the question asked) note, acquisition is always a key factor, however, for large companies like Kraft that specialize in making many food and confectionery items. Since Kraft deals in so many different markets, attempting to penetrate in one more or specialize in one more market is much less risk overall for the company since they have more fallback options (for example, if the candy industry doesn't work out well, there's always the Mac 'n Cheese and other boxed, pre-cooked food industry). Because of this, the option of paying a large premium on a company is a better option than attempting to penetrate a certain new market (such as the confectionery market).
COOL DUDE!!!
ReplyDeleteTo be honest, I think this is quite an interesting article, because it surprises me that Cadbury's market share in the gum industry would be the most prized asset if a takeover of it was made. You are right, this topic refers to the concept of branding in 4.1. Cadbury is known for its reputation as chocolate makers, but not as gum producers!
Also, I liked your detailed analysis of Kraft Food's bid for a takeover of Cadbury. However, I somewhat disagree with your opinion. I believe that a 30+% premium for Cadbury's acquisition is a bit too high. Seeing from your statistics, the gum industry grows at a pace of 4.8%, whereas chocolates grow at 4.1% and non-choco sugar confectionaries at 3.5%. I think that the growth percentage is not significant enough for Kraft to make this acquistion. Being a reputable food manufacturer itself, why doesn't Kraft focus on the markets it has a larger share in, like the chocolate and non-chocolate confectionaries, and try to boost growth there? The growth percentages are not really that low, compared to the gum industry. It would be wasteful to spend 30+% premium to make an acquisition.
what is your opinion of my point?:)
Hi, Calvin. Cool comment.
ReplyDeleteI was waiting for someone to challenge the 30+% premium statement, and I still stand strong by what I believe.
You mention many percentages and growth factors, and of course, comparatively to 30+% of what Cadbury is worth, they seem like nothing. However, I would like to mention first off that the market value of Cadbury is pretty much similar (if not exactly) the price that a company is worth on the market. This being said, if Kraft were to attempt to set up a company that would be as grand as Cadbury, they would need to pay all the start-up costs totaling the approximate market value of Cadbury (although it is worth mentioning that starting up a company as grand as Cadbury would take much time and planning, and it would be no easy feat). In the time it takes to start up this venture as well, money could be made already if Cadbury were purchased. And again, to make the name as popular as Cadbury (even if the venture was successful, and products as good as Cadbury's were being produced), much money and time would be put into advertisement and brand recognition. This time and money all adds up, the time especially, since money could potentially be made in the time it takes to establish another entire brand (especially when there are so many titans in the industry already existing). By paying a nice big premium for an extremely established and successful titan such as Cadbury, Kraft will save a lot of time planning instead make a lump payment for something that will pay off in a number of years. For a big company like Kraft, it would be incredible to suggest that they would not want a piece of the growing market, especially when it is so closely related to their already existing products. Hence, the large premium technically saves Kraft from paying the same amount of money, spend a lot more time advertising and promoting, and ultimately reap returns a lot later and with a lot less risk (as any market penetration involves a huge amount of risk). For this reason, the premium paid for Cadbury was, indeed, acceptable if not too low than the value that Cadbury should be offered for a buyout.
Hope that helps you understand, Calvin!
Oh, and by the way, regarding your comment on branding and Cadbury not being known for gum: Cadbury owns Trident, heard of them? :) Peace.
Hi Lloyd. You have incorporated business theory nicely in your blog leading to a good discussion. I wonder if the negotiations on the value of Cadbury involves the value of intangible assets such as trademarks, patents, goodwill, etc. Intangible assets are often difficult to value and in this case could be quite substantial.
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