Cadbury Acquisition Recommendation
Cadbury Schweppes considers acquiring Adams to boost market share and efficiency despite high costs and integration challenges.
Cadbury Schweppes, a leading beverage and confectionery company, considered acquiring Adams, a prominent chewing gum brand, to enhance market share and operational efficiency. Cadbury, known for its decentralized approach, faced significant integration challenges and high acquisition costs, with the potential bid for Adams reaching $4.1 billion. Despite risks, the acquisition offered substantial benefits, including improved R&D, operational efficiencies, and expanded market reach. Cadbury could either bid outright for Adams or propose a strategic partnership, balancing ownership and operational synergies. Ultimately, the acquisition’s potential to drive growth and complement Cadbury’s existing strengths made it a strategic move worth pursuing.
Introduction
Mergers and acquisitions are the lifeblood for many businesses attempting to claim market share. Acquisition teams will often look for other businesses in complementary or adjacent markets to growth, evolve, or protect themselves. Cadbury Schweppes (Cadbury) was in this situation with its examination of Adams in the early 2000’s. This analysis gives a background of the Cadbury company, weighs the benefits and risks of acquisition, and makes a recommendation for an effective business arrangement.
Overview of Cadbury Schweppes
Cadbury was formed from the merger of both Cadbury, a company formed in 1824, and Schweppes, a company formed in 1783, in 1969 with a focus on beverages and confectionary.
By the early 2000’s the company was acquired several household beverage brands including Canada Dry, Sunkist, Dr. Pepper, 7-UP, Orangina, Mott’s, Hawaiian Punch, and Snapple. Cadbury operated in North America with 9.5% market share. The major players in North America were Coca-Cola, Pepsi, and Nestle. The European market was much more fragmented, and Cadbury ranked seventh for overall market share. In Australia, Cadbury products were dominated by Coca-Cola.
In the confectionary space they acquired businesses selling gum that included Trebor, Basset, and Hollywood. Its global confectionary footprint covered more countries than the soda brands but was seeing declining operating margins due to what some identified as underinvestment in their brands. In the United States, Cadbury had sold the rights to its confectionery products to Hershey in perpetuity.
A majority of these acquisitions were successful, and Cadbury allowed each new company much leniency in how they operated. This decentralized approach enabled individualized operational freedom with funding coming from the center of the conglomerate. Individual business segments defended their autonomy when previous attempts to centralize were made. In total, Cadbury had 98 bottling and manufacturing plants around the world.
Overview of Adams
Adams was a chewing gum company founded in 1876 and acquired by Warner-Lambert, a pharmaceutical company, in 1962 to shift the marketing of its chewing gum toward functional health benefits such as fresh breath and dental hygiene. Warner-Lambert later diverted funding for Adams to its more traditional pharmaceutical products. Pfizer later acquired Warner-Lambert and had no interest in the confectionary business and planned to sell the division in 2002.
Adams pioneered the sugar-free gum market and held more market-leading positions in more countries than any other confectionary brand. They achieved this through meticulous resource and production planning. They had 22 facilities across 18 countries. Half were set up to take advantage of economies of scale and distribute mass-produced goods around the world. The other half of the factories focused on supplying local and regional specialties. 49% of Adams’ revenue involved intercountry transfers.
Low investment in the company from parent conglomerates meant that Adams’ research and development time was often between 24–36 months compared to 16 months from other industry leaders. Despite the lack of funding, one under-the-radar project created a significant advancement in flavorful gum with the creation of pelletized, fruit-filled pieces.
Confectionary Competition
Hershey
Cadbury sold its rights to operate in the United States to Hershey, who would pose as a significant competitor to any future operations. Hershey’s strong brand presence and consumer loyalty in the US could make it difficult to capture market share.
Nestle
Nestle is a large competitor in Europe and Australasia through a wide variety of different product lines. Product diversity enables Nestle to create dynamic investments to maintain market dominance.
Wrigley
Wrigley maintains strong international branding that is not direct competition to Cadbury but would be a key competitor if Adams is acquired.
Risks of Purchasing Adams
As Pfizer prepared to sell the Adams division in 2022, Cadbury spent $10 million on strategizing for their bid. It came down to a two-week offsite with over 100 managers worldwide weighing the pros and cons of a potential purchase and integration.
High Cost of Acquisition
Cadbury was prepared to spend up to $4.1 billion dollars on acquiring Adams. This is four times its total debt for 2021. $4.1 billion is 2.2 times Adams’ net sales and between 14 to 15 times EBITDA. Cadbury was concerned that the bid would not be enough compared to Nestle’s and Hershey’s bids, meaning they were poised to pay a premium, potentially overpaying, to acquire Adams.
Integration Challenges
Historically, Cadbury was generally successful with their acquisitions besides two exceptions. Snapple and Orangina proved to be difficult integrations, most notable for the difference in company cultures. Cadbury executives believed that purchasing Adams could create similar issues. Adams’ centralized structure was severely misaligned with Cadbury’s decentralized brand focused model. Aligning these two could cost much more and drive timelines well beyond what the strategy team anticipated.
Benefits of Purchasing Adams
Despite the risks, there are significant benefits to both businesses through working together including how each approach research and development, operations, and brand management.
R&D
Cadbury typically developed their products around taste and other consumer-friendly attributes. It wanted to expand into more health-conscious options with sugar free offerings as they explored other avenues for growth. This pairs nicely with Adams’ products lines. The R&D department could benefit by leveraging Adams’ history of ownership in the pharmaceutical space and dental health-oriented products.
Operation Efficiencies
Adams’ production was much more operationally streamlined and cut out extraneous costs to feed the global demand for its products. Cadbury could benefit from this operational attunement. Adding these efficiencies could create exponential production capabilities or allow Cadbury to scale back the number of factories it operated to save costs.
Brand Mangement
A significant benefit of Cadbury’s decentralized model is that it had to become brand experts to maintain the diverse and localized confectionary production. This is something that could benefit Adams’ Body Smarts brand. Adams experienced a $32 million loss in launching that brand but learned new capabilities in its pursuit, including manufacturing methods, supply chain improvements, and internal systems advances. All this learning could be transferred to Cadbury’s brands to augment growth.
Market Share
Adams operated mostly in the Americas, falling behind only Wrigley in the US but taking the lead in Latin American countries and other emerging markets, making up 40% of its sales. Adams operated mostly in the Americas, falling behind only Wrigley in the US but taking the lead in Latin American countries and other emerging markets, making up 40% of its sales. Despite selling in over 70 countries, Adams would benefit from a larger global reach. This is something Cadbury was particularly good at. Cadbury would also benefit from selling in the American markets. After selling their confectionary rights to Hershey, they were unable to capture market share from these regions.
Recommendation
Cadbury should pursue the Adams purchase in one of two ways: by offering multiple equivalent simultaneous offers (MESOs). This is the most practical approach because it secures a second acquisition route if their bid falls short compared to competitor bids. It also shows Adams that Cadbury is a serious buyer and that if neither of these two options is appealing, there is room to negotiate for the best terms for each company. Regardless of which offer they move forward with; the emphasis should be integrating culture and processes to best suit each company.
MESO One
The first is to bid $4.1 billion in hopes that it will beat out competitor bids. If they fall short with their offer, they can highlight the projected market share and brand growth. The benefit here is that Cadbury obtains complete and total ownership of the Adams and can modify them to fit the company.
MESO Two
Offer a strategic partnership between the two companies. Cadbury could invest $1–2 billion in speeding up R&D for Adams and in return learn about operational efficiencies that would improve their operating costs. The benefit here is that both companies retain ownership of themselves and can learn from each other’s success without the risk of merging operations and culture.
Conclusion
The benefits clearly outweigh the risks of purchasing Adams. Cadbury would be less apt to handle the acquisition if it hadn’t experienced difficult mergers in the past. The emphasis here is to lean into the learning and capabilities of both companies. The fact that these categories are complemented by each company makes the merger much more valuable overall. There isn’t a single path toward a positive relationship and Cadbury executives need to explore every available option to continue its growth.