Last week Coca Cola (see chart here) announced it was ponying up over $4 billion to buy Glaceau, a company with only $355 million in revenue (see PR announcement here, see article here). Rarely are such lofty prices paid for a company not in high tech, so investors have to wonder if Glaceau is worth it. After all, Glaceau’s products are just another form of flavored water – in this case vitamin enriched water and energy drinks.
There are two criteria which determine if the price is right on this acquisition. Firstly, where is Glaceau and its products in the life cycle? If late in the cycle, then such a premium is not warranted. But if you believe that these are a new category of drink, and that this category will have rapid growth by eating into plain water, traditional sodas and possibly sport drinks you could claim that these products are just at the beginning of their lifecycle. And this is critical. Coke has had practically no White Space, so the company has nothing early in the lifecycle. Organically, Coke could spend years trying to develop something on its own, and who knows if they could pull it off. If you believe that Energy Brands have the potential to grow like sports drinks, then this price will look absolutely cheap in just a few years.
The second criteria is how will Coke manage this acquisition? Should Coke decide to buy the company and integrate its products and marketing into Coke then this would be just $4 billion thrown down the proverbial rat hole. The Coke Success Formula is so powerful around traditional soft drinks it would kill the learning necessary to grow a new Success Formula and develop this new market. As we can read in the press release, Coke has chosen to keep Glaceau as a completely separate business unit, and the existing management team has been given 3 year contracts to stay and run the business. In a nutshell, Coke is setting up White Space for Glaceau, and that dramatically improves the chances of the acquisition fulfilling its potential and value.
If Coke can follow through on allowing Glaceau to develop its new market, this could be an important turning point for the moribund Coke organization. Glaceau could develop a new Success Formula which Coke could migrate toward. Revenue could regain old growth rates, and margins could improve as focus shifts to innovation rather price wars. Big companies need new businesses which are early in the Rapids – not just a lot of Wellspring ideas. They need to catch waves early, give the new business White Space (money and permission to try new things) and then learn how to migrate forward. And Glaceau could be just the right acquisition for Coke. If Glaceau can help migrate Coke forward, and out of it’s Locked-in ways, then $4.1 billion was not too much to pay at all.