Thirty years ago The Steve Miller Band put out a son "Take the Money and Run" – and that’s exactly what the investors in Wrigley (see chart here) now need to do. Mars has made an offer to purchase Wrigley at a substantial premium, and investors get their money all in cash (read article in Chicago Tribune here and on Marketwatch here). Take it and run.
Wrigley is well known for its chewing gum – a no growth business at best. In 2005 Wrigley acquired the candy business from Kraft, including Altoids and Lifesavers. And it bought a Russian chocolate company. One would have hoped these acquisitions would have sparked White Space and growth for Wrigley – but the results have been nothing more than the sum of the parts. No internal Disruptions happened, no White Space developed and nothing new happened.
New things can happen in the sweets business. Do you remember in 1982-1985 when we Mrs. Field’s Cookies came along? Suddenly, cookies became a hot item and we paid lots more than before as we switched to cookies from many other sweets. But the good folks at Wrigley really didn’t push for more innovation, and nothing substantially new came out of these acquisitions. And Mars, the acquirer of Wrigley has done nothing exciting for several decades – practically since inventing M&Ms. And they have no plans for Disrupting or creating White Space with the Wrigley acquisition. All the analysts quoted in the articles talk about "industry consolidation" as the future road – with Cadbury selling its go-nowhere soft drinks business to buy Hershey, for example. Ho Hum. Who cares?
But, a smart reader may say, what about Warren Buffet buying into this deal (see Berkshire Hathaway chart here)? Isn’t he the savviest investor alive? Don’t be fooled by his personal sweet tooth, or the notion that he thinks gum is exciting. With the debt market collapsing beneath us due to the financial crisis, Mr. Buffet was able to do what banks used to do but now won’t – and that is make a $4B loan to finance the acquisition. For this he will gets the backing of Mars, and a premium rate of return taking advantage of a breakdown in the market. Second, he negotiated to acquire $2.1B of equity AT BELOW THE PRICE BEING GIVEN INVESTORS – meaning he has a guaranteed positive rate of return on his equity holding. He could be financing cow pie collection for all the difference the underlying business matters. Berkshire Hathaway just made a financial deal that none of us could do – and for returns none of us (nor even banks) could get. Yes Mr. Buffet is savvy. But not because he likes Wrigley. Rather, because he knows a great guaranteed return when he sees one.
For us mere mortals, limited to buying traditional stocks, take the money and run. Don’t buy Mars. Be glad you’re getting this windfall, and find something with substantial growth to invest in.