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Acquisition of Dandy

Essay by   •  October 30, 2016  •  Case Study  •  1,717 Words (7 Pages)  •  796 Views

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  1. Acquisition of Dandy without new machinery installation

In case of acquisition of Dandy, Wrigley has to pay 46 million $ for 80% of shares and %80 of Dandy’s 12 million $ debt which equals to 9,6 M $ has to be acquired by Wrigley, too. In addition, every year a 3% Cost of Capital has to be considered based on the changing economic conditions. Wrigley’s top management insists a 5- year break even policy on investments. On the other hand, Wrigley has to pay the 9.6 million $ debt in 3 years. To achieve these conditions the required calculations are below:

Cash Flow = Investment Payments + Debt Payments

 [pic 1]

        According to this table, Wrigley has to provide an operational profit of cash flows at minimum to achieve break-even and debt conditions.

STRATEGIES

  1. Promotion

It can be considered that high sales of %55 and promotion activities of 45% represent a good product quality. According to the data, it is assumed that Dandy uses a budget of 6M $ for publishing their promotion. Therefore, Dandy’s estimated promotion budget is given below:

SEGMENTS

BUDGET RATIO

BUDGET (M $)

AGE 6-11

0,16

 $       0,96

AGE 12-17

0,38

 $       2,28

AGE 18-24

0,23

 $       1,38

AGE 25+

0,23

 $       1,38

After the acquisition of Wrigley-Dandy, the total budget for publishing of promotion can be determined as 10M $.

Since promotion activities are based on age segments, the relative ratios to the market size are determined. After that, Dandy’s ratios are recalculated based on the segments’ market leader. Finally, uncountable data (such as advertisement`s ineffectiveness for 25+ segment etc.) are added to estimated ratios and the final weights are given. The total promotion budget is divided with respect to the final weights.

[pic 2]

SEGMENTS

BUDGET RATIO

BUDGET (M $)[pic 3]

AGE 6-11

0,299

 $       2,99

AGE 12-17

0,304

 $       3,04

AGE 18-24

0,239

 $       2,39

AGE 25+

0,158

 $       1,58

Since Wrigley is known as a market leader on this segment in other countries, the company should focus more on 6-11 age segments to increase the effectiveness of promotion activities. The company has enough knowledge to compete with its rivals (especially with Perfetti). Besides, underlying the fact that Turkey`s population is mostly composed of young people, it would create a competitive advantage for the company. In addition, there are pre-prepared advertisements from Wrigley for this segment. Thus cost of promotion would not decrease; moreover, resulting in additional return to the company.

The impact of promotional expenses on the market share is given below in a simple way:

Promotion Cost (M$)

7,00

13,00

9,00

10,00

Market share

14,87

22,22

16,35

18,64

Effectiveness of promotional activities (M$)

0,47

0,59

0,55

0,54

  1. New Brand Name

After acquisition of Dandy, if Wrigley considers using a new brand name, it has to be taken into account that “First” has an important brand image for 25+ age segment. However, for the other segments, Dandy`s market share is relatively low and without changing any product strategies, it is difficult to get a higher brand position in the consumers’ mind. Consequently, to use a new brand name especially for products which are appealed to younger people might provide some benefit.

Using a new brand name requires changing of the existing packaging style which leads to an additional cost since packaging has to be redesigned according to the related age segment.

As shown in table below, it is not logical to decrease the unit price, because lower prices do not lead to a bigger market share in this sector. On the other hand, if new products will be served with a new brand name, due to the lack of brand awareness, sales revenue can be affected from high prices negatively. Keeping unit price at medium level in this sector will be a better choice.

Kent

Perfetti

Ülker

Dandy

Unit Prices

0,95

1,1

0,98

0,99

Market Share

14,87

22,22

16,35

18,64

Effect of promotion on market share

[pic 4]

Coefficient of Promotion Effectiveness =(Promotion/ Market Share2012)

Proportion effectiveness= Average Coefficient of Promotion Effectiveness x final weights

Old Market Share= Estimated Budget x proportion effectiveness

New Market Share=Suggested Budget x proportion effectiveness

Increase in Market Share with respect to new promotion investment policy: 1,408- 0,81642=0,565

  1. Distribution

Since Dandy has one of the best distribution networks in the sector, there is no need for any additional investment in distribution channel. Therefore, the estimated cost for the following years can be used as it is in 2012 by considering cost of capital of 3% and increase in produced units which affects the cost in overall.

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