Abstract
While mergers and acquisitions can benefit companies with economies of scale, there are many pros and cons for businesses to consider. Throughout this document, a discussion of PepsiCo’s recent merger with Quaker Oats will be examined to ascertain what affects it will have on this oligopoly. A detailed analysis describing the current business structure, its competition, measurements regarding its position in the market, and arguments for and against the merger will be analyzed to determine the effect on the business environment.
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PepsiCo: Analysis of Recent Acquisition 2
PepsiCo, Inc., incorporated in 1919, is a world leader in convenient foods and beverages, with revenues of about $27 billion and about 143,000 employees. The company consists of the snack businesses of Frito-Lay North America (FLNA) and Frito-Lay International (FLI); the beverage businesses of Pepsi-Cola North America, Gatorade/Tropicana North America and PepsiCo Beverages International; and Quaker Foods North America, manufacturer and marketer of ready-to-eat cereals and other food products, complement this world leader in convenient foods and beverages.
In addition, in January 2001, the Company completed the acquisition of the beverage business of South Beach Beverage Company, LLC (SoBe). PepsiCo brands are available in nearly 200 countries and territories. Its share of the US soft-drink market is about 32% and Frito-Lay has about 58% of the US snack-chip market. (Pepsico, 2001)
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This analysis talks about the latest trend of mergers and acquisitions and the ensuing fallout. The concern here is about the $14 billion merger of PepsiCo and Quaker Oats. After a long delay with regards to granting permission for this merger, the Federal Trade Commission (FTC) finally gave the go ahead after it realized that there was a split in the opinion of its members. 50 percent of the members voted in favor and the rest against the decision for the merger. This committee was set up to investigate the fairness of the deal with respect to the marketing principles commonly followed. Due to the split in decision, the entire investigation was called off, allowing the deal to proceed. FTC staff had objected to this merger since they believed that this kind of merger would kill competition in the sports drink market segment. This would lead to an almost monopolistic scenario and give PepsiCo the overriding authority in cutting deals with convenience stores. (nutraingredients.com, 2001)
This deal, under the able leadership of Steve Reinemund, created a formidable position of PepsiCo in the drinks and fast food segment. This would push the limit of the revenues to over $25 billions. This merger would mean that Gatorade, one of the leading sports drink, would come under the PepsiCo banner and thus give PepsiCo the leading edge especially over Coco- Cola, in the non- carbonated drink segment. This is because Coco-Cola’s PowerAde, a non- carbonated drink aimed at the sports segment has only 15% of the market share while Gatorade has over 80% of the share. The deal would also consolidate PepsiCo’s position in the ready-to- eat food segment.
Quaker’s grain-based snacks and cereals like ‘Life’ and ‘Cap’n Crunch’ would now come under the Frito-Lay banner thus introducing more variety. (justdrinks.com, 2001) The case is definitely one of acquisitions and mergers. This case highlights the business strategies and tactics employed by big corporate houses to kill competition. PepsiCo is definitely going to benefit enormously from this merger. Quaker is definitely a big company in itself, but a merger with yet another soft-drink giant will only further consolidate its position in the market. This merger is highly beneficial to both parties since them more or less substitutes for one another. Thirsty people will either go in for a carbonated sweet drink or a non-carbonated fruit drink. By supplying both the alternatives less than one banner the company is retaining both the customer bases.
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Further, Quaker is known for its Gatorade in the sports drink segment with almost 80% of the market share, which is nearing a monopoly in this segment. The tie up would boost the sales of PepsiCo’s other fast foods, since fast foods and drinks almost always supplement each other. This would also give PepsiCo an upper hand in the pricing policy of the drinks market. Since it would be one of the major suppliers it could possibly regulate the prices to lead to an increase in its profits. Also when a customer tends to see the same company products everywhere and that too at a slightly elevate rate, and then the element of ‘Buyers illusion’ comes into the picture. The customers tend to believe that the product is priced higher as it is superior in quality and better as compared to other similar products priced at a lower rate. Any company prefers to diversify and systematically target and capture certain market segments in order to provide that segment superior quality service and kill all forms of competition from that segment. This seems to be the goal of PepsiCo too. It wants to diversify from being a supplier of just carbonated drinks and branch into fruit drinks. To do this the merger was the ideal option, because along with the Quaker company they are also buying its goodwill and market share.
This way they can systematically cater to every possible need of the sports segment right from the choice of drinks to providing snacks. On a final note, acquisitions and mergers have their own positive as well as flip sides. On the positive side smaller firms with fewer resources could continue to thrive in the market if they merged with a larger parent company that provides it with ample resources. On the flip side excessive mergers could cause a market situation wherein only a few big players are left. This could give rise to either monopoly or oligopoly either of which could prove detrimental to the healthy growth of the society.
“PepsiCo’s overall mission is to increase the value of our shareholder’s investment. We do this through sales growth, cost controls and wise investment of resources. We believe our commercial success depends upon offering quality and value to our consumers and customers; providing products that are safe, wholesome, economically efficient and environmentally sound; and providing a fair return to our investors while adhering to the highest standards of integrity”. PepsiCo’s business strategy focuses on growth via product innovation, consumer base expansion, PepsiCo: Analysis of Recent and mergers and acquisitions. PepsiCo, Inc. is in the Food and Beverage industry. The U.S. food and beverage industry sector (SIC 20) is the nation’s largest manufacturing sector at $321 billion and it is mature and developed.
Additional growths in the food and beverage industry likely to come from overseas market and factors that will affect industry growth are population growth, economic conditions, and foreign trade patterns. (PepsiCo, 2001) PepsiCo’s marketing effort is amongst the most aggressive for any company. Advertisements for Pepsi, Mountain Dew, and Doritos are aired on network and cable programming, including prime time and other premium air times. PepsiCo is noted for using high profile celebrities (Michael Jackson, Larry Bird, Britney Spears) in ad campaigns. PepsiCo has been active in mergers and acquisitions activity to create operating synergies and increase firm value. As mentioned earlier, it has acquired such companies as Frito Lay, Tropicana, Quaker Oats, and all these acquisitions seem to be working as intended. PepsiCo is one of the largest food and beverage companies.
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PepsiCo has a strong cash-generating capability and its financial condition give the company ready access to capital markets throughout the world. PepsiCo’s principle source of liquidity is operating cash flows of $4.2 billion derived from net sales of $27 billion. Moody’s and Standard & Poor have given PepsiCo a debt rating of A1 and A, respectively, thus the firm has global accessibility to global capital markets. The company has favorable liquidity ratios. Liquidity ratios include the current ratio, quick ratio, and net working capital and they measure company’s ability to pay its short-term debts. ((PepsiCo, 2001) PepsiCo had to overcome significant communications problems before the deal with Quaker Oats could be consummated.
Reports had been floating in the market for weeks about a not-so- private auction of Quaker, with The Coca-Cola Co. and Group Danone as the other suitors. After PepsiCo: Analysis of Recent PepsiCo offered to pay a 20 percent premium for Quaker, it exercised unusual discipline by not raising its bid, even in the face of competing offers. PepsiCo’s announcement was received very positively by investors – its shares rose over 6 percent in the days after the announcement and have continued to outperform the shares of its peers over time. The merger in 2000 with Quaker Oats continues to pay off for US-based soft drinks and snacks company PepsiCo. The company reported double-digit operating profit growth for the year to December 2002, boosted by expanded margins as a result of synergies from the Quaker deal. The company has already realized $250 million in synergies from the merger and this rose to $400 million by the end of 2004. (smeal.psu.edu, 2002)
PepsiCo reported net revenues for the full year of $25 billion, up 4 per cent on the previous year (or 5 per cent at constant exchange rates). Volume sales for the year were up 4 per cent, with a 5 per cent rise in snack sales and a 4 per cent increase in beverages. But it was at the operating profit level that the synergies with Quaker were most clearly seen, rising 11 per cent for the year to $5.3 billion. Looking at the two divisions separately, the international snacks arm, Frito-Lay International, posted sales of $5.7 billion, up 4 per cent year-on-year, while operating profits surged 20 per cent to $781 million as a result of the Quaker merger.
PepsiCo Beverages International, meanwhile, posted a 1 per cent increase in sales to just over $2 billion, with operating profits increasing 23 per cent to $261 million. (PepsiCo, 2002) Quaker Foods North America (QFNA), saw sales increase 2 per cent during the year to $1.5 billion, while operating profit was up 21 per cent to $481 million. Under the Quaker merger agreement dated December 2, 2000, Quaker shareholders received 2.3 shares of PepsiCo common stock in exchange for each share of Quaker common stock, including a cash payment for fractional shares. They issued approximately 306 million shares of the common stock in PepsiCo: Analysis of Recent exchange for all the outstanding common stock of Quaker. PepsiCo’s chairman and chief executive officer Steve Reinemund said: “In 2002 our portfolio of businesses complemented each other and performed very well overall. We’re pleased to report very strong operating profit and earnings per share growth.”Our businesses are fundamentally very healthy. We’re focused on driving top line growth through innovation and by leveraging our strong brands and go-to-market systems.
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At the same time we are driving productivity improvements that will allow us to re- invest in the top line and continue to expand our margins. Looking forward, over the long run we believe that we can sustainably grow volume and net revenues in the mid-single digits and earnings per share in the low double-digits.” (PepsiCo, 2002) The merger was accounted for as a tax-free transaction and as pooling-of-interests. As a result, all prior period consolidated financial statements presented have been restated to include the results of operations, financial position and cash flows of both companies as if they had always been combined. Certain reclassifications were made to create the presentation of the financial statements, and the fiscal calendar and certain interim reporting policies were also conformed. US GAAP was utilized as the method of accounting. There were no material transactions between pre-merger PepsiCo and Quaker.
The results of operations of the separate companies and the combined company for the most recent interim period prior to the merger and for the years presented in the consolidated financial statements are as follows:
The management team articulated clearly how it planned to integrate Quaker Oats and all of its brands into Pepsi and how capabilities from both companies would be leveraged to achieve additional growth. This biggest strategic decision PepsiCo Corporation ever made added not only the necessary boost in sales needed to attain tremendous growth, but also positioned company as a dominating force in the food and beverage industry. The merger between PepsiCo and Quaker Oats created important cost savings. Due to the similarities of each company’s products, the distributional needs were close to each other. Merging with the major suppliers’ channels of PepsiCo gave Quaker Oats additional benefits and savings. Warehouse forces were also combined that enabled to save time, space and manpower. Beverage manufacturing for Pepsi- Cola, Tropicana and Gatorade has been also consolidated, that gave operational benefits and valuable cost savings.
Economies of scale resulted because certain components that comprise more than one of the beverages would be able to be produced on a larger scale. Thus, PepsiCo and Quaker now share warehouses and distributing system. It is the most important reason why this merger meets all cost savings needs. Latest releases show that PepsiCo reduced its costs from $400 million annually to $230 million . PepsiCo and Quaker Oats combined its forces not only in terms of production but also in terms of human capital.
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Thus, PepsiCo did not have a necessity to invest huge sums of money in improving the system and was just getting benefits from the additional asset the merger has provided. In combining their resources, PepsiCo and Quaker Oats saved money and increased efficiency. All major criteria for raising productivity are met. Physical capital and human capital are combined, and costs from operations are significantly reduced, while increasing returns to scale are applied. All these issues outline a winning merger, one that created $ 25 billion corporation that is the fifth largest in the country.
REFERENCES
http://www.secinfo.com/d2bwb.3n.htm (Pepsico 2001)
Quaker Merger boosts Pepsi Co Profits:
www.nutraingredients-usa.com/Consumer-Trends/Quaker-merger-boosts-PepsiCo-profits
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Recent Quaker and Pepsi co press release:
www.quakeroats.com/qfb_PressRoom/PressReleases/PressRelease.cfm?ID=86
Pepsi and Quaker merger could reduce Pepsi’s flexibility:
www.smeal.psu.edu/news/latest-news/may01/pepsi.html
Pepsi and Quaker finally merged:
www.nutraingredients.com/Industry/PepsiCo-and-Quaker-finally-merged
Pepsi and Quaker oats merger gets green light:
findarticles.com/p/articles/mi_m3374/is_12_23/ai_78269193
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Merger and Pepsi Co resources:
resources.bnet.com/topic/merger+and+pepsico.html
Has the Quaker deal got Coke scared:
www.just-drinks.com/article.aspx?id=85269