The Pepsico Company the Quaker Oats Acquisition free essay sample

Company Overview By the end of 1999, following a multi-year restricting effort, PepsiCo had once again become one of the most successful consumer products companies in the world. In less than four years, it had achieved am 80% increase in net income, on 30% lower sales, and with 75% fewer employees. PepsiCo’s major subsidiaries were the Pepsi-Cola Company, which was the world’s largest manufacturer and distributor of snack chips, and Tropicana Products, the largest marketer of branded juices. Throughout 1999, PepsiCo was closely tracking several potential strategic acquisitions. In the fall of 2000, it appeared that the right moment for an equity-financed acquisition had arrived. At this time, PepsiCo management decided to initiate confidential discussion with The Quaker Oats Company about a potential business combination. Gatorade, a key brand in Quaker’s portfolio, had long been on PepsiCo’s wish list. On October 5, 2000, an investment-banking team from Merrill Lynch met with the top executives of PepsiCo to discuss a possible business combination between PepsiCo and Quaker. The goals of the meeting were: †¢To assess the value of Quaker’s businesses; †¢To estimate potential synergies associated with a Pepsi-Quaker merger; and †¢To come up with an effective negotiation strategy. PepsiCo executives were confident that Quaker’s beverage and snack food business could contribute to Pepsi’s profitable growth in convenience foods and beverages. However, PepsiCo’s managers, led by CEO Roger Enrico and CFO Indra Nooyi, were committed to upholding the value of PepsiCo shares, and as a result, they were determined not to pay too much for Quaker. PepsiCo’s Origin and History In the summer of 1898 Caleb D. Bradham, a young man pharmacist from North Carolina, looked for a name that would better describe the â€Å"Brad’s Drink,† his concoction of carbonated water, sugar, vanilla and kola nuts. He decided to buy the name â€Å"Pep Kola† from the local competitor, which he later changed to Pepsi-Cola, maintaining that the beverage aided in curing dyspepsia, or indigestion. In 1902, Bradham applied for federal trademark protector and founded the first Pepsi-Cola company.As a result of Bradham’s gambling on the post World War 1 price of sugar, the company went to bankrupt in 1923, and its asset were sold for $30,000. It was reorganized as the National Pepsi-Cola company in 1928, only to go bankrupt again three years later. Emerging from bankruptcy with new owners, the company’s fortunes changed suddenly in 1934. In 1965, the company merged with the Texas-based snack manufacturer, Frito-Lay, Inc. in 1970, its total food and beverage sales passed the $1 billion mark.The company, now called PepsiCo, continued to grow through the 1970s and 1980s. During this period, it used acquisitions to diversify out of its profitable, but relatively slow-growth beverage and snack businesses, acquiring North American Van Lines, a trucking company, in 1968; Wilson Sporting Goods in 1970; Pizza Hut restaurants in 1977; and the Taco Bell fast food chain in 1978. In 1984, PepsiCo was restructured to focus on soft drinks, snacks and restaurants, and the transportation and sporting goods businesses were sold.To strengthen its restaurant division, PepsiCo acquired Kentucky fried Chicken in 1986; purchased an equity interest in California Pizza Kitchen in 1992; and acquired East Side Mario’s Restaurants and D’Angelo Sandwich shop a year later. By 1995, PepsiCo sales had reached $30 billon, and it had 4 70,000 employees worldwide. It was the world’s third largest employer. Restructuring in the Mid-1990s In the mid-1990s, PepsiCo began to encounter severe problems in its international bottling operations and in its restaurant division.In August of 1996, PepsiCo’s long-time archival, The Coca-Cola Company, bought Pepsi’s largest Venezuelan bottler, and PepsiCo was left with no presence in that market practically overnight. Simultaneously, the company suffered volume and profit declines in its restaurant businesses. Between 1988 to 1994, PepsiCo had invested close to $7 billion to acquire thousands of fast food and casual dining outlets. But the operational complexity of these businesses was a tax on PepsiCo’s management. In April 1996, Roger Enrico, formerly the head of the Frito-Lay division, became the CEO of PepsiCo. He acknowledged that the company had invested ‘too much many too fast, trying to achieve heroic overnight success where, in retrospect, the odds were tougher that they seemed. † (Letter From the Chairman, 1996 PepsiCo Annual report) In the restaurant division, Enrico’s team began by divesting PepsiCo restaurant supply and distribution company and the smaller casual dining businesses. Simultaneously, the company announced plans to spin off its core restaurant businesses into a separate company. In 1997, PepsiCo combine its three restaurant businesses, Pizza Hut, KFC and Taco Bell, into a new corporate entity, Tricon Global restaurants.At the same time, PepsiCo managers embarked on a major restricting of the international beverage division. The goals of the program were to lower fixed costs, write down underperforming assets, and divest noncore businesses. Thus in 1998 PepsiCo created the Pepsi Bottling Group (PBG) with $7 billion in sales, and bottling operations in countries ranging from the United Stated to Russia. This move separated the bottling and concentrates parts of the business, and allocated responsibility for building operational efficiency to the bottling companies.Retaining a 35% noncontrolling interest, PepsiCo sold 65% of PBG’s equity in an initial public offering in 1999. The sale brought $1 billion in cash onto Pepsi’s balance sheet, and led to a significant reduction in the company’s asset base. Signaling management confidence in the new corporate strategy, PepsiCo used the cash generated by the restaurant and bottling divestitures to launch a share repurchase program. It bought back 54 million shares in 1996, 69 million shares in 1997 and 59 million shares in 1998. PepsiCo acquired the Tropicana juice business from Seagram’s for $3. 3 billion in cash. The acquisition gave the company a strong market presence in the fast-growing noncarbonated beverage segment. Compared to Pepsi’s existing businesses, Tropicana provided a lower return on assets and invested capital, but PepsiCo’s managers, especially Enrico and Indra Nooyi, the CFO, saw a great opportunity for strong margins and profitable growth if this superior brand were brought under the PepsiCo umbrella. At the time of the Tropicana acquisition, there was a perception on Wall Street that Pepsi might have paid too much. Two years later, however, the Tropicana acquisition was viewed as an outstanding success. The Quaker Oats CompanyNearly a century old in 1999, Quaker Oats was a worldwide consumer goods company with annual sales of $4. 7 billion. In addition to its hot cereals, Quaker Oats and Quaker Instant Oatmeal, the company’s portfolio of brands included Gatorade sports beverages, granola snack bars, Life and Cap’n Crunch ready-to-eat cereals, and rice-a-Roni and Near East flavored grain dishes. In 1999, Quaker was emerging from a period of restricting and refocusing of its core businesses. During the decade prior to 1999, Quaker divested businesses with more than $2 billion in revenues, or about a third of its initial asset base. In 1994, Quaker paid $1. billion for Snapple’s corporation, which sold branded juice-based beverages. Quaker then made the mistake of replacing Snapple’s distributors, and alienating the brand’s target consumers. After incurring dramatic losses, Quaker sold the business to Triac in 1997 for $300 million. Robert Morrison joined the company as CEO in 1997, and proceeded to lead the company through an impressive turnaround. By 1999, 93% of Quaker’s U. S sales came from brands holding the number-one or number-two positions in their product categories, and the company was perceived to be one of the best-managed companies in the packaged food and beverage industry.The drink was named for school’s football teams, the Gators: its introduction in the early 1970s launched the commercial sports beverage industry. Quaker acquired rights to the formula and the name in 1983. By 1999 Gatorade was well established as the world’s leading sports drinks with $1, 9 billion in global sales, and 82% of the US sports beverages market. At the time of the acquisition by Quaker, Gatorade had only to flavors on the market: orange and lemon-lime. By 1999, there were more than 20 different flavors, from Whitewater Splash to Cool Blue Raspberry. In the summer of 2000, Quaker launched vitamin-fortified flavored water called proper under the Gatorade brand umbrella in southern US markets. This new product was advertised asâ€Å"fitness water†. Finally, Quaker’s management had decided to extend the Gatorade brand into the $500 million energy bar market, which was growing at an annual red of 30%. This was a natural move, given Quaker’s core expertise in snack bar product, in the fact that nearly 70% of energy bar consumer also drank Gatorade.