Oxford Brookes University

Title:
An analysis and evaluation of the
financial and operational
consequences of the acquisition of
Teavana Holdings Inc. by Starbucks
Corporation in year 2012.
A Research and Analysis Project for the BSc
(Hons) in Applied Accounting

Table of Contents
Part
1.

Project Objectives and Overall Research Approach

1.1

1.2

1.3

2.

The Topic
1.1.1

Reason for Choosing Topic

1.1.2

Reason for Choosing the Organisation

Aims and Objectives

1.2.1

Aim of the Research Report

1.2.2

Research Question

1.2.3

Research Objectives

Research Approach
1.3.1

Operational Consequences

1.3.2

Financial Consequences

Information Gathering and Accounting and Business Techniques

2.1

Sources of Information
2.1.1

2.2

2.3

Secondary Sources

Limitations of Information Gathering

2.2.1

Secondary Data Limitations

2.2.2

Ethical Issues Encountered

Accounting / Business Techniques Used:

2.3.1

SWOT Analysis

2.3.2

Ratio Analysis

2.3.3

Altmans Z-score Formula

2.3.4

Piotroskis Scoring System

Page No.

3. Results, Analysis, Conclusions and Recommendations

3.1

3.2

3.3

Company Profiles and Details of the Deal

3.1.1

Acquiring Company Profile

3.1.2

Target Company Profile

3.1.3

Details of the Deal

Analysis and Results

3.2.1

Pre-acquisition Operational Analysis

3.2.2

Financial Analysis of Target Company

3.2.3

Financial Analysis of the Acquirers Company

3.2.4

Post-acquisition Operational Analysis

Conclusions and Recommendations

Page No.

Part 1: Project Objectives and Overall Research

Approach
1.1 The Topic
I had selected Topic 19, provided by Oxford Brookes University, for my research and analysis
project that is An analysis and evaluation of the financial and operational consequences of a
merger between two organisations or of the acquisition of one organisation by another.

1.1.1 Reasons for choosing the topic

My interest for the events relating to mergers and acquisitions (M&A) started after undertaking
an internship program previously. The company that I interned was going through an integration
process at that time after acquiring a business.
Global M&A deals reached highest record value of $4.28 trillion in 2015, breaking previous 2007
record. The most growth has come from the technology, pharmaceutical and biotechnology and
the consumer industries (Mergermarket, 2016).
http://www.mergermarket.com/pdf/MergermarketTrendReport.2015.FinancialAdvisorLeagueTabl
es.pdf Examples of recent M&A deals: Technology industry: Western Digital and SanDisk
Pharmaceutical industry: Pfizer and Allergan Food industry: Kraft Foods and Heinz
The another reason for the selection is because I feel more comfortable in the topic area as I
am able to apply my past knowledge from the ACCA Paper F5, F7 and F9 to evaluate the
financial performance of the company. The business techniques like SWOT and the whole
subject on M&A will be relevant for my future studies in Paper F3 and F4.

1.1.2 Reason for Choosing the Organisation

Selecting a company that I am genuinely interested in is also important for my
motivation to work on the project. Ive chosen the case of Starbucks Corporation
acquisition of Teavana Holdings in 2012 as my research subject.
The reason for the choice is because I am interested to know about Starbucks
performance being the top in its industry and if there are any significant impact from the
latest acquisition decision. It would also allow me more assess to the companys
information as it is a well-known organization. Another reason is my personal fascination
with the brand, being famous for its premium coffee and iconic logo.

1.2 Aims and Objectives

1.2.2 Research Objective
The general purposes of M&A activities are to gain economic benefits from the combined
business and to diversify the companies operational domains. (Maps of World, 2013)
http://finance.mapsofworld.com/corporate-finance/hybrid-financing/purposes-mergersacquisitions.html However, prior statistics that involve businesses with annual revenue between
$20-$300 million has indicated that the success rate for M&A activity is only 50% from the
acquirers perspective. Reasons for the failures may varies, an example for the cause is the
poor execution of the post-merger integration processes (Forbes, 2012).
http://www.forbes.com/sites/forbesleadershipforum/2012/03/19/why-half-of-all-ma-deals-failand-what-you-can-do-about-it/#1a9fc89220ae
This brings us to the objective of this research report, which is to assess whether Starbuckss
business operations and financial performance have improved or declined after the acquisition
of Teavana in 2012.
The aims for this research are to develop an understanding for the key drivers that lead to
Starbucks strategic decision to acquire Teavana and to examine the post-merger effects the
operational and financial aspect of the acquirers overall business.

1.1.1 Research Questions

The following questions have been set to limit the focus area of the project so that the report
meets the research aims and objectives stated above. They are:

What are the reasons behind Starbucks acquisition decision?

How much has change in Starbucks business operations after the acquisition and does
the company achieves its initial envision goal for the acquisition?
What are the significant impacts to Starbucks financial performance after the merger?

1.2 Research Approach

1.3.1 Financial and Operational Consequences
Altmans Z-score formula and PIotroskis Scoring System are applied to determine the target
companys likelihood of bankruptcy and financial strength respectively based on its financial
statement figures before the acquisition.
To achieve the objective of assessing the acquirers financial performance following the merger,
ratio analysis is performed and a study of the trends is done. I have analyse Starbucks financial
information covering six consecutive years, which include the three pre-merger and postmerger years. Together with the financial analyse, significant post-merger changes in the
operational aspects will also be highlighted. The assessment of the business operations
contains a mixture of quantitative and qualitative information that will be used to meet the
research objectives. (OBU Exemplars).
The SWOT analysis tool is used to determine what additional strength, weaknesses,
opportunities and threats that Starbucks has hoped the target company, Teavana, will bring to
the organization. A comparison of the SWOT analysis for the acquisition with the post-merger
operational consequence is made at the end.

Part 2: Information Gathering and Accounting /

Business Techniques
2.1 Sources of Information
2.1.1 Secondary Sources
I have only use secondary sources for my data collection. Since the company is a well-known
public listed company, I believe the secondary data available is sufficient for the purpose of my
research objectives. The use of the internet search engine is the main method employed for
gathering that information.
Secondary data is data that is originally collected by other researchers for a certain purpose and
is reused by another for a different objective. (OBU Exemplars)
The secondary data used in my research are from the following sources:

Audited annual reports of Starbucks that are available on its website.

The companies official websites for information on their products and marketing
methods.
Analyst reports and researches are perhaps the more important source to gain a clearer
picture in the industry and the companies business positions
Online magazine and news articles such as Forbes magazine and The Wall Street
Journal to get more information of the companies activities.
ACCA text books published by BPP and Kaplan was used to revise my technical
knowledge and for my advance reading on related topics.
Other financial and business websites are also useful in my research.

2.2 Limitations of Information Gathering

2.2.1 Limitations of Secondary Data
The benefits from the use of secondary data is that they are readily available and inexpensive to
obtain. Nevertheless, it also has disadvantages. It is still time consuming to identify the relevant
and appropriate information required from the large amount of data available. Checking on its
factual accuracy is also proved to be challenging. Being an ACCA student that is not required to
conduct any research assignments, my research skills are obviously lacking.
While gathering relevant information, I came across a few problems:

Teavanas audited financial statement for 2012 is the only one that is publicly available.
Contradicting information from different credible sources

2.2.2 Ethical Issues Encountered

Since I am using secondary data and the works of others as references in order to conduct my
research project, I am aware of the risk of plagiarism. Therefore, to mitigate this risks, I have
ensured that full citation and proper referencing are done for all the facts that are not contributed
by me. Ill be using the Harvard Referencing System for it.
I must also be mindful to conduct my research objectively and with integrity to avoid any
biasness in making judgement and conclusion.

2.3 Accounting and Business Techniques Used:

As state earlier in my approach to the research, these are the accounting and business models I
have used to meet the research objectives:

2.3.1 SWOT Analysis

SWOT is the mnemonic for Strengths, Weaknesses, Opportunities and Threats. It is a business
appraisal framework to analyse an organisations strength and weaknesses and also to identify
the opportunities and threats arise from the external business environment (BPP, 2015).
Strengths and weaknesses come from the firms internal capability in which the management
have some measure of control. Opportunities and threats refers to the external factors that are
beyond the companys management control (Free Management Ebooks). http://www.freemanagement-ebooks.com/faqst/swot-01.htm
It can also assist in determining if the strategic decision that the company is planning to execute
is sound and logical (Heller, 2006). http://www.leadershipreview.net/takeovers-mergersand-acquisitions-%E2%80%93-avoid-these-common-mistakes-and-thrive
Limitations:
SWOT is a simple tool for analysing a business planning process but may not be suitable for
more complex issues. The following are its other limitations:

time consuming
Ignore prioritisation
No solutions or alternatives offered to the problems identified
Generate a long list and not all may be very meaning (Queensland Government, 2014)
https://www.business.qld.gov.au/business/starting/market-customer-research/swotanalysis/benefits-limitations-swot-analysis

2.3.2 Ratio Analysis

Ratio analysis is used as a means to measure the financial performance of a business to
provide an understanding on how well the company is doing. It is a method to enable
comparative valuation between different financial variables that can be obtain from the financial
statements of the organization. The ratio calculations depend on the purpose it is use for. The
types of ratios are profitability, debt and gearing, liquidity, efficiency and investor ratios (BPP,
2013) It is useful for comparing business of different size and trading currency
Limitations of Ratios:

The followings are the limitations of ratio analysis:

Ignores time value of money

Difference in accounted policy adopted can affect the calculations
Based on historical data
Unfair comparison between companies with different strategy
Possibility of incorrect interpretation (Accounting Tools, 2011)
http://www.accountingtools.com/questions-and-answers/what-are-the-limitations-ofratio-analysis.html

2.3.3 Altmans Z-score Formula

2.3.4 Piotroskis Scoring System

3. Results, Analysis, Conclusions and

Recommendations
3.1

Industry Information and Company Profiles

3.1.1

Retail Coffee and Snacks Store Industry

3.1.1 Acquiring Company Profile

Starbucks Corporation is an American company formed in 1985 that trades in NASDAQ stock
market under the symbol SBUX. Starbucks is a roaster, marketer and retailer of specialty
coffee with total revenues of $19.2 billion for its fiscal year end (FY) in 2015. Its revenues mainly
derive from its licensed stores, package goods and company-operated stores located in over 60
countries and territories. The companys mission is to inspire and nurture the human spirit
one person, one neighborhood at a time. It was named as the top ten for Best Workplaces in
Canada in the past five consecutive years. (Starbucks, 2015)
https://news.starbucks.com/uploads/documents/AboutUs-Company_Profile-Q12016.pdf
In 2011, Starbucks drops the word coffee from its name and introduces a new logo. Since then
it has put more focus on expanding its product range beyond coffee such as juices, baked
goods and tea (FoodBusinessNews, 2013).
http://www.foodbusinessnews.net/articles/news_home/Site_News/2013/01/Juice_baking_busine
ss_come_int.aspx?ID=%7B005C2A7B-634A-49FF-879F-5476193ADDB3%7D&cck=1
http://marketrealist.com/2014/01/understanding-starbucks-cost-structure-operating-expenses/

3.1.2Target Company Profile

Teavana Holdings, Inc. is specialty tea retailer that offers premium loose-leaf teas, teawares and
other tea-related merchandise. The American company is founded in 1997 and is based in
Atlanta in the state of Georgia. It is previously listed in the New York Stock Exchange under the
symbol TEA in 2011. It aims to create a Heaven of Tea retail experience and expanding the
culture of tea. Teavana mainly generates its revenue from the companys mall-based stores and
from its franchises. Its revenue has been rapidly increasing over the years and recorded a total
of $168.1 million in FY2012. (Teavana, 2012)
On 31 December 2012, Teavana is officially acquired by Starbucks and becomes its wholly-own
subsidiary.

3.1.3 Details about the Deals

On 14th November 2012, Starbucks announces it agreement to purchase Teavana in its official
website. It is a friendly takeover and Teavanas founder will resume his role as the to oversee
the companys operations after the acquisition. Starbucks offers a premium of 53% to Teavanas
share price valuing at $15.45 on that date (The Wall Street Journal, 2012).
http://www.wsj.com/articles/SB10001424127887323551004578119283001096190 Starbucks
CEO, Howard Schultz, has said that We will do for tea what we did for coffee during an
interview, referring to its successful coffee chain business. He also stresses the acquisition
decision is not a sign that the companys business growth is slowing down (The Wall Street
Journal, 2012). http://blogs.wsj.com/deals/2012/11/14/starbucks-ceo-we-will-for-tea-what-wedid-for-coffee/
The acquisition deal closes on 31st December 2012 with the agreed consideration price of
approximately $620 million that is paid in full cash. Teavanas shareholders receive cash of
$15.50 for each of their shares. (Starbucks, 2012c).
https://news.starbucks.com/news/starbucks-closes-teavana-acquisition It is the largest
acquisition transaction for Starbucks to this day.
http://marketrealist.com/2014/01/must-know-risks-starbucks-hedge-shrubs/
http://www.forbes.com/sites/greatspeculations/2016/01/18/how-starbucks-plans-to-grow-itsinternational-operations/#62f37b95fc70

3.2 Analysis and Results

3.2.1 Pre-acquisition Operational Analysis
The SWOT analysis on Starbucks decision to purchase Teavana is performed to examine the
strategic aims Starbucks plans to achieve in order to justify the transaction with consideration of
the possible risks of not achieving those aims (Heller, 2006).

SWOT analysis for Teavanas Acquisition

http://www.imaginegrow.com/is-your-business-prepared-for-an-acquisition-teavana-sure-wasstarbucks/
http://www.cheatsheet.com/business/stock-news/starbucks-and-teavana-should-investors-beworried.html/?a=viewall

Strengths

Brand recognisation: Teavanas mission is to become an establish brand in the international

specialty tea industry. It has strived to promote the tea culture while emphasising its product
quality and customer service throughout the years (IGS). Teavana has a stronger and distinct
brand presence in the upscale market compared to Starbucks existing tea brand, Tazo, which
appeals more to the slightly lower end market (The Motley Fools, 2014).
Wider distribution channel: Teavanas stores are mostly located in luxury malls (Starbucks,
2012) while Starbucks stores are usually located in more convenient locations for customers to
purchase their takeaways. The company has plans to build a tea bar concept for Teavana that
offers more in-house products and focusing on leisure (USA Today, 2013).
http://www.usatoday.com/story/money/business/2013/10/23/starbucks-teavana-fast-food-teatea-houses/3146149/ Besides that, Starbucks wishes to expand Teavanas existing stores of
300 to 500 by the year 2015 (Fortune, 2015). http://fortune.com/2015/06/19/starbucks-teavana/
Large product range: Teavana boasted of having more than 100 varieties of premium looseleaf teas from all around the world in addition to selling handcrafted tea wares. The company
markets some of its teas for containing health benefits properties that will appeal to health
conscious consumers. It also have its own special tea blends that would enable it to stand out
among its competitors and (Teavana, 2012). Starbucks wants to include new innovative choices
like fusion teas and tea-based lattes (Bloomberg, 2013).
http://www.bloomberg.com/news/articles/2013-10-31/starbuckss-teahouse-ambitions-for-itsteavana-chain
Teavanas strong revenue growth: Teavana demonstrates impressive growth in revenues of
28% and 26% for the year 2011 and 2012 respectively. Its revenue for 2012 amounted to $168
million
Starbucks expertise and resources: Starbucks is very confident in its experience in retail and
marketing that comes from its successful coffee chain business. Combine with the net worth of
$5.1 billion in FY2012, Starbucks have all the resources to expand Teavanas business and
presence domestically and globally. (Starbucks, 2012a)

Weaknesses
High pricing and sell in bulk: Although Teavana has differentiate its products by ensuring the
quality of its premium loose-leaf teas and promoting the whole Heaven of Tea retail
experience, its products is considered expensive and requires a minimum purchase amount.
This might lead to loss of new customers who would opt for cheaper options (Journal Sentinel,
2013). http://www.jsonline.com/blogs/news/191252151.html
Single distribution center: Teavana has only one distribution center, located in the U.S.A., that
supplies to its 300 stores and franchises in other countries. The company is exposed to high
business risks if there are any disruptions to occur to their supply chain (Teavana. 2012).

Pesticide controversy: Just after Starbuck announces its plan for the acquisition, a short-seller
claims that Teavanas tea contains a material amount of pesticides. Teavana has refuted by
stating that the report is bias as Glaucus Research Group has the financial interest to tarnish
the brand name. http://www.bizjournals.com/atlanta/news/2012/11/20/teavana-denies-glaucusclaims-of.html The report has cause its intended damage as Teavanas share price are lower on
28th November 2012 (The Cheat Sheet, 2009).

Opportunities
Diversifying portfolio: While Starbucks has its own brand of tea, Tazos sales only represent
12% of the companys revenue in FY 2010 (World Tea News, 2011).
http://worldteanews.com/news/starbucks-bolsters-tazo-tea-for-retail-growth Therefore, the
horizontal acquisition will be necessary for Starbucks to attain greater presence and easier
market penetration into the growing $40 billion global tea industry (The NY Times, 2012).
Higher demand for healthy products: As people are getting more health conscious, the need
for health and wellness are increasing. Tea is thought to contain health benefits and consumers
are willing to pay more for its health attributes. As a result, the tea industry in the U.S. is growing
steadily (Euromonitor, 2015) http://www.euromonitor.com/tea-in-the-us/report and Starbucks will
be able to take advantage of the trend to boost its revenue.
Tapping into the developing markets: Starbucks has the ambition to introduce Teavanas
brand to the lucrative Chinese and Indian market. The expansion of its international operations
will be important for the companys growth prospect (Starbucks, 2012a). According to
Euromonitors data for 2013, China is the largest tea consumer in the world, followed by Russia
and then Japan. India ranked sixth. http://blog.euromonitor.com/2014/02/the-worlds-biggestcoffee-and-tea-drinkers.html If Teavana is successful in China, Starbucks will definitely increase
its market share in the global tea industry.
Geographical diversification: In line with the global expansion plan, the acquisition will reduce
Starbucks heavy reliance in the U.S. market. In 2012, revenue from the U.S. accounted for 75%
of Starbucks total revenue (Starbucks, 2012a). North America is predicted to experience slow
economic growth and will only gradually improve in 2017 (Dun & Bradstreet).
http://www.dnb.com/lc/credit-education/global-economic-outlook-2013-to-2017.html Hence, it is
important that Starbucks diversify its business into different regions for a more balanced
international presence and to reduce economic risks.

Threats
Self-cannibalism: Starbucks states that Teavana will provide the opportunity to create a twotier market position, referring to Teavanas focus on higher-end markets and the Tazo brand
that targets the mid-range markets. However, there is a risk that Starbucks will put too much
focus in growing its new business so much so that its existing tea brand suffers as the result.

Integration issues: Lastly, there is still a possibility that Starbucks fail to successfully integrate
the companies after the merger. It also faces the risks of not being able to achieve the aims or
the operational and revenue synergies from the business.

Conclusion:
Overall, the acquisition will bring more benefits and opportunities than risks to Starbucks. The
risks involved will not pose as a great threat as larger organization will be still be able to absorb
the losses (Forbes, 2012) should the merger fail in the short run. This could be the reason for
Starbucks to make the strategic decision.

3.2.2 Financial Analysis

Starbucks Corporation acquired Teavana Holdings on 31st December 2012, which falls in
Starbucks second quarter for FY2013. The post-merger years (FY2013-2015) show
approximately two years and nine months after Teavana is acquired. It is worth noting that
Starbucks had carried out other acquisitions earlier in the first and fourth quarter of FY2012.
Starbucks acquired Evolution Fresh that specialize in premium juice for $30 million in cash on
10th November 2011 to offer healthier menu items in response to the rising consumer demands
for health and wellness (Starbucks,2011). http://investor.starbucks.com/phoenix.zhtml?
c=99518&p=irol-newsArticle&ID=1629169 The company also bought La Boulange bakery brand
from Bay Bread, LLC for $100 million in cash to expand their foodservice segment on June 4th,
2012 (Starbucks, 2012c). http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irolnewsArticle&ID=1702299

Revenues
Diagram 1: Starbucks annual revenues and growth over a period of six years.

Starbucks Annual Revenues and Growth

14.2%
12.0%
10.7%
9.5%

8.5%

$10,707

$11,700

$13,300

$14,892

$16,448

$19,163

0.0%
Revenues

Revenue Growth

Diagram 1 shows that Starbucks revenues have shown steady growth over the six years. In
2010, Starbucks introduce the Blueprint for Profitable Growth plan to leverage its multiple
distribution channels. Starbucks states that the strategy was successful and had contributed to
the growth in revenues and operating income for 2011 and 2012. The companys growing
operations in the emerging markets like China and India combine with the revenue generated

from the two new business acquisitions may have also cause the increase in revenue for 2012.
(Starbucks, 2012a).
In 2013, there was an increase in revenue that was mainly driven by the rise in their global
comparable store sales and additional 1,701 net new stores (Starbucks, 2013) and the price
increase by an average of 1% across their U.S. stores (Bloomberg, 2013).
http://www.bloomberg.com/news/articles/2013-06-25/starbucks-is-raising-its-prices-today-dotbut-by-how-much Teavana, that was acquired approximately nine months ago, had brought in a
total revenue of approximately $156 million that represent 10% of the revenue growth.
Teavanas first Tea bar was opened and strategically located in wealthy side of Manhattan,
U.S. Starbucks branding and merchandise will not be present in Teavanas store (USA Today,
2013). http://www.usatoday.com/story/money/business/2013/10/23/starbucks-teavana-fast-foodtea-tea-houses/3146149/
In 2014, Starbucks had once again showed strong growth in their net revenue and comparable
store sales. This is partly due to another slight increase in pricing and also the companys
innovations and marketing efforts. Starbucks had introduced a new line of carbonated drinks,
Fizio. http://www.forbes.com/sites/greatspeculations/2014/10/31/starbucks-top-line-growth-infy2014-driven-by-higher-pricing-accelerated-expansion-in-new-beveragesegments/#529dc36f6cbd Starbucks had conducted more promotional activities for Teavana in
2014 compared to the previous year. This include the addition of new flavours for Teavanas
iced teas and celebrity endorsement for the brand.
http://www.fool.com/investing/general/2014/06/04/why-the-teavanastarbucks-partnershipmakes-so-much.aspx. Teavanas sales for FY2014 was $173.8 million (Teavana, 2014) which
did not show much growth while compared to last year revenue gained in nine-month time.
https://www.behance.net/gallery/21855449/Teavana-2014-Annual-Report
The commendable revenue growth in 2015 was due to

Revenue by Segments as percentage

1.4%
6.6%
3.8%
8.9%

1.5%
7.4%
4.7%
8.9%

All Other Segments

79.3%

77.5%

1.6%
9.7%
5.4%
8.6%

2.6%
9.5%

3.0%
9.4%

2.7%
9.0%

6.2%
7.8%

6.9%
7.9%

12.5%

Channel Development

74.7%

73.9%

CAP

72.8%

EMEA

6.3%
US

69.4%

http://www.forbes.com/sites/greatspeculations/2014/04/29/starbucks-delivers-strong-figuresagain-sales-and-margins-rise/#793d19473270

Profitability Ratios
Diagram 1: Starbucks Profit Margin Ratios for six consecutive years.

Starbucks Profit Margins Ratios

Source: Calculated from Starbucks financial statements figures from FY2010-2015

Gross Profit Margin

Pre-acquisition (FY2010-2012):
On the other hand, Diagram 2 shows gradual decline in the companys gross profit margin for
2011 and 2012. The reason for the decline may be due to the high coffee bean input price in
2011. In 2012, the lower gross margin is likely caused by the significant increase in occupancy
cost from the company aggressive international expansion. Oversea stores that are located in
main areas usually have more expensive rental compared to the U.S. (Babson, 2013)
http://www.core-corner.com/Web2/GsMaterialDB/HC_HBRC_9/2014-0709/fim0kpa8_20140507.PDF

Post-acquisition (FY2013-2015):
Starbucks revenue increases in 2013 after including the revenues from its new acquisitions.
Their gross margin gradually increases in 2013 and records the highest in 2015 for the six
years.
2013

Lower coffee price

sales leverage in our Americas segment and store portfolio optimization initiatives in
Europe that began in the fourth quarter of fiscal 2012. This was partially offset by
addition of Teavana and continued investment in our emerging brands
Income from equity investees increased $41 million, primarily due to increased income
from of our joint venture operations in Japan and China, as well as improved
performance from our North American Coffee Partnership joint venture, which produces,
bottles and distributes our ready-to-drink beverages.

Operation Profit Margin

2013

Litigation charge* $2,784.1 with Kraft & increase in depre

decreased marketing expenses
Gen & admin costs increase related to overall company growth & our October Global Leadership
Conference.

Net Profit Margin

2013