Multinational Management

1 GERBER PRODUCTS COMPANY INVESTING IN NEW POLAND

Case Study Analysis # 1 Presentation and Quiz on Tuesday; 22nd October 2013 Case 2-2, Pages 1-20

1.1 CASE BACKGROUND

Gerber to acquire Alima S.A Gerber- Largest baby food producer, located in US (Michigan) Alima S.A- Largest food processing plant, located in Poland

1.2 CHARACTERISTICS OF ACQUISITION

Gerber would gain i. Low cost base for European Operations ii. Get early movers advantage iii. Get rid of heavy excise duty taxes on trade from US iv. Be able to export to neighboring European countries like Hungary v. Be close to European market vi. Gain economies of scale and hence competitive prices Alima S.A would gain i. Modernized aging plant ii. Boost in export iii. Ownership and taxation issues resolved Poland would get the much needed hard currency ($11 million for acquisition) Negotiations were made and agreed upon by both sides until the change in political system

1.3 GERBER COMPANY - INTRODUCTION

Daniel Gerber founder, 1928. 165 variety of jarred baby foods Market leader in US (72% Market Share;1991) Baby apparel under own name and baby clothes as buster brown label Location of plant was critical since Gerber needed fresh fruit and vegetables for its product and minimum carrying cost 600 million jars sold yearly Corporate headquarter in Fremont, Michigan and employed 1200 people Company considered moving after 63 years to Chicago but couldnt compromise on Fremonts loyalty Birth rate in US decreased but Gerber sales increased by 11% in 1991 (total sales -$1.2 billion) Gerber reached 92% of the babies in the US

Competitors Heinz (domestic market leader in Canada) and Beechnut

1.4 GERBER COMPANY EXPANSION AND DIVERSIFICATION CHALLENGE

Gerber diversified to infant clothing; sales increased from 14.5% [1980] to 29% [1990] 90% sales in US (only 3% of the worlds babies reside in the US) Cultural barriers in Japan and Korea, licensed technology in middle east, Australia, western Europe and Africa[ hence no significant growth opportunity] 1992 , Polish government invited bids for Alima S.A

1.5 POLANDS POLITICAL AND ECONOMIC CRISIS

1990 , Economic Reform Establish Market Economy to stabilize inflation Polish Government lowered trade barriers and increase in taxes Inflation declined from 54% to 3% after decline in communism Currency devalued and so did the buying power Prices increased; energy prices rose to 500% Government Deficit to US$400 million Loads of global competition Industrial production fell 30% [1990] , unemployment increased Polish government short on capital; raised funds through world bank and European Bank Polish government in debt of $41 billion in 1989 Transformation of economy depended on foreign investors Ideal target for foreign investors due to high population, high demand 1991. Abolished all restraints on trade (except defense , air and sea port, real estate)

1.6 ALIMA S.A

Located in an agricultural center Farmers technologically advanced Had centralized planning Baby food was only 10% of Altimas total production [60% juices etc.] Produced 300-400 baby jars per minute [Gerber produced 1300 jars per minute] Manager , Maria intelligent , flexible and a true asset No financial record or demand forecast, production based on previous sales No marketing whatsoever $20 million sales yearly, 1200 employees Since it was running successfully without competition, surviving in a capitalist economy was indeed a serve challenge

1.7 GERBERS INVESTIGATION FOR ACQUISITION

Gerber had 2 weeks to decide whether to enter into acquisition bidding (investigate etc.) Polands changing investment laws made Gerber company hesitant Gerber personnel ensured that Alima had up-to-date technology and logistics, they sampled soil to check for contamination and concluded that although there were environmental problems the soil and the plant was good enough. Environmental problems : i. Extensive use of pesticides by farmers ii. Faulty waste system , requires $3million to fix iii. Practices like smoking on production

1.8 FINANCIAL DETAILS OF ACQUISITION

Lasher ( director of corporate planning) evaluated all data of the deal and calculated the value of the acquisition Lasher calculated worth using previous years financial statements and assumed worst case scenarios to be on the safe side Lasher considered tiniest of details for calculation; jars, caps, labels etc. Inflation rates, interest rates, tax rates and political situation were few of the uncertain factors that made calculation not just trickier but also a challenge for lasher. Rates might vary significantly over the years changing values and worth of the business of both Alima S.A and Gerber Products If foreign investors increased rapidly, Gerber might lose some existing privileges. It was assumed that Gerber would price its exports in foreign currency Gerber to export its profit in quarterly dividends Polish government to give Gerber a significant tax credit ( either exempt from paying tax or lessening the amount payable )

1.9 DETAILS OF THE FINAL OFFER

Alima S.A seemed a good deal for Gerber as the net present value was positive even after considering the worst of catastrophes and the internal rate of return was high Gerber offered to purchase 60% of Alimas stock for $11 million Gerber willingly spend $14 million over 5 years to upgrade and amend facilities at Alima S.A and resolve environmental issues

1.10 NEGOTIATIONS
Ministry agreed and Gerber entered 19 shortlisted companies Government ensures employment level remained same at Alima and that its suppliers would remain associated with the company. Gerber offered to train the employees, increase their salaries Gerber did not want Borek Stary Facility ( alcohol beverages) because i. It was against their motto , pure and natural ii. The environmental issues were complex and costly to resolve Government agreed on selling the facility separately at first but later realized it cant be done The agricultural land around Alima was the property of citizens, Gerber purchased the land on lease but was afraid it might be a problem later on as the land could be claimed back Gerber was mostly worried about taxation as in affected their return rate

1.11 CONCLUSIONS
Ministry of privatization changed while negotiations were still in process Gerber was accused of exploiting Polands condition and purchasing Alima to shut it down and sell US products instead The political distress put Gerber in a dilemma whether to proceed with the deal Change in political system would result in the following Problems: 1. Renegotiations would take place 2. Gerber might lose its tax credit and other privileges that previous government agreed upon 3. High public pressure and hence high risk