PEPSICOs BID FOR QUAKER OATS GROUP C14

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Pepsico

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Beverage and Snack company at the core Annual sales of 20b US$ in 1999 Gambled during WW-I and almost vanished Struck gold during recession Diversified succesfully into Snacks Diversified to unrelated industries like transport and sporting goods unsuccesfully Acquistion spree from xxxx to yyyy of restaurent chains Failures in bottling and dining sections Disinvested dining and outsourced

Quaker Oats

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Cereal and Snack company at core Annual sales of 4.7b US$ in 1999 Diversified into numerous unrelated industries, including Snapple, mostly unsuccesfully Disinvested in all irrelevant industries to shift focus to packaged food and beverage industry Product categories include hot cereals, ready-to-eat cereals, golden grain, grain based snacks, sports drinks and others Except Sports drinks and few others, most categories are low growth and high margin

Heavy diversification & agglomeration and then streamlining of both companies A general trend of mgmt followed in that era. Streamlining triggered by Jack Welchs success and spread virally to many organizations Core products of both companies have reached maturity, with reduced growth opportunities, inducing the companies to go in search of new high growth products. Pepsi has repeated its mistake of taking 5/29/12 huge risks

Changes in Arena & Reasons for Change

Demographic effect - baby boomers becoming older lead to choice of healthier foods, probably helping recent success of tropicana and quaker oats. Climatic effect sales of gatorade as sports drink limited to hotter regions nearer to latitude, preventing movement of product to other developed markets The beginning of the outsourcing era can be traced, with Pepsis formation of Pepsi Bottling Group Pepsis innovative payment to 5/29/12 shareholders through share repurchase

Changes in Arena & Reasons for Change

Why Quaker sells

Possession of Gatorade, a product that leads in the segment by a large margin and promises high growth for long period, probably the fastest growing billion-dollar growth potential in the market. Small, publicly-traded and well-managed company, providing the best option for an acquisition at that point of time. Quakers diverse product portfolio and smaller scale provided chance for higher synergies and economies of scale.
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Why Pepsico buys

Pepsicos stock prices have come out of slump in the prices caused by the dot-com boom. It was ideal time for expansion after a lull period of inactivity. Recent success of Tropicana in the hands of Pepsico would encourage pepsico to reachout for more acquisitions. Gatorade, which forms 39% of quakers sales can be seamlessly fitted into pepsicos lineup of beverages Various other synergies, which are listed further in the slides
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Positives of Acquisition

Gatorade can be sold through the Direct Store Delivery, followed by Pepsico, as it will be more effective with better capacity utilization, as most costs are fixed in DSD Pepsicos non-refrigerated beverages like Twister and Dole can be sold through the Brokers distribution system Pepsico will become the Category Captain ov non-refrigerated beverages 60m US$ savings for Pepsico Production of Gatorade also uses Hot-fill method used by most other Pepsico products, hence increasing Capaity utilization Other abstract aspects like better penetration, 5/29/12 visibility.

Positives of Acquisition

Quakers snack division can be combined with Frito Lays to provide better distribution, increasing operating profit by 2004 to 34m US$ Quaker brands positioning gives a lot of consumption opportunities to Frito-Lays.

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Negatives of Acquisition
Quakers oatmeal, RTE cereals, Golden grain and Aunt Jemima businesses do not fit well within Pepsicos strategy Only stock-for-stock transaction is possible Merger has to be accounted as pooling of interests without creation of any goodwill. Pooling of interests accounting adds a lot of restrictions on Pepsico for 2 years, on sharerepurchase or sale Quaker traded at a lower ratio than Pepsico, and hence, every stock-for-stock purchase will dilute Pepsis price Pepsi would have to start giving dividends, 5/29/12 which can become cumbersome to change