Mergers and Acquisitions

Intro

At the beginning of the 21st century the future of the beverage and food industry seemed to be unclear. With a slow growth rate of only 2% per year, food and beverage companies were desperately seeking the ways to enhance sales and profits. Many companies such as Kellogg's, Sara Lee, Quaker Oats and others considered merging to be a solution and thus the turn of the 21st century was marked by $ 30.5 billion worth of mega-mergers . One of the largest mergers was the merger between PepsiCo and Quaker Oats which occurred on August 2,2001. 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. Detailed analysis of this decision, its impact on productivity and cost is presented below.

Analysis

In order to understand clearly the motivating factors of this decision, it would be useful to describe the nature and position of the two companies on the global market arena prior to the merger. Quaker Oats was formed in 1901 in Raven, Ohio by joining several oat-milling companies. Before the merger, 92% of Quaker Oats' U.S. brands held number one and number two positions in their respective categories. However, throughout its life, Quaker frequently tried itself in non-food industry, which all weakened the company's greatness and left little worse off. The primary reason was that Quaker could not handle the scale of big corporation. The biggest strategic decision that followed by a huge success was acquiring the rights to sell Gatorade, as it captured 84% of the sport drink market. In 1994, Quaker bought rights to sell Snapple, but the result was much worse than expected. Quaker bought Snapple for $1.7 billion and sold it in 1997 for $300 million, making a net loss of $1.4 billion . Due to this huge fiasco, Quaker could not survive independently any more and needed a financial bailout. Merger with PepsiCo was considered to be a solution and in the beginning of December, 2000 Quaker sealed the deal. The transaction was done in exchange of shares - 2.3 PepsiCo shares/1 Quaker Oats share, thus leaving the deal tax-free.

A North Carolina pharmacist Caleb Bradham founded PepsiCo in 1890 as a beverage company. Throughout its history, PepsiCo developed and acquired many different products, merged with Frito-Lay Snack Company, bought Tropicana in 1998 that was one the smartest strategic decisions. Currently PepsiCo has revenues of about $27 billion and over 143,000 employees in over than 200 countries. Over the years PepsiCo has been competing with its major rival Coca Cola for being the leader in carbonated soft drinks in the marketplace, as it was the favorite choice of consumers. However, in recent years market conditions have changed and due to health trends, customers' attention turned to non-carbonated beverages. Demand for non-carbonated drinks increased significantly. It had a stable sales growth of 8% - 9% a year in comparison with 2% - 3% of carbonated beverages. This condition explained where the major profit could be made. Before the merger, PepsiCo portfolio of non-carbonated beverages included Lipton teas, Tropicana juices and Aquafina water. Gatorade was worth of attention and despite Quaker's financial difficulties, commanded over 84% of the sport drinks market . It made clear that acquiring Quaker Oats would make PepsiCo a leader on the non-carbonated beverages market. That was one of the reasons to seal the deal between two corporations. Gatorade was not the only interest of PepsiCo. On the contrary, Quaker Oats snack line, including granola bars, rice snacks, fruit and oatmeal bars perfectly completed an existing successful line of PepsiCo's Doritos and Tostitos corn chips. That gave two companies an ability to extend their pool of consumers.

Quaker Oats and PepsiCo completed each other not only in terms of their products but also in advertising strategy. PepsiCo strategy known as "Pepsi Generation" created an image that Pepsi products