Pepsicos Bid For Quaker

Pepsico
• 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
• Failures in bottling and dining sections
• Disinvested dining and outsourced bottling
• Cash generated used for buyback
• Buys Tropicana and succeeds over initial doubts
Quaker Oats
• 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
• Speculated for acquisition for quite sometime
now, leading to jump in share prices
Changes in Arena & Reasons for Change
• Heavy diversification & agglomeration and then
streamlining of both companies – A general trend of
mgmt followed in that era. Streamlining triggered by
Jack Welch’s 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 huge risks
• Pepsi has done well during depression scenarios
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 Pepsi’s formation of Pepsi Bottling Group
• Pepsi’s innovative payment to shareholders through
share repurchase to avoid double taxation
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.
• Quaker’s diverse product portfolio and smaller scale
provided chance for higher synergies and economies
of scale.
Why Pepsico buys…
• Pepsico’s 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 quaker’s sales can be
seamlessly fitted into pepsico’s lineup of beverages
• Various other synergies, which are listed further in the
slides
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
• Pepsico’s non-refrigerated beverages like Twister and Dole can
be sold through the Broker’s 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, visibility.
• Gatorade Sports Institute can combine with Tropicana
Nutrition Center to bring out better products.
Positives of Acquisition
• Quaker’s 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.
Negatives of Acquisition
• Quaker’s oatmeal, RTE cereals, Golden grain and Aunt
Jemima businesses do not fit well within Pepsico’s 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 share-repurchase or sale
• Quaker traded at a lower ratio than Pepsico, and hence,
every stock-for-stock purchase will dilute Pepsi’s price
• Pepsi would have to start giving dividends, which can
become cumbersome to change back from it.

Pepsicos Bid For Quaker

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Pepsico

• Beverage and Snack company at the core

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