• 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.