PepsiCo's Bid for Quaker Oats – Case Study Example
PepsiCo’s Bid for Quaker Oats PepsiCo had been looking for a strategic acquisition ever since it’s restructuring. The restructuring exercise had ledto a dramatic rise in its margins on lower sales and employee strength. However, due to a sudden boom in information technology, the consumer products sector was not a hot favorite among the investors and therefore, PepsiCo’s executives thought it wise enough to wait for the right moment. The dotcom bubble burst in 2000 gave then this opportunity and Quaker Oats seemed to be the best fit in their long term acquisition strategy.
PepsiCo was in a position to benefit significantly from the synergies to be achieved as a result of acquisition of Quaker Oats. Gatorade, one of the major products of Quaker, used warehouse brokers’ distribution system in contrast to PepsiCo’s Direct Store Delivery System. Both the systems were appropriate for their products. Through the acquisition, PepsiCo would be able to leverage Gatorade’s distribution system for its low volume products such as Tropicana. Moreover, benefits would be derived from economies of scale through common suppliers, production lines and capacity utilization. The acquisition would also enable PepsiCo to diversify its range of snacks.
However, there were a few problems with the acquisition. PepsiCo only wanted a stock for stock transaction through pooling of interests, hence leaving no room for goodwill. As a result of this accounting method, PepsiCo would not be able to divest its assets in Quaker for 2 years. Another problem was that, PepsiCo would not be able to buy back its shares in large numbers. This cash distribution policy had been used extensively by PepsiCo and Quaker in the past to consolidate their assets. This acquisition, therefore, called for a sudden and big change in this policy.
Another problem in the acquisition was that PepsiCo was more interested in Gatorade which constituted 40-45% of Quaker’s business while the other product lines such as food products may act as a liability for PepsiCo. Also, Quaker’s Price-Earnings ratio was lower than PepsiCo’s and an acquisition in the proposed manner could lead to erosion of PepsiCo’s earnings.
There is no perfect solution to these problems but if PepsiCo sees considerable value in this acquisition, there is no harm in changing its cash distribution policy for the short term. Also since PepsiCo repurchased shares in the recent past. It may not be in urgent need to do the same for quite some time. The synergies gained as a result of this acquisition are sufficient to justify it. The company would gain significant cost savings as a result of Quaker’s distribution system, complementary product lines and health quotient of its products. These cost savings would more than offset the losses due to changes in cash distribution policy.
Since, PepsiCo is interested only in Gatorade; it could also consider having talks to acquire only this part of Quaker’s business. However, this would require a completely different acquisition strategy as compared to stock for stock transaction. As far as Price-Earnings ratio is concerned, it is the best for Quaker among competitors. In other words, Quaker is the best possible acquisition target for PepsiCo at the moment. This may a lead to a short term dilution of its earnings and affect stock performance. The same should get compensated over the medium term.
Baldwin, Carliss Y & Soudakov, Leonid. “PepsiCo’s Bid for Quaker Oats (A)”. Harvard Business School, 2008