In the late 1990’s and early 2000’s the food industry was struggling with weak sales and low inflation which caused waves of consolidation among some of the largest firms in the industry. In 1998 General Mills studied areas of potential growth and value creation for their company which lead to small acquisitions of other firms. Looking to further grow their company, in December 2000, management of General Mills made a recommendation to its shareholders that they authorize the creation of more shares of common stock and approve a proposal for the company to acquire Pillsbury Company, a producer of baked goods, from Diageo PLC. Company Information
General Mills is one of the leading food companies in the world. It is the largest producer of yogurt and the second-largest producer of ready-to-eat breakfast cereals in the United States. The company is primarily engaged in the manufacturing and marketing of branded consumer foods. General Mills also provides branded and unbranded food products to the food-service and commercial baking industries. The company owns many product lines that are marketed under high profile names such as Betty Crocker, Yoplait, Cheerios, and Big G. In 2000, General Mills annual revenue was $7.5 billion and their market capitalization was about $11 billion. They pursued expansion efforts overseas through joint ventures with Nestle and PespsiCo as their brands are mature and offered low organic growth. In order to stay competitive in the food industry General Mills has begun to acquire smaller firms. In acquiring Pillsbury, General Mills would rank as the 5th largest food company in the world.
Diageo is one of the world’s leading companies in the branded beverage alcohol industry. It is engaged in the production and distribution of branded premium spirits, beer and wine. Some of their major brands include Smirnoff, Johnnie Walker, Captain Morgan, Baileys Original Irish Cream, J&B, Tanqueray, Guinness, Crown Royal Canadian, Beaulieu Vineyard and Sterling Vineyards, and Bushmills Irish. The company, along with its subsidiaries, sells its products in 180 markets worldwide. In recent years, Diageo’s beer and liquor businesses have been strong performers. In selling Pillsbury, Diageo would be exiting the food business, leaving it well positioned to pursue additional beer and liquor purchases. Pillsbury
Pillsbury is a baked goods company that operates under the parent organization, Diageo PLC. Pillsbury is one of America’s best recognized names in the food industry due to successfully marketing its goods under the popular Dough Boy character. The company controls several other high profile brands such as Green Giant, Old El Paso, and Progresso. In 2000, Pillsbury’s annual revenue was $6.1 billion and showed a high potential for growth in the food industry. If the deal is accepted, Pillsbury would operate at a wholly-owned subsidiary of General Mills. Industry Analysis
The consumer foods segment is a sub sector of the consumer staples industry. Companies in this industry, such as General Mills, produce products deemed to be necessities that are purchased by the majority of the population regardless of the economic climate. Staples products include basic food and beverage items, household products, prescription drugs, and tobacco. A primary characteristic of this industry is the consistent demand for these products among consumers. They are generally not purchased in mass quantities, but rather, repeatedly and regularly to keep up with steady consumption. As a result of this ongoing demand, companies in this sector typically do not experience a lot of stock volatility and are considered to be less risky than the market as a whole. Porter’s 5 Forces
To assess the economic structure of the consumer foods industry and determine its relative attractiveness for both business and investments, an analysis using Porter’s five forces was...