Pepsi and Quaker Merger

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Introduction…………………3

1. The business – economic setting
a. The Business Strategy………………….4
b. Mission and Strategies………………….5

2. PepsiCo Strategic Positioning
a. Industry Analysis………………….6
b. Company Background…………………7
c. Snack Food…………………7
d. Beverages…………………8
e. Company History – PepsiCo…………………9 f. PepsiCo Financial Analysis…………………10

3. Terms of the acquisition
a. How large was the premium paid to the target …..12 b. PepsiCo's Acquisition of Quaker Oats…………12 c. Quaker boosts Pepsi’s results…………13

4. Merger transaction analysis…………………14 a. Target Firm Valuation…………………17
b. Discounted Cash Flows…………………17
c. Consolidated Cash flows…………………18 d. Test of Merger Performance …………………19 e. Evaluation and Prognosis…………………19

5. References…………………22

Pepsi and Quaker merger analysis

Introduction:

This case talks about the latest trend of mergers and acquisitions and the ensuing fallout. The concern here is about the $14 billion merger of PepsiCo and Quaker Oats. After a long delay with regards to granting permission for this merger, the Federal Trade Commission (FTC) finally gave the go ahead after it realized that there was a split in the opinion of its members. 50 percent of the members voted in favor and the rest against the decision for the merger. This committee was set up to investigate the fairness of the deal with respect to the marketing principles commonly followed. Due to the split in decision, the entire investigation was called off, allowing the deal to proceed.

FTC staff had objected to this merger since they believed that this kind of merger would kill competition in the sports drink market segment. This would lead to an almost monopolistic scenario and give PepsiCo the overriding authority in cutting deals with convenience stores.

This deal, under the able leadership of Steve Reinemund, will create a formidable position of PepsiCo in the drinks and fast food segment. This would push the limit of the revenues to over $25 billions. This merger would mean that Gatorade, one of the leading sports drink, would come under the PepsiCo banner and thus give PepsiCo the leading edge especially over Coco-Cola, in the non carbonated drink segment. This is because Coco-Cola’s PowerAde, a non-carbonated drink aimed at the sports segment has only 15% of the market share while Gatorade has over 80% of the share.

The deal would also consolidate PepsiCo’s position in the ready-to-eat food segment. Quaker’s grain-based snacks and cereals like ‘Life’ and ‘Cap’n Crunch’ will now come under the Frito-Lay banner thus introducing more variety.

1. The business – economic setting

a. The business strategy

The case is definitely one of acquisitions and mergers. This case highlights the business strategies and tactics employed by big corporate houses to kill competition. This case also depicts the importance antitrust laws and focuses on their role in protecting consumer rights.

The main reason as to the emergence of these laws is the existence of monopolies and their harmful effects on the society as a whole. Before proceed with the analysis of the case, is necessary to know what monopoly is all about.

Monopoly: It can be defined as any condition which gives individual sellers, or groups of sellers acting as a unit; some measure of direct control over price.

The features of this kind of business transaction are:
➢ There is one and only one seller and several buyers; ➢ This also hints at no competition from immediate substitutes; ➢ Cross elasticity of demand between the monopolist’s product and any other product is low; ➢ The monopolist is in a position to set the price himself thus implying market power.

Two very important features that enhance the...
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