The Pepsico Company: the Quaker Oats Acquisition

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Company Overview
By the end of 1999, following a multi-year restricting effort, PepsiCo had once again become one of the most successful consumer products companies in the world. In less than four years, it had achieved am 80% increase in net income, on 30% lower sales, and with 75% fewer employees. PepsiCo’s major subsidiaries were the Pepsi-Cola Company, which was the world’s largest manufacturer and distributor of snack chips, and Tropicana Products, the largest marketer of branded juices. Throughout 1999, PepsiCo was closely tracking several potential strategic acquisitions. In the fall of 2000, it appeared that the right moment for an equity-financed acquisition had arrived. At this time, PepsiCo management decided to initiate confidential discussion with The Quaker Oats Company about a potential business combination. Gatorade, a key brand in Quaker’s portfolio, had long been on PepsiCo’s wish list. On October 5, 2000, an investment-banking team from Merrill Lynch met with the top executives of PepsiCo to discuss a possible business combination between PepsiCo and Quaker. The goals of the meeting were: •To assess the value of Quaker’s businesses;

To estimate potential synergies associated with a Pepsi-Quaker merger; and •To come up with an effective negotiation strategy.
PepsiCo executives were confident that Quaker’s beverage and snack food business could contribute to Pepsi’s profitable growth in convenience foods and beverages. However, PepsiCo’s managers, led by CEO Roger Enrico and CFO Indra Nooyi, were committed to upholding the value of PepsiCo shares, and as a result, they were determined not to pay too much for Quaker. PepsiCo’s Origin and History

In the summer of 1898 Caleb D. Bradham, a young man pharmacist from North Carolina, looked for a name that would better describe the “Brad’s Drink,” his concoction of carbonated water, sugar, vanilla and kola nuts. He decided to buy the name “Pep Kola” from the local competitor, which he later changed to Pepsi-Cola, maintaining that the beverage aided in curing dyspepsia, or indigestion. In 1902, Bradham applied for federal trademark protector and founded the first Pepsi-Cola company. As a result of Bradham’s gambling on the post World War 1 price of sugar, the company went to bankrupt in 1923, and its asset were sold for $30,000. It was reorganized as the National Pepsi-Cola company in 1928, only to go bankrupt again three years later. Emerging from bankruptcy with new owners, the company’s fortunes changed suddenly in 1934. In 1965, the company merged with the Texas-based snack manufacturer, Frito-Lay, Inc. in 1970, its total food and beverage sales passed the $1 billion mark. The company, now called PepsiCo, continued to grow through the 1970s and 1980s. During this period, it used acquisitions to diversify out of its profitable, but relatively slow-growth beverage and snack businesses, acquiring North American Van Lines, a trucking company, in 1968; Wilson Sporting Goods in 1970; Pizza Hut restaurants in 1977; and the Taco Bell fast food chain in 1978. In 1984, PepsiCo was restructured to focus on soft drinks, snacks and restaurants, and the transportation and sporting goods businesses were sold. To strengthen its restaurant division, PepsiCo acquired Kentucky fried Chicken in 1986; purchased an equity interest in California Pizza Kitchen in 1992; and acquired East Side Mario’s Restaurants and D’Angelo Sandwich shop a year later. By 1995, PepsiCo sales had reached $30 billon, and it had 470,000 employees worldwide. It was the world’s third largest employer. Restructuring in the Mid-1990s

In the mid-1990s, PepsiCo began to encounter severe problems in its international bottling operations and in its restaurant division. In August of 1996, PepsiCo’s long-time archival, The Coca-Cola Company, bought Pepsi’s largest Venezuelan bottler, and PepsiCo was left with no presence in that market practically overnight. Simultaneously, the company suffered volume and...
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