REV. OCTOBER 24, 2008
CARLISS Y. BALDWIN LEONID SOUDAKOV
PepsiCo's Bid for Quaker Oats (A)
By the end of 1999, following a multi-year restructuring 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 an 80% increase in net income, on 30% lower sales, and with 75% fewer employees. Exhibits 1 through 3 contain the company’s recent financial statements. PepsiCo’s major subsidiaries were the Pepsi-Cola Company, which was the world’s second largest refreshment beverage company, Frito-Lay, Inc., the world’s largest manufacturer and distributor of snack chips, and Tropicana Products, the largest marketer of branded juices. PepsiCo’s leading brands included carbonated soft drinks (Pepsi, Diet Pepsi and Mountain Dew), AquaFina bottled water, Tropicana juices and juice-based drinks, Lipton tea-based beverages and Frappucino ice coffee, as well as Fritos and Doritos corn chips, Lay’s and Ruffles potato chips, and Rold Gold pretzels. 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 discussions 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 businesses could contribute to Pepsi’s profitable