Finance II

PepsiCo's Bid for Quaker

Discussion Questions

4/21/11

Summary (from CP): PepsiCo management and CEO Roger Enrico have decided to initiate confidential discussions with The
Quaker Oats Co. about a potential business combination. This case illustrates the negotiation process in mergers an acquisitions, the
role of outside options, and bidding wars. The case is set in October 2000.

PepsiCo is determined not to pay too much for Quaker and will only consider a stock-for-stock-transaction.
Under this structure, the merger would be a pooling-of-interests and no goodwill is created and neither companys shareholders
have to recognize a gain or loss for income tax purposes.
However, PepsiCo cant divest any of Quakers assets for two years, including the slower growth food divisions that do not fit
with PepsiCos strategy.
Additionally, PepsiCo cannot repurchase shares for two years, which had been its primary mode of returning cash to
shareholders.
o
PepsiCo will need to alter its cash distribution policy for the next two years.

Questions
1. See Tutorial
2. Does a Pepsi-Quaker combination have a compelling rationale?
YES
GATORADE: This is the main reason behind the acquisition. Gatorade allows PepsiCo to become the leader in non-carbonated
beverages, a market that is growing at 8-9%pa, which is three times faster than the CSD market.
o Synergies with Tropicana: Adding Gatorade, would give PepsiCo 25% of the $23B non-carbonated market = $5.75B,
which is approx 32% of PepsiCos 1999 revenues.
o Distribution synergies: Adding Tropicana to Gatorades distribution system for supermarkets and convenience stores to
dominate the nonrefrigerated juice segment. Projected $400M in sales and $45M in operating profit by 2004.
Procurement savings of $60M annually from reductions in the cost of raw materials and suppliers.

Key Players / People

o
o

Roger Enricho CEO

PepsiCo
Indra Nooyi CFO PepsiCo

Key Facts/Terms/Questions

Additional topics

FIN quiz due Friday.

Savings of $65M annually from better capacity utilization in manufacturing, warehouse, delivery and logistics systems.
Use PepsiCos existing extensive distribution network to increase Gatorade penetration in vending machines and other niche
channels.
Integrate Quakers snacks into Frito-Lays distribution.
o Projected increase in revenues of $200M and increase in operating profit of $34M.

Quakers nonsnack food business (Oatmeal, RTE cereals, etc) are highly profitable and generate significant free cash flow.
NO

PepsiCo cant divest any of Quakers assets for two years, including the slower growth food divisions that do not fit with
PepsiCos strategy.

Additionally, PepsiCo cannot repurchase shares for two years, which had been its primary mode of returning cash to
shareholders.
o
PepsiCo will need to alter its cash distribution policy for the next two years.

Quakers nonsnack food business makes up 55% of Quaker.

Quaker is trading at a P/E of 22.6 compared to an average of 18.7 of the Food Comps in Ex 12.

PepsiCo does not want to dilute EPS and this acquisition has the potential to hurt earnings if the exchange ratio is too high.
3. PepsiCos board prefers an all-stock deal. Suppose that Quaker and Pepsi are fairly valued as in Question 3 of the
tutorial, with synergies of $4.7B. What is the most PepsiCo should be willing to bid for Quaker? How does your answer
change if Pepsi or Quaker is not fairly valued as a stand alone?
From the tutorial, the most PepsiCo should pay is $15.3B which is a zero NPV X-ratio of 2.44.

If either company is not valued fairly, the total acquisition price will adjust accordingly. See Q4 on tutorial.
4. How should Enrico approach Quaker? What can he do to minimize the probability of a bidding war against Coke?
Propose a friendly takeover that includes maintaining Quakers brand identity and most of the management.

Please include page numbers and references wherever possible, especially for key players, terms, and dates

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Finance II

PepsiCo's Bid for Quaker

Discussion Questions

4/21/11

Demonstrate synergies between PepsiCo and Quaker and potential shareholder value that can be captured with a merger.
o Quantify the larger synergies of a PepsiCo-Quaker merger over a Coke-Quaker deal. Q3 in tutorial.

PepsiCo should be willing to pay a premium in the short term to gain the long term revenue increases, cost-savings and
qualitative synergies.
Minimize the chances of a bidding war by making a preemptive bid and expediting the process.

Please include page numbers and references wherever possible, especially for key players, terms, and dates

Key Players / People

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