9-801-458 REV. OCTOBER 24, 2008 CARLISS Y. BALDWIN LEONID SOUDAKOV PepsiCo’s Bid for Quaker Oats (A) Introduction 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 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’s shares, and as a result, they were determined not to pay too much for Quaker. ________________________________________________________________________________________________________________ Leonid Soudakov (MBA ‘01) prepared this case from published sources under the supervision of Professor Carliss Y.
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No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 801-458 PepsiCo’s Bid for Quaker Oats (A) PepsiCo’s Origins and History In the summer of 1898 Caleb D. Bradham, a young 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 protection and founded the first Pepsi-Cola Company. As a result of Bradham’s gambling on the post-World War I price of sugar, the company went bankrupt in 1923, and its assets 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 uddenly in 1934. That year, in the middle of the Great Depression, it introduced a 12-ounce bottle of Pepsi Cola for “just a nickel. ” Its sales soared, and the Pepsi-Cola Company embarked on six decades of sustained and profitable growth. 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 major products in its portfolio at this time were Pepsi-Cola, Diet Pepsi and Mountain Dew beverages, plus Fritos, Lay’s, Ruffles, Doritos, Cheetos, and Rold Gold snacks.
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 Shops a year later. By 1995, PepsiCo sales had reached $30 billion, 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 archrival, The CocaCola Company, bought Pepsi’s largest Venezuelan bottler, and PepsiCo was left with no presence in that market practically overnight. In Brazil and Argentina, a bottler jointly owned by PepsiCo and local investors, came close to bankruptcy. The bottler’s debts were converted into equity, a move that essentially eradicated Pepsi’s claim: PepsiCo reported a one-time loss of $576 million as a result of this restructuring. Simultaneously, the company suffered volume and profit declines in its restaurant businesses.
Between 1988 to 1994, PepsiCo had invested close to $7 billion to acquire thousands of fast food and casual dining outlets. But the operational complexity of these businesses was a tax on PepsiCo’s management. Moreover, because of their capital intensity, even profitable restaurant chains could not maintain high returns on invested capital without commensurately high levels of debt. Finally, PepsiCo’s beverage sales to other restaurant chains suffered because of the company’s dual role as a beverage supplier and a major competitor through its own fast food chains. 2
PepsiCo’s Bid for Quaker Oats (A) 801-458 In April 1996, Roger Enrico, formerly the head of the Frito-Lay division, became the CEO of PepsiCo. He acknowledged that the company had invested “too much money too fast, trying to achieve heroic overnight success where, in retrospect, the odds were tougher that they seemed. ”1 In the restaurant division, Enrico’s team began by divesting PepsiCo’s restaurant supply and distribution company and the smaller casual dining businesses. Simultaneously, the company announced plans to spin off its core restaurant businesses into a separate company.
In 1997, PepsiCo combined its three restaurant businesses, Pizza Hut, KFC and Taco Bell, into a new corporate entity, Tricon Global Restaurants. PepsiCo received $4. 5 billion in cash from Tricon as repayment of certain amounts due and a dividend; Tricon’s shares were then distributed to PepsiCo’s shareholders, and simultaneously listed on the NYSE. These moves created a new public company, with $10 billion in sales and a market capitalization of $4. 5 billion. Altogether, the divestitures of the restaurant businesses brought $5. 5 billion of cash proceeds to PepsiCo.
At the same time, PepsiCo’s managers embarked on a major restructuring of the international beverage division. The goals of the program were to lower fixed costs, write down underperforming assets, and divest noncore businesses. Following the lead of Coca-Cola, the company consolidated its previously dispersed bottling operations into the hands of a few large, well capitalized “anchor” bottlers, who were focused solely on manufacturing, selling and distributing Pepsi’s line of beverages. The new bottlers were designed to be counterweights to large retailers, like Wal-Mart and Carrefour, in the rapidly consolidating retail marketplace.
Thus in 1998 PepsiCo created the Pepsi Bottling Group (PBG) with $7 billion in sales, and bottling operations in countries ranging from the United States to Russia. This move separated the bottling and concentrate parts of the business, and allocated responsibility for building operational efficiency to the bottling companies. Retaining a 35% noncontrolling interest, PepsiCo sold 65% of PBG’s equity in an initial public offering in 1999. The sale brought $1 billion in cash onto Pepsi’s balance sheet, and led to a significant reduction in the company’s asset base.
Signaling management’s confidence in the new corporate strategy, PepsiCo used the cash generated by the restaurant and bottling divestitures to launch a share repurchase program. It bought back 54 million shares in 1996, 69 million shares in 1997 and 59 million shares in 1998. Management was now able to focus on building a strong portfolio of brands in beverage and snack foods. In 1998, PepsiCo acquired the Tropicana juice business from Seagram’s for $3. 3 billion in cash. The acquisition gave the company a strong market presence in the fast-growing noncarbonated beverage segment.
Compared to Pepsi’s existing businesses, Tropicana provided a lower return on assets and invested capital, but PepsiCo’s managers, especially Enrico and Indra Nooyi, the CFO, saw a great opportunity for strong margins and profitable growth if this superior brand were brought under the PepsiCo umbrella. Investment analysts and portfolio managers were more skeptical, however. At the time of the Tropicana acquisition, there was a perception on Wall Street that Pepsi might have paid too much. Two years later, however, the Tropicana acquisition was viewed as an outstanding success.
Tropicana’s sales volume and profitability consistently exceeded market expectations every quarter from the date of acquisition in the fall of 1998 through September 2000. Moreover, the integration of the new business into PepsiCo’s corporate structure was seamless: neither Tropicana’s brand heritage, nor its unique distribution system was harmed by the acquisition process. 1 Letter From the Chairman, 1996 PepsiCo Annual Report. 3 801-458 PepsiCo’s Bid for Quaker Oats (A) Exhibit 4 shows PepsiCo’s stock price history from October 31, 1997 through October 4, 2000.
Throughout 1999, PepsiCo’s stock price stagnated as investors shied away from the traditional packaged goods companies in favor of the Internet and technology stocks. This lackluster performance caused PepsiCo’s management to abstain from any major acquisitions. In the words of CFO Indra Nooyi, “we wanted a few quarters of solid performance behind us, and our currency— that is, our stock price—to reflect our underlying value. ”2 When the Internet bubble burst in March 2000, PepsiCo’s stock price began to rise: between March 8 and October 4, it appreciated from $30. 0 to $45. 125, or almost 50%. PepsiCo’s managers believed that it was time to see if a deal could be struck with Quaker that would be advantageous to both sides. The Quaker Oats Company Nearly a century old in 1999, Quaker Oats was a worldwide consumer goods company with annual sales of $4. 7 billion. In addition to its hot cereals, Quaker Oats and Quaker Instant Oatmeal, the company’s portfolio of brands included Gatorade sports beverages, Granola snack bars, Life and Cap’n Crunch ready-to-eat cereals, and Rice-a-Roni and Near East flavored grain dishes.
Exhibits 5-7 contain Quaker’s most recent financial statements as of October 4, 2000. Exhibit 8 provides data on Quaker’s financial performance broken down by beverage and food segments and by region. Exhibit 9 shows Quaker’s total sales and growth rates by product line for the years 1994-1999. In 1999, Quaker was emerging from a period of restructuring and refocusing of its core businesses. During the decade prior to 1999, Quaker divested businesses with more than $2 billion in revenues, or about a third of its initial asset base.
The divested operations included chemicals, toy manufacturing, specialty retailing, restaurants and pet foods, as well as the infamous Snapple beverage business. (In 1994, Quaker paid $1. 7 billion for Snapple Corporation, which sold branded juice-based beverages. Quaker then made the mistake of replacing Snapple’s distributors, and alienating the brand’s target consumers. After incurring dramatic losses, Quaker sold the business to Triarc in 1997 for $300 million. ) Robert Morrison joined the company as CEO in 1997, and proceeded to lead the company through an impressive turnaround.
By 1999, 93% of Quaker’s U. S. sales came from brands holding the number-one or number-two positions in their product categories, and the company was perceived to be one of the best-managed companies in the packaged food and beverage industry. However, because it was a relatively small player in a highly concentrated and competitive global industry, Quaker was also seen as a potential acquisition target. Table A shows the distribution of revenues among the major players in the global packaged food and beverage industries.
Indeed, in August 2000, David Nelson, an analyst at CSFB estimated Quaker’s synergies with various large food and beverage companies, and translated those figures into a potential takeover price for the company. His calculations are summarized in Table B. 2 Quoted in Lauren R. Rubin, “Profitable Fit,” Barron’s, December 11, 2000. 4 PepsiCo’s Bid for Quaker Oats (A) 801-458 Table A Major Companies Competing in the Global Packaged Food and Beverage Industries Annual Revenues, $Bns 50 40 30 20 10 0 Heinz Kraft Quaker Oats Hershey General Mills Coca-Cola Campbell PepsiCo Unilever Keebler Danone Kellogg Nestle
Table B Potential Acquirer’s Estimated Synergies ($ in millions) Synergy Estimates Savings Kellogg Campbell Philip Morris Coca-Cola Pepsi-Cola Nestle Danone Source: Capitalized Value Total 450 200 450 650+ 425 400 275 Per OAT Share $20. 36 $9. 05 $20. 36 $30. 00+ $19. 23 $18. 10 $12. 45 Potential Takeover Price $95. 36 $84. 05 $95. 36 $105+ $94. 23 $93. 10 $87. 45 Revenues 150 25 150 500+ 250 150 100 300 175 300 150 175 250 175 CSFB Equity Research Report on Quaker Oats, August 1, 2000. Interest in Quaker was centered on its Gatorade line of sports beverages, which accounted for 39% of Quaker’s sales in 1999.
According to one analyst report in August 2000, “As a small, publicly traded, now well-managed company owning possibly the fastest-growing billion dollar growth potential product in the food and beverage industry, there is little doubt that Quaker is an attractive target or at least a highly desirable merger partner. ”3 3 David C. Nelson, David S. Bianco, “Quaker Oats: Is It in the Stock? ,” Credit Suisse First Boston Equity Research, 08/01/2000, p. 4. 5 801-458 PepsiCo’s Bid for Quaker Oats (A) Rumors linking PepsiCo and Gatorade first surfaced in 1994.
Late in 1996, Quaker reportedly attempted to sell both its beverage businesses (Gatorade and Snapple) as a package for about $3 billion. A year later, analysts predicted that PepsiCo’s would use the proceeds from the spin-off of its restaurant unit to finance an acquisition of Gatorade. Finally, in a report published in March 2000, Bill Pecoriello, an analyst at Sanford C. Bernstein & Co. , advocated a PepsiCo-Quaker merger, saying that PepsiCo was “strongly positioned” to leverage Gatorade through its distribution system in the US and internationally, and to sell Quaker snacks through its Frito-Lay network.
Fueled in part by speculation that it might be acquired, Quaker stock appreciated almost 80% from its low of $45. 9375 on March 14 to its recent high of $79. 125 on September 29, 2000. Exhibit 10 shows Quaker’s stock price history from October 1997 through October 4, 2000. Exhibit 11 calculates selected ratios for PepsiCo and Quaker for the years 1996 to 2000. Exhibit 12 provides data on comparable companies. Exhibit 13 shows market interest rates as of October 4, 2000. Gatorade Gatorade was created on the campus of the University of Florida in 1965.
Researchers at the school wanted to create a drink that would prevent dehydration among athletes. The drink was named for school’s football team, the Gators: its introduction in the early 1970s launched the commercial sports beverage industry. Quaker acquired rights to the formula and the name in 1983. By 1999 Gatorade was well established as the world’s leading sports drink with $1. 9 billion in global sales, and 82 percent of the U. S. sports beverage market. Its growth had been remarkable: From 1997-1999, Gatorade’s sales grew at an annual rate of 12 percent, while profits grew at around 15 percent (see Exhibits 8 and 9).
Over the next five years (2000-2004), Quaker’s management expected Gatorade sales to increase by $1 billion, implying a 9. 25% cumulative average growth rate. Should that growth materialize, economies of scale were expected to drive profits upward at a 13. 5% rate over the same time period. As a rehydrating and energy beverage, Gatorade was a seasonal product, with the majority of its sales occurring in the warmer months of April to October. Highest levels of per capita consumption were in the southern parts of United States. Gatorade’s international presence was limited, however: less than 20% of its sales came from outside North America.
Its European launch in the mid-1980s had been unsuccessful, partly because of poor brand positioning, but also because heat-driven beverage consumption was not common in Europe’s colder climates. Quaker’s managers believed that Gatorade had huge growth potential in the warm-weather climates of Latin America and Asia, but the shaky economies in these regions presented major challenges to sustained, profitable growth. At the time of the acquisition by Quaker, Gatorade had only two flavors on the market: orange and lemon-lime. By 1999, there were more than twenty different flavors, from Whitewater Splash to Cool Blue Raspberry.
Quaker was also seeking to extend the Gatorade’s brand into new product arenas. In the summer of 2000, Quaker launched a vitamin-fortified flavored water called Propel under the Gatorade brand umbrella in southern U. S. markets. This new product was advertised as a “fitness water”: it delivered the vitamins, carbohydrates, and antioxidants present in Gatorade with only one-fifth of the calories. This move marked Gatorade’s entrance into the fast-growing bottled water market. At the same time, the company launched Torq, a quick energy, high-carbohydrate diet supplement for intense athletes.
Although Torq was a niche product with limited market prospects, it signaled Gatorade’s continuing commitment to sports nutrition, thereby enhancing consumers’ perception of the brand. 6 PepsiCo’s Bid for Quaker Oats (A) 801-458 Finally, Quaker’s management had decided to extend the Gatorade brand into the $500 million energy bar market, which was growing at an annual rate of 30%. This was a natural move, given Quaker’s core expertise in snack bar products (see below), and the fact that nearly 70% of energy bar consumers also drank Gatorade. Quaker’s Food Businesses
Quaker’s food businesses were based on an assortment of brands in the categories of hot and ready-to-eat cereals, grain products, snack bars, maple syrups, pancake mixes and grits. Following Morrison’s restructuring, all product lines were profitable, but for the most part their growth rates were low (see Exhibits 8 and 9). None of Quaker’s current food brands had the potential to exceed $ 1 billion in sales in the foreseeable future:? Hot cereals Oats were Quaker’s original product, but by 1999, hot cereals represented only 13% of the company’s U.
S. sales. Still oats were the company’s most profitable product line with operating contribution margins of almost 30%, and high returns on invested capital. Recently, sales had benefited from a growing consumer focus on healthy living and diet. Thus in 1999, Quaker’s hot cereal sales increased by 12. 5% compared with the compound annual sales growth of 1. 6% over the prior five years (see Exhibit 9). Quaker managers projected considerable volume growth in this category as the baby boomers grew older and became even more health conscious.
In the eyes of consumers, the main drawbacks of oatmeal were its taste and inconvenience in preparation. New product development focused on these issues. Thus in 1999 Quaker introduced several new instant oatmeal flavors, including baked apple, French vanilla, and cinnamon roll. It was testing convenient single-serve microwave-ready cups designed to eliminate the need for a bowl in preparation. Other new hot oatmeal products included Dinosaur Eggs, which were targeted towards kids: when hot water was added to the instant oatmeal, the eggs hatched little dinosaurs.
Ready-to-eat cereal In 1999, Quaker held the number four position in the intensely competitive ready-to-eat (RTE) cereal market category, trailing General Mills (33%), Kellogg (31%) and Kraft (16%). The business included three strong brands: Life and Cap’n Crunch, with more than $150 million in annual sales each, and the Toasted Oatmeal line, with sales of around $100 million. The balance of the segment was made up of bagged cereals: Sweet Crunch, Cocoa Blasts, and Marshmallow Safari. Real per-capita RTE cereal demand had decreased about 6% annually in the United States since 1994.
Bucking this trend, Quaker’s RTE sales had increased by 1%-2% on average over the last five years (see Exhibit 9). But, although Quaker’s top RTE cereal brands were competing effectively for share in this declining category, it was increasingly difficult to maintain their profitability. In this difficult segment of their business, Quaker management had decided to focus on efficiency. In 2000, the company announced a two-year restructuring plan designed to achieve significant cost savings by closing manufacturing facilities, consolidating manufacturing lines, and reconfiguring the RTE ereal distribution network. Golden Grain Quaker’s Golden Grain business produced flavored rice and pasta. Sales had been flat for the last five years (see Exhibit 9), but Quaker still held the number one position in flavored rice with a 37% market share, and the number two position in flavored pasta with a 33% market share. Competition was increasing in these markets, however: Mars was aggressively marketing flavored rice under its Uncle Ben’s brand, and General Mills was promoting flavored pasta under the Betty Crocker label.
In response to these competitive moves, Quaker managers felt they might have to defend share by increasing expenditures on promotion and advertising or dropping 7 801-458 PepsiCo’s Bid for Quaker Oats (A) prices. The division contributed about $50 million in operating profits annually, and accounted for about 7% of Quaker’s 1999 operating income. Grain-based snacks Quaker’s Snack Foods division sold Chewy Granola Bars, Fruit & Oatmeal Bars, Rice Cakes, and new Crispy Mini-Rice Cakes. Its products accounted for 17. 4% of the snack/granola bar market, second only to Kellogg Co.
Quaker’s Chewy Granola Bars led the $360 million granola bar category with a 39% market share. Over the past five years, Chewy’s growth in revenues averaged 8% annually. Quaker Fruit & Oatmeal Bars were number two to Kellogg’s NutriGrain in the cereal bar category. Quaker Rice Cakes had an impressive 66% market share in the $165 million rice cake category. The profits of the snack business had grown at 10% per year over the past three years, owing to the strength of demand for granola and cereal bars, and successful new product introductions (see Exhibit 9). Other U. S. nd international foods Quaker also sold Aunt Jemima syrup and pancake mixes, and through them held a 17% share of the $560 million syrup category and 21% of the $300 million pancake mix category. Quaker Grits dominated the $100 million corn grits market, with a 77% share. These were highly profitable brands, but they were in categories that promised little in the way of future growth. The Quaker’s international food businesses lacked critical mass. Its Latin American food sales were concentrated in Brazil, where sales had declined 17% in 1999, due to severe currency dAssessment and economic recession.
In Europe, Quaker had a small, growing RTE cereal business, which was concentrated in the United Kingdom and Scandinavia. Its Asian food business was minuscule, accounting for less than $25 million in sales in 1999. Potential Synergies Gatorade If the acquisition succeeded, PepsiCo’s management expected that Gatorade would dramatically enhance both the company’s strategic position and its economic performance. PepsiCo would become the clear category leader in noncarbonated beverages, a market, which was growing at 8%-9% annually, three times faster than the carbonated soft drink market.
With Tropicana and Gatorade combined, PepsiCo would control a full quarter of this $23 billion market. One of the major benefits of combining the two companies’ operations would stem from distribution. Gatorade used a warehouse brokers’ distribution system to deliver beverages to convenience stores and supermarkets, whereas PepsiCo’s used a Direct Store Delivery (DSD) system. Each system worked best for different types of products and retail outlets. The DSD system was much more expensive, usually amounting to 15%-20% of sales, but it gave PepsiCo direct control over product selection, in-store visibility and the size of product displays.
Moreover, the labor and equipment costs of DSD were mostly fixed, hence the contribution margins of incremental unit sales were high. DSD worked well for high volume products (like colas), but it was not an economical way to supply lower volume products in large varieties) to supermarkets and convenience stores. As indicated, Quaker used a warehouse brokers’ distribution system. In the case of Gatorade, however, robust consumer demand acted to offset many of the disadvantages of selling through brokers, including lower margins, potential stock-outs and poor product presentation.
As a fastmoving convenience store item, Gatorade was regularly allocated highly visible shelf space, almost entirely without slotting fees, which were customary in the retail business. Moreover, Gatorade’s new products and packages historically had won increased shelf space for the brand, instead of taking up the same shelf space and cannibalizing older products. 8 PepsiCo’s Bid for Quaker Oats (A) 801-458 The acquisition of Quaker would enable PepsiCo to distribute Tropicana’s nonrefrigerated juices, like Twister and Dole, through Gatorade’s warehouse brokers’ distribution system.
The merger would thus considerably enhance company’s position in the $7 billion nonrefrigerated juice segment: According to CEO Enrico, PepsiCo would become the “category captain” of the nonrefrigerated juice aisle. PepsiCo’s managers estimated that using Gatorade’s warehouse distribution system for Tropicana juices could generate an incremental $400 million in sales and $45 million in operating profit by the year 2004. The PepsiCo management team also projected procurement savings of approximately $60 million annually by 2004 from reductions in the costs of raw materials and supplies.
Moreover, Gatorade used “hot-fill” production lines, which were similar to those used by PepsiCo’s Twister, Lipton teas, Frapuccino and SoBe beverages. If the two companies were combined, the team anticipated cost savings from better capacity utilization in manufacturing, warehouse, delivery and logistics systems. Collectively, these cost savings were expected to reach $65 million annually by 2004. Other potential benefits of the business combination were more difficult to quantify.
For example, PepsiCo’s managers believed that Pepsi’s extensive cooler distribution network could be used to increase Gatorade’s penetration in vending machines, schools, and smaller convenience stores as well as other niche vending channels and food service accounts. PepsiCo CFO Indra Nooyi argued: “The combination of Gatorade and AquaFina in vending machines is a no-brainer. ” Over the longer term, PepsiCo could accelerate Gatorade’s international expansion by using the existing sales and distribution organizations of both Pepsi-Cola International and Frito-Lay International.
Finally, the sports technology expertise of the Gatorade Sports Science Institute might be combined with the health research capabilities of the Tropicana Nutrition Center to develop products that would meet the refreshment and nutrition needs of beverage consumers in new ways. Snacks If the acquisition succeeded, PepsiCo’s managers planned to integrate the Quaker’s snack food division into its Frito-Lay unit, which was already the world’s leader in salty snacks. They saw a significant opportunity in the $2 billion snack bars market, which was growing at 9% annually.
Frito-Lay was in the process of reengineering its direct store delivery (DSD) distribution system to handle more product units. PepsiCo’s management believed that distributing Quaker’s Chewy Granola and other snacks through Frito-Lay’s system could increase Quaker’s revenues from snacks by an incremental $200 million and its operating profit by $34 million by 2004. A nonquantifiable benefit of the acquisition would be that Quaker snacks were not salty. For the most part, its brands connoted nutrition and health more than good taste or fun.
Quaker brands’ positioning would give Frito-Lay access to numerous consumption occasions, for example, in the morning, that its existing salty snack brands did not serve. According to Roger Enrico, PepsiCo CEO: “We see bars as an ideal way to “smuggle” nutrition into more daily diets. ” Other foods If the acquisition succeeded, Quaker’s nonsnack food businesses would represent 10% of the combined company’s pro forma sales. Quaker Oatmeal, RTE cereals, Golden Grain, and Aunt Jemima businesses did not fit within PepsiCo’s convenience-food strategy, nor did they represent significant growth opportunities.
Yet these businesses were highly profitable, and were expected to generate substantial free cash flows and modest growth over the foreseeable future. Lastly, their unit volumes supported the scale of Quaker’s (hence Gatorade’s) warehouse brokers’ distribution system. One complexity of the proposed acquisition stemmed from the fact that PepsiCo’s management would only consider a stock-for-stock transaction. Under that transaction structure, the company would be able to account for the merger as a pooling-of-interests. With a pooling-of-interests 801-458 PepsiCo’s Bid for Quaker Oats (A) accounting treatment, no goodwill would be created, and neither PepsiCo’s nor Quaker’s shareholders would have to recognize a gain or loss as a result of the merger for income tax purposes. On the other hand, under pooling-of-interests accounting, PepsiCo was precluded from selling any significant assets of Quaker for two years following the merger. Thus, if the acquisition succeeded, PepsiCo would not be able to divest Quaker’s slower-growth food divisions for at least two years.
By the same token, PepsiCo would not be able to repurchase shares in any significant quantity for two years. Both Pepsi and Quaker used share repurchases as their primary mode of returning cash to shareholders (see Exhibits 3 and 7). If the acquisition succeeded, Pepsi would have to change its cash distribution policy radically. Decision PepsiCo had to determine its initial offer before approaching the Quaker. The timing was critical, as several other companies were likely to be attracted by Quaker’s obvious strengths (see Tables A and B).
At the same time, PepsiCo management had two major concerns. First, although Gatorade’s synergies and growth prospects provided a clear strategic rationale for the acquisition, Gatorade plus the snack business accounted for only about 40%-45% of Quaker’s sales and operating income. Food products like Quaker Oats, which PepsiCo was not directly interested in, constituted the bulk of Quaker’s business. Second, Quaker traded at 23 times the earnings, which was lower than PepsiCo, but still at a premium compared to other food manufacturers (see Exhibit 12).
Depending on the price and the value of realized synergies, a stock-for-stock transaction could potentially dilute PepsiCo’s earnings and diminish earnings per share, at least in the short run. 10 PepsiCo’s Bid for Quaker Oats (A) 801-458 Sources This case was prepared using the following published sources: PepsiCo, Inc. 2000 Annual Report, available at www. pepsico. com/2000/annual2000. html PepsiCo, Inc. 1999 Annual Report, available at www. pepsico. com/1999/annual1999. html PepsiCo, Inc. 1998 Annual Report, available at www. pepsico. com/1998/content. shtml PepsiCo, Inc. 997 Annual Report, available at www. pepsico. com/1997/content. shtml PepsiCo, Inc. 1996 Annual Report, available at www. pepsico. com/1996/content. shtml The Coca-Cola Company 1999 Annual Report, available at www. cocacola. com/annualreport The Quaker Oats Company 1999 Annual Report, available at www. quakeroats. com The Quaker Oats Company 1998 Annual Report, available at www. quakeroats. com The Quaker Oats Company 1997 Annual Report, available at www. hoovers. com Form S-4, Registration Statement under the Securities Act of 1933, as filed by PepsiCo, Inc. ith SEC on 01/09/2001 “Pepsi Seeks $5B Credit Line,” Dow Jones News Service, 10/12/1994 “Analysts Dubious on Pepsi’s Interest in Quaker,” Dow Jones News Service, 10/12/1994 “Quaker Rises on Pepsi Report,” The Milwaukee Journal Sentinel, 11/30/1996 Michael J. Branca, “PEP: The Good, The Bad and The Ugly,” Lehman Brothers Equity Research, 11/03/2000 Cathleen Egan, “S. Bernstein Analyst Muses over a Pepsi-Quaker Merger,” Dow Jones News Service, 03/13/2000 Cathleen Egan, “Quaker in Talks to Sell Gatorade, Snapple to Pepsi,” Dow Jones News Service, 11/29/1996 David C.
Nelson, David S. Bianco, “Quaker Oats: Is It in the Stock? ,” Credit Suisse First Boston Equity Research, 08/01/2000 Lauren R. Rubin, “Profitable Fit,” Barron’s, 12/11/2000 Patricia Sellers, “Can Coke and Pepsi Make Quaker Sweat? ” Fortune, 07/10/1995 Janet Kidd Stewart, “Pepsi Chief Pooh-poohs Deal for Quaker Drinks,” Chicago Sun-Times, 01/25/1997 11 801-458 PepsiCo’s Bid for Quaker Oats (A) Exhibit 1 PepsiCo Financial Statements: Consolidated Statement of Income ($ millions, except per share data) 9/2/00a 1999 1998 1997 1996
Net sales New PepsiCo Bottling operations Total net sales Costs and expenses Cost of sales SG&A Amortization of intangible assets Impairment and restructuring charge Total costs and expenses Operating profit New PepsiCo Bottling operations and equity investments Total operating profit Bottling equity income, net Gain on bottling transactions Interest expense Interest income Income before taxes Provision for income taxes Income from continuing operations Income from discontinued operations, net Net income Net income per share of common stock, $ 14,028 0 14,028 8,244 2,123 20,367 14,686 7,662 22,348 13,655 7,262 20,917 20,337 5,433 6,209 96 0 11,738 8,198 9,103 183 65 17,549 9,330 9,924 222 288 19,764 8,525 9,241 199 290 18,255 8,452 9,063 206 576 18,297 2,290 0 2,290 135 0 (156) 43 2,312 740 1,572 0 1,572 1. 09 2,765 53 2,818 83 1,000 (363) 118 3,656 1,606 2,050 0 2,050 1. 40 2,460 124 2,584 0 0 (395) 74 2,263 270 1,993 0 1,993 1. 35 2,252 410 2,662 0 0 (478) 125 2,309 818 1,491 651 2,142 1. 40 2,040 (565) 91 1,566 624 942 207 1,149 0. 73 Source: Company 10(K) and 10(Q) filings. aData for 36 weeks ended September 2, 2000. 2 PepsiCo’s Bid for Quaker Oats (A) 801-458 Exhibit 2 Assets PepsiCo Financial Statements: Consolidated Balance Sheet ($ millions) 9/2/00a 705 97 1,835 975 588 4,200 9,209 (3,928) 5,281 4,531 3,011 636 8,178 17,659 1999 964 92 1,704 899 514 4,173 8,816 (3,550) 5,266 4,735 2,846 531 8,112 17,551 1998 311 83 2,453 1,016 499 4,362 13,110 (5,792) 7,318 8,996 1,396 588 10,980 22,660 1997 1,928 955 2,150 732 486 6,251 11,294 (5,033) 6,261 5,855 1,201 533 7,589 20,101 1996 307 289 2,276 853 225 3,950 10,908 (4,822) 6,086 6,036 1,147 491 7,674 4,450 22,160
Cash and cash equivalents Short-term investments, at cost Accounts and notes receivable, net Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Accumulated depreciation Net PP&E Intangible assets, net Investments in unconsolidated affiliates Other assets Net II&O Net assets of discontinued operations Total assets Liabilities and Shareholders’ Equity Short-term borrowings Accounts payable and other current liabilities Income taxes payable Total current liabilities Long-term debt Other liabilities Deferred income taxes Common stock Capital in excess of par value Retained earnings Accumulated other comprehensive loss Less: Repurchased common shares, at cost Total shareholders’ equity Total liabilities and shareholders’ equity Average shares outstanding, millions 16 3,337 168 3,621 2,737 3,033 1,380 29 963 15,040 (1,219) (7,925) 6,888 17,659 1,446 233 3,399 156 3,788 2,812 2,861 1,209 29 1,081 14,066 (989) (7,306) 6,881 17,551 1,466 3,921 3,870 123 7,914 4,028 2,314 2,003 29 1,166 12,800 (1,059) (6,535) 6,401 22,660 1,480 0 3,617 640 4,257 4,946 2,265 1,697 29 1,314 11,567 (988) (4,986) 6,936 20,101 1,528 0 3,378 413 3,791 8,174 1,997 1,575 29 1,201 9,184 (768) (3,023) 6,623 22,160 1,564 Source: Company 10(K) and 10(Q) filings. aData for 36 weeks ended September 2, 2000. 13 801-458 PepsiCo’s Bid for Quaker Oats (A) Exhibit 3 PepsiCo Financial Statements: Consolidated Statement of Cash Flows ($ millions) 9/2/00a 1999 1998 1997 1996
Cash Flows from Operating Activities Net income from continuing operations Adjustments to reconcile net income to net cash provided by operating activities: Gain on bottling transactions Bottling equity income, net Depreciation and amortization Noncash portion of 1998 income tax benefit Noncash portion of restructuring charges Deferred income taxes Other noncash charges and credits, net Net change in operating working capital Net Cash Provided by Operating Activities Cash Flows from Investing Activities Capital spending Investments in unconsolidated affiliates Sales of businesses Sales of property, plant and equipment Short-term investments, by original maturity: More than three months – purchases More than three months – maturities Three months or less, net Other, net Net Cash Used for Investing Activities Cash Flows from Financing Activities Proceeds from issuances of long-term debt Payments of long-term debt Short-term borrowings, by original maturity: More than three months – proceeds More than three months – payments Three months or less, net Cash dividends paid Share repurchases Proceeds from exercises of stock options Other, net Net Cash Used for Financing Activities Net cash from discontinued operations Effect of Exchange Rate Changes Net (Decr. )/Incr. in Cash and Cash Equivalents Cash and Cash Equivalents – Beginning of year Cash and Cash Equivalents – End of period Source: Company 10(K) and 10(Q) filings. aData represents 36 weeks ended September 2, 2000. 1,572 2,050 1,993 1,491 942 0 (135) 642 0 0 138 191 (295) 2,113 (1,000) (83) 1,032 0 37 529 364 98 3,027 0 0 1,234 (259) 254 150 237 (398) 3,211 0 0 1,106 0 233 51 342 196 3,419 0 0 1,073 0 366 160 505 146 3,192 (574) (66) 0 0 (582) 577 0 (137) (782) (1,118) (430) 499 126 (2,025) 2,008 12 (144) (1,072) 1,405) (4,537) 17 134 (525) 584 839 (126) (5,019) (1,506) (119) 221 80 (92) 177 (735) (96) (2,070) (1,630) (75) 43 9 (115) 192 736 (214) (1,054) 108 (716) 103 (32) 375 (594) (1,238) 408 0 (1,586) 0 (4) (259) 964 705 3,480 (1,123) 3,691 (2,741) (2,856) (778) (1,285) 308 0 (1,304) 0 2 653 311 964 990 (2,277) 2,713 (417) 1,753 (757) (2,230) 415 0 190 0 1 (1,617) 1,928 311 0 (1,875) 146 (177) (1,269) (736) (2,459) 403 5 (5,962) 6,236 (2) 1,621 307 1,928 1,772 (1,432) 740 (1,873) 89 (675) (1,651) 323 (9) (2,716) 605 (5) 22 285 307 14 801-458 -15- Exhibit 4 PepsiCo Stock Price History PEP Historical Price Performance, October 31, 1997-October 4, 2000 Oct 4: Last close $45. 125 50 45 40 35 30
Mar 8: 52 week low of $30. 50 25 Jul-98 Jul-99 Jan-98 Apr-98 Jun-98 Oct-98 Jan-99 Apr-99 Jun-99 Oct-99 Jan-00 Feb-00 Apr-00 Jun-00 Jul-00 Nov-97 Dec-97 Feb-98 Mar-98 Feb-99 Mar-99 Mar-00 Aug-00 Aug-99 Sep-99 Nov-99 May-99 Dec-99 May-00 Aug-98 Nov-98 May-98 Source: Prepared by casewriter based on CRSP data. Sep-98 Dec-98 Sep-00 Oct-00 20 801-458 PepsiCo’s Bid for Quaker Oats (A) Exhibit 5 Quaker Financial Statements: Consolidated Statement of Income ($ millions, except per share data) 9/30/00* Net sales Cost of goods sold Gross Profit SG&A Impairment and restructuring (gain) or charge Interest expense Interest income Foreign exchange loss, net Income before taxes
Provision (benefit) for income taxes Net income Preferred dividends, net Net income available for common Net income per share of common stock, $ 4,045 1,805 2,240 1,551 172 40 1999 4,725 2,137 2,588 1,904 (2) 62 (12) 18 618 163 455 4 451 3. 36 1998 4,843 2,374 2,468 1,873 129 70 (11) 12 397 112 285 5 280 2. 04 1997 5,016 2,565 2,451 1,939 1,486 86 (7) 11 (1,064) (133) (931) 4 (934) (6. 80) 1996 5,199 2,808 2,392 1,981 (113) 107 (7) 9 416 168 248 4 244 1. 80 477 165 312 3 309 2. 34 Source: Company 10(K) and 10(Q) filings. aData for nine months ended September 30, 2000. 16 PepsiCo’s Bid for Quaker Oats (A) 801-458 Exhibit 6 Quaker Financial Statements: Consolidated Balance Sheet ($ millions)
Assets Cash and cash equivalents Short-term investments, at cost Accounts and notes receivable, net Inventories Other current assets Total current assets Property, plant and equipment Accumulated depreciation Net PP Intangible assets, net Other assets Total assets Liabilities and Shareholders’ Equity Short-term borrowings Accounts payable Other current liabilities Total current liabilities Long-term debt Other liabilities Deferred income taxes Preferred stock Deferred compensation Tresury preferred stock Total preferred stock, net Common stock Capital in excess of par value Retained earnings Accumulated other comprehensive loss Deferred compensation Less: Repurchased common shares, at cost Total shareholders’ equity Total liabilities and shareholders’ equity Average shares outstanding, millions /30/00* 111 126 391 287 234 1,149 1,872 (797) 1,075 231 57 288 2,512 89 258 648 995 672 510 0 100 (27) (47) 25 840 126 1,051 (108) (22) (1,578) 310 2,512 132 1999 283 0 254 266 193 997 1,852 (745) 1,107 237 56 293 2,396 155 214 570 938 715 523 0 100 (39) (39) 22 840 101 855 (95) (46) (1,457) 197 2,396 134 1998 327 28 283 261 216 1,115 1,819 (749) 1,070 246 79 325 2,510 137 168 704 1,009 795 533 0 100 (48) (30) 22 840 79 556 (80) (68) (1,176) 151 2,510 137 1997 84 0 306 256 487 1,133 1,913 (748) 1,165 351 49 400 2,697 169 191 586 946 888 579 36 100 (57) (22) 21 840 29 431 (82) (91) (899) 228 2,697 137 1996 111 0 295 275 209 890 1,943 (743) 1,200 2,237 69 2,306 4,394 568 210 576 1,355 994 559 238 100 (65) (16) 19 840 0 1,521 (68) (103) (960) 1,230 4,394 135 Source: Company 10(K) and 10(Q) filings. Data for nine months ended September 30, 2000. 17 801-458 PepsiCo’s Bid for Quaker Oats (A) Exhibit 7 Quaker Financial Statements: Consolidated Statement of Cash flows ($ millions) 9/30/00* 1999 455 124 14 (5) 4 0 13 (38) 32 31 631 (222) 14 (185) 219 14 0 (160) (156) 34 1 (96) 83 (373) (9) (516) 2 (44) 327 283 1998 285 133 (31) (27) 90 38 12 (41) 32 23 514 (205) 266 (166) 143 8 240 287 (160) (17) 2 (109) 112 (377) (8) (557) (1) 242 84 327 1997 (931) 161 (12) 1,151 66 40 42 (91) 20 43 490 (216) 300 0 0 0 0 84 (159) (453) 8 (54) 121 (50) (6) (593) (7) (26) 111 84 1996 248 201 14 (82) 23 0 29 (70) 22 27 410 (243) 174 0 0 0 0 (68) (157) (125) 2 (78) 31 0 (6) (331) 6 17 93 111
Cash Flows from Operating Activities Net income from continuing operations Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes (Gains) losses on divestitures, net Restructuring charges** Asset impairment losses Loss on disposition of property and equipment Net change in operating working capital Change in deferred compensation Other items Net Cash Provided by Operating Activities Cash Flows from Investing Activities Additions to property, plant and equipment Business divestitures, net of tax Purchase of marketable securities Proceeds from sale of marketable securities Proceeds from sale of PP Capial gains tax recovery Net Cash Used for Investing Activities Cash Flows from Financing Activities Cash dividends paid Change in short-term debt Proceeds from issuances of long-term debt Reduction of long-term debt Issuance of common treasury stock Repurchases of common stock Repurchases of preferred stock Net Cash Used for Financing Activities Effect of Exchange Rate Changes Net (Decr. )/Incr. in Cash and Cash Equivalents Cash and Cash Equivalents – Beginning of year Cash and Cash Equivalents – End of period 312 99 4 0 177 0 2 (132) 35 15 512 (199) 0 (354) 232 5 0 (316) (115) (25) 1 (84) 105 (236) (9) (364) (4) (172) 283 111 Source: Company 10(K) and 10(Q) filings. a Data for nine months ended September 30, 2000. bThe 2000 number represents the sum of restructuring charges, asset impairments and losses (gains) on divestiture. 18 801-458 -19- Exhibit 8 Quaker Oats Operating Segment Information (dollars in millions, except per share data) b
Year Ended December 31 1999 Net Sales a 1998 1997 Operating Income (Loss) 1999 1998 1997 $2,359. 5 308. 4 215. 4 2,883. 3 1,502. 3 229. 1 103. 8 1,835. 2 4,718. 5 6. 7 $4,725. 2 $2,274. 1 372. 9 202. 9 2,849. 9 $399. 8 26. 2 21. 1 447. 1 253. 9 16. 5 (7. 3) 263. 1 710. 2 -$710. 2 $2,287. 8 371. 4 205. 7 2,864. 9 1,183. 3 232. 2 103. 0 1,518. 5 4,383. 4 632. 3 $5,015. 7 $369. 8 28. 2 (1. 2) 396. 8 214. 9 25. 6 (7. 4) 233. 1 629. 9 (2. 4) $627. 5 $390. 3 34. 0 (9. 9) 414. 4 182. 7 19. 3 (15. 0) 187. 0 601. 4 (34. 6) $566. 8 1,338. 2 267. 7 103. 1 1,709. 0 4,558. 9 283. 6 $4,842. 5 Foods: U. S. and Canadian Latin American Other c Total Foods Beverages: U. S. nd Canadian Latin American Other c Total Beverages Total Ongoing Businesses Total Divested Businesses d Total Sales/Operating Income Less: (Gains) losses on divestitures, restructuring charges, asset impairments and other–net e (2. 3) 25. 9 50. 2 18. 1 618. 3 163. 3 $455. 0 $3. 36 $3. 23 128. 5 31. 9 58. 9 11. 6 396. 6 112. 1 $284. 5 $2. 04 $1. 97 1,491. 1 50. 1 79. 1 10. 8 (1,064. 3) (133. 4) ($930. 9) ($6. 80) ($6. 80) General corporate expenses Interest expense–net Foreign exchange loss–net Income (Loss) before income taxes Provision (Benefit) for income taxes f Net Income (Loss) Per Common Share: Net income (loss)e Net income (loss)–diluted 801-458 -20- Exhibit 8 (continued) (dollars in millions) Year Ended December 31 1999 Identifiable Assets 1998 1997 1999
Capital Expenditures Net of Depreciation 1998 1997 Foods: U. S. and Canadian Latin American Other c Total Foods Beverages: U. S. and Canadian Latin American Other c Total Beverages Total Ongoing Businesses Total Divested Businesses g Total Operating Segments Corporateh Total Consolidated $1,124. 6 174. 0 110. 1 1,408. 7 522. 7 105. 4 79. 6 707. 7 2,116. 4 0. 0 2,116. 4 279. 8 $2,396. 2 464. 2 94. 6 109. 5 668. 3 2,115. 1 37. 5 2,152. 6 357. 7 $2,510. 3 364. 5 81. 9 98. 2 544. 6 1,845. 4 335. 9 2,181. 3 515. 7 $2,697. 0 69. 8 20. 4 1. 7 91. 9 99. 5 0. 0 99. 5 (0. 9) $98. 6 $1,187. 0 167. 7 92. 1 1,446. 8 $1,056. 9 122. 4 121. 5 1,300. 8 $3. 7 3. 7 0. 2 7. 6 $37. 5 6. 5 (0. ) 43. 4 26. 1 6. 3 0. 8 33. 2 76. 6 (3. 5) 73. 1 (0. 9) $72. 2 $7. 2 9. 7 12. 3 29. 2 26. 4 (0. 9) 20. 0 45. 5 74. 7 (18. 7) 56. 0 (1. 7) $54. 3 Source: Company financial statements and casewriter calculations. aIntersegment sales are not material. bOperating results exclude restructuring and asset impairment charges, gains and losses on divestitures and certain other expenses not allocated to operating segments such as income taxes, general corporate expenses and financing costs. cOther includes European and Asia/Pacific businesses. d1999 includes net sales and operating results (through the divestiture date) for the Brazilian pasta business. 998 includes net sales and operating results (through the divestiture date) for the Ardmore Farms, Continental Coffee, Nile Spice and Liqui-Dri businesses and the business divested in 1999. 1997 includes net sales and operating results (through the divestiture date) for the Snapple beverages and certain food service businesses and the businesses divested in 1999 and 1998. e1999 includes pretax restructuring charges of $12. 7 million, or $0. 06 per share, a pretax divestiture gain of $5. 1 million, or $0. 03 per share, and pretax adjustments of $9. 9 million, or $0. 04 per share, to reduce prior restructuring and divestiture reserves. 1998 includes pretax restructuring charges of $89. 7 million, or $0. 8 per share, pretax asset impairment losses of $38. 1 million, or $0. 18 per share, and a combined pretax divestiture loss of $0. 7 million, or a gain of $0. 20 per share, due to certain tax benefits. 1997 includes pretax restructuring charges of $65. 9 million, or $0. 27 per share, a pretax net charge of $4. 8 million, or $0. 02 per share, for an asset impairment loss partly offset by a cash litigation settlement, and a combined pretax loss of $1. 42 billion, or $8. 41 per share, for business divestitures. f1999 includes reductions in the provision for income taxes of $59. 3 million, or $0. 44 per share, related to previously recorded tax accruals and tax assets. Includes the following Divested Businesses: in 1999, the Brazilian pasta business in 1998 Ardmore Farms, Continental Coffee, Nile Spice, Liqui-Dri and the business divested in 1999; in 1997, Snapple, certain food service businesses and the businesses divested in 1999 and 1998. hIncludes corporate cash and cash equivalents, short-term investments and miscellaneous receivables and investments. PepsiCo’s Bid for Quaker Oats (A) 801-458 Exhibit 9 Quaker Oats Company Operations Summary 1994-1999 Annual Sales (dollars in millions) 1994 U. S. and Canadian Gatorade a International Gatorade Total Beverages U. S. Hot Cereals U. S. Ready-to-Eat Cereals Golden Grain Grain-based Snacks Other U. S. nd Canadian Foods Latin American Foods European and Asian Foods Total Foods Total Sales $908 269 1,177 416 679 334 275 483 301 233 2,721 $3,898 1995 $1,040 308 1,348 402 665 324 298 505 319 210 2,723 $4,071 1996 $1,095 283 1,378 440 626 316 285 518 345 207 2,737 $4,115 1997 $1,183 335 1,518 462 693 343 269 521 371 208 2,867 $4,385 1998 $1,338 371 1,709 431 712 341 291 500 373 203 2,851 $4,560 1999 $1,502 333 1,835 485 725 344 305 501 308 215 2,883 $4,718 CAGR 10. 6% 4. 4% 9. 3% 3. 1% 1. 3% 0. 6% 2. 1% 0. 7% 0. 5% -1. 6% 1. 2% 3. 9% Distribution of Annual Sales (%) 1994 U. S. and Canadian Gatorade a International Gatorade Total Beverages U. S. Hot Cereals U. S. Ready-to-Eat Cereals Golden Grain Grain-based Snacks Other U. S. nd Canadian Foods Latin American Foods European and Asian Foods Total Foods Total Sales 23% 7% 30% 11% 17% 9% 7% 12% 8% 6% 70% 100% 1995 26% 8% 33% 10% 16% 8% 7% 12% 8% 5% 67% 100% 1996 27% 7% 33% 11% 15% 8% 7% 13% 8% 5% 67% 100% 1997 27% 8% 35% 11% 16% 8% 6% 12% 8% 5% 65% 100% 1998 29% 8% 37% 9% 16% 7% 6% 11% 8% 4% 63% 100% 1999 32% 7% 39% 10% 15% 7% 6% 11% 7% 5% 61% 100% Source: Company financial statements. aIncludes Europe, Asia-Pacific and Latin America. 21 801-458 -22- Exhibit 10 Quaker Oats Stock Price History OAT Historical Price Performance, October 31, 1997-October 4, 2000 90 Oct 4: Last close $76. 0625 80 70 60 50 40 Mar 14: 52 week low of $45. 9375 Jul-98 Jul-99 Jan-98 Apr-98 Jun-98 Oct-98 Jan-99 Apr-99 Jun-99 Oct-99 Jan-00
Apr-00 Jun-00 Jul-00 Feb-98 Mar-98 Feb-99 Mar-99 Feb-00 Nov-97 Dec-97 Aug-98 Sep-98 Nov-98 Dec-98 Aug-99 Sep-99 Nov-99 Dec-99 Mar-00 Aug-00 May-99 May-00 Source: Prepared by casewriter based on CRSP data. May-98 Sep-00 Oct-00 30 PepsiCo’s Bid for Quaker Oats (A) 801-458 Exhibit 11 PepsiCo PepsiCo and Quaker Oats: Selected Ratios 1996-2000 36 Wks. 00 39% 44% 16% 16% 32% a 1999 40% 45% 14% 15% 44% -2% 26% 40% 64% 53% 12% 30% 1998 42% 44% 12% 17% 12% 0% 33% 49% 82% 35% 12% 31% 1997 41% 44% 13% 16% 35% -4% 30% 36% 62% 54% 13% 21% 1996 42% 45% 10% COGS/Sales SGA/Sales Operating Profit/Sales New Pepsi Operating Profit/New Pepsi Sales Tax Rate NWC (excl.
Cash ST Inv and ST Debt)/Sales a Net PPE/Sales a Net II/Sales a Invested Capital/Sales Shareholders Equity/Invested Capital Return on Invested Capital d Return on Equity c 40% -2% 30% 38% 66% 50% 9% 14% -1% 26% 40% 66% 52% 17% 23% Quaker Oats, Inc. COGS/Sales SGA/Sales b Operating Profit/Sales Tax Rate NWC (excl. Cash ST Inv and ST Debt)/Sales a Net PPE/Sales a Net II/Sales a Invested Capital/Sales Shareholders Equity/Invested Capital Return on Invested Capital d Return on Equity c a 9 Mos. 00 45% 38% 13% 35% 0% 20% 5% 25% 23% 33% 100% 1999 45% 40% 15% 26% -2% 23% 6% 28% 15% 38% 229% 1998 49% 39% 10% 28% -2% 22% 7% 26% 12% 26% 185% 1997 51% 39% -19% 13% 5% 23% 8% 37% 12% -46% -410% 1996 54% 38% 10% 40% 0% 23% 44% 67% 35% 9% 20% Source: Company financial statements. aAnnualized. Quaker Operating Profit = Gross Profit – SG – Impairment, consistent with PepsiCo’s definition. cReturn on Invested Capital = [Operating Profit * (1 – Tax Rate)]/Invested Capital. dReturn on Equity = Net Income from Continuing Operations/Shareholders’ Equity. 23 801-458 -24- Exhibit 12 Quaker Oats: Comparable Food and Beverage Companies Source: Company Annual Reports, Hoover’s Online Business Network. aSara Lee financial information includes RYA/Monarch, the sale of which is scheduled to close in second quarter of fiscal 2001. bH. J. Heinz EBIT includes $464. 6 million gain on the sale of Weight Watchers. Hershey EBIT includes $243. 8 million gain on the sale of U. S. pasta business. Kellogg EBIT incorporates $244. million in restructuring charges and equipment write-offs. PepsiCo EBIT includes $1,000,000 gain on bottling transactions. cAverage diluted shares outstanding, in millions of per-share calculations, including stock options, ESOP and non-vested awards. dCommon Stock price data for 52 weeks prior to October 4, 2000, includes Danone ADR’s traded at NYSE. eP/E calculated as Closing Common Stock price divided by EPS for the last full fiscal year. fMarket Capitalization calculated as the Closing Common Stock price times the average diluted shares outstanding. Using last-available diluted shares outstanding would not change the calculation significantly. PepsiCo’s Bid for Quaker Oats (A) 801-458 Exhibit 13
