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Quaker Oats Sells Snapple at A $1.4 Billion Loss

News

On March 27, Quaker Oats Co. announced that it would sell the Snapple drink business to Triarc Cos. for $300 million, for which it paid $1.7 billion in 1994

Investors responded positively. Quaker stocks closed at $37.75, up 25 cents. Triarc's shares advanced $1.625, to $17.375.

Analysis

When Would Breaking Up A Company Into Separate Parts Make Sense?

It would make sense if the current shareholders benefit from such an action, i.e., if the value of the two separate companies is worth more than the combined value. The amount of value created would be the difference between the whole and the sum of the separate parts. Obviously if the latter is worth less than the whole, then a breakup would destroy value.

In the case of Quaker the added value comes from two eliminating losses generated by Snapple, and Quaker can now recoup $250 million in capital gains taxes it paid on previous transactions.

Why Did The Acquisition Fail?
Quaker made financial, marketing, and strategic miscalculations. A number of analysts had indicated at the time of purchase that Quaker was paying about $1 billion too much for the company. Another reason was strategic in nature. At the time of purchase, Quaker probably thought that it would use its highly regarded skills in distribution to supermarkets and mass markets to boost Sanpple’s sales. However, it eventually realized that more than half of Snapple’s sales were at convenience stores, gasoline stations, and similar outlets, which it had no special skills in managing.

Moreover, according to the New York Times (March 28, 1997), Quaker made advertising miscues that compounded the marketing mistakes. "Quaker discontinued its quirky campaign, featuring a Snapple employee named Wendy Kaufman, and replaced it with one in which Snapple boasted that it would be happy to be third behind Coca-Cola and Pepsi in the beverage market."

The moral of the story is that companies should not leap into lines of business where they have no special managerial skills or knowledge. That is, companies should "stick to their knitting." However, in practice it is not easy to draw precise lines across different businesses. To Quaker’s credit, it has had success with another beverage line, Gatorade.

There are a number of big merger failures, including AT&T's acquisition of the NCR Corp., Sony's purchase of Columbia Pictures, Matsushita's acquisition of MCA, and GM’s deal for National Car Rental System.

What Is The Difference Between A Spin-off And A Divestiture?
A divestiture is when a division of a company is sold out to new investors. A spin-off, on the other hand, is a newly created company that used to be part of a parent company. Parent company shareholders receive pro rata ownership in the new company.

About Triarc
Triarc is a mini-conglomerate based in New York with a beverage subsidiary that sells Mistic fruit drinks and RC Cola. Financiers Nelson Peltz and Peter May, who gained a reputation in the 1980s for making bargain acquisitions that later generated big profits, head the company.

They bought large stakes in several can-making companies, combining them into Triangle Industries Inc., which they in turn sold to a French company for $1.26 billion. The two received about $800 million for Triangle stock they had acquired for about $50 million. However, more recently, their 1992 investment in Brandt Inc., a closely held supplier of currency and coin handling equipment, did not fare as well. The company filed for protection under Chapter 11 of the U.S. Bankruptcy Code, citing a $10.5 million patent-infringement judgment against it.

Triarc's beverage and fast-food businesses accounts for about 65% of its annual revenue of nearly $1 billion.

 

By Alex Tajirian


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