Quaker Oats Sells Snapple at A $1.4 Billion Loss
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.
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?
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 Quakers 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 GMs deal for National Car Rental System.
What Is The Difference Between A Spin-off And A
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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