Acquisitions: The Good And The Bad

By Will Ashworth | February 03, 2010 AAA

Public companies have four things they can do with free cash: pay dividends, buyback shares, repay debt and make acquisitions. How efficient they are in each of these areas determines their long-term success. BusinessWeek ran an article in 2007 about the worst deals of all time. One of the examples used was Quaker Oats purchase of Snapple for $1.7 billion in 1994. Quaker Oats, now part of Pepsi (NYSE:PEP), felt combining its Gatorade division with the iced-tea maker would generate savings between $300 million and $600 million from operational synergies alone. These savings failed to materialize and sales tumbled. In 1997, the company sold Snapple to Nelson Peltz's Triarc Companies for the bargain basement price of $300 million. Read on and I'll explain why acquisitions can be both good and bad depending on your side of the table.
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Awesome Return
The actual deal made by Triarc was for $311.9 million including fees and expenses. The company turned Snapple around by repairing the relationship with convenience store owners, promoting the brand like crazy and creating innovative new products to go alongside its existing ones. The plan worked. Business picked up and in 2000, it made the decision to go the IPO route. Before it could, Cadbury Schweppes Plc swooped in buying Snapple from Triarc for $910 million in cash, the assumption of $420 million in debt and the payout of $120 million in options held by Snapple employees. Quaker Oats took three years to lose $1.4 billion, the same amount of time it took Triarc to make $600 million. Whose shareholders do you think were happier with the acquisition?

Snapple Today
In May 2008, Cadbury (NYSE:CBY) spun-off its drink business, Dr. Pepper Snapple Group (NYSE:DPS). It's been nine years since the Snapple acquisition by its former parent. In 1999, Snapple's total revenues were $772 million. Today, I'd estimate the iced tea products generate approximately $500 million in annual revenue. However, because the company doesn't break out the sales numbers of its individual brands, I have no way of knowing what the total amount is including juices and water. Since Snapple has always been a sore spot in its drinks business, I'd bet they're under $700 million. That's only a guess. Triarc used an EBITDA margin of 10% when assessing its purchase back in 1997. I'll be more generous and apply the company's EBITDA margin of 22%. Based on $700 million in revenue, it would have generated $154 million in EBITDA profits in 2008. Multiply that by nine (the number of years since the acquisition) and you get $1.4 billion, the exact amount it paid for Snapple. However, that's being entirely generous.

Back to Mr. Peltz
In April 2008, Peltz's Triarc Cos. bought Wendy's (NYSE:WEN) for $2.4 billion, merging it with his Atlanta-based Arby's chain, creating a business with the potential of taking on McDonald's (NYSE:MCD) and Burger King (NYSE:BKC). Wendy's shareholders got 4.25 shares in the newly combined company for each share owned. The deal valued one old share at $27.92 or $6.57 for a new one. Today, those shares are worth $4.63, a loss of 29.5% in just 20 months. It seems that bad deals can even happen to the best of them.

Bottom Line
Of the four options available to executives of public companies with free cash, the trickiest to evaluate in terms of success or failure is the acquisition. Snapple is going on 10 years since it was sold by Triarc, and yet to this day it's still difficult to tell if the deal was worth it for Dr. Pepper Snapple. (Read about other M&A flops in Biggest Merger and Acquisition Disasters.)

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