Boardroom confidence
in mergers and acquisitive activity to drive growth has never been stronger.
Annual global M&A transactions are now estimated to exceed US$2.2 trillion*
and more deals of a mammoth scale are expected. The food industry plays a major
part in this activity – but does it get results for employees, management and,
in particular, shareholders? Sue Barnard reports.

Mega deals this year have
included Philip Morris’ purchase of Nabisco for US$14.9bn, Unilever‘s buyout
of Bestfoods for US$20.3bn, and General Mills‘ purchase of Pillsbury from Diageo
for US$10.5bn. But in our increasingly competitive and over-capacitated trading
environment, are these deals actually meeting the aims they set out to achieve?

According to recent research
carried out by global business advisors KPMG the answer in the majority of cases
is a resounding no.
In what has been claimed to be the first research to use an objective benchmarking
measure to determine merger success it found that, of the 700 largest cross-boarder
deals between 1996 to 1998, the results were at total odds to boardroom views.
KPMG measured the success via increased shareholder value.

merge or not to merge – that is the question”

The results showed that
82% of senior executives believed the deal they had been involved in was successful.

However, this was a subjective estimation. When KPMG carried out its measurements
one year after each deal had been completed it found that just 17% added value,
30% produced no discernible difference, and as many as 53% actually destroyed

KPMG’s head of M&A integration,
John Kelly, said: “83% of mergers were unsuccessful in producing any business
benefit in terms of shareholder value and equally alarming is the fact that
less than half of the directors interviewed had conducted a formal post-deal

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In Kelly’s opinion, once
that value has been lost within the first year, it’s likely to be lost forever.
He said: “Long term performance will have been factored into the share price
after a year. Once a company has lost market share it will have to spend a lot
of money to get it back.”

Taking the long view

But not everybody is in
agreement. Some industry analysts say that success cannot always be judged in
the short-term.
The purchase of Walkers Snackfoods by PepsiCo is an example. PepsiCo knew that
Walkers, at No 3, was the lynch pin to taking it to pole position in the UK
savoury snacks market. PepsiCo had to buy Walkers. As a result PepsiCo paid
a full price for the company and invested substantially in it over time. Walkers
now makes its parent group an outstanding amount of money. While shareholders
would not have benefited in the very short term, in the long term it has turned
out to be a different story.

performance in the first year after merger need not be an indication of
long term failure”

Raymond Duignan of Stamford
Partners in London, a specialist food industry investment bank, believes that
the success has to be looked at in the long term.

“We are in a situation of
intense competition. Retailers are forcing down prices, there is deflation in
food, and oversupply. In that climate, if you are a business seeking to buy
up one of your competitors you may have to pay what appears to be a high price
for that business.”

Paul Monk, commercial director
of Golden Wonder, considers that poor performance in the first year need not
be an indication of long term failure – as long as it is part of the initial

He says: “There may be good reason why year one was expected to be poor – company
refocus, for example. This would need to be laid out in the initial plans. It’s
when year one is expected to be good and it doesn’t perform that there’s trouble

MBO can be a safer route

Golden Wonder took the management
buyout route in 1995, backed by Legal and General Ventures. Major investment
in manufacturing, logistics, advertising and NPD followed. Sales of its key
brands escalated and the company also moved into the No 1 position in own label
crisps. Legal and General recouped more than four times its original stake when
Golden Wonder went through a secondary buyout with Bridgepoint Capital earlier
this year. Plans are now under way for Golden Wonder to make acquisitions of
its own and to drive its move into other sectors of the food trade.

laws for merger success: synergy, profitability and good management”

Monk said: “In our case
a buyout was the right decision. Golden Wonder had low single figure profit
when it was part of a large corporation. As a standalone company we have been
able to intensify our focus and the secondary buyout – an increasing exit option
for venture capitalists – will enable us to maintain our momentum.

But while the industrialists
may have their own view on when and how assessment is measured, many consider
that the current climate within the food industry is giving companies limited
choices as to whether to merge or not.

Duignan says: “Retailers
have tremendous power because of overcapacity in the food industry. If overcapacity
continues, retailers will drive prices down within a sector to a point where
a manufacturer cannot pull them back. If they just sit tight, their earnings
may well be eroded and the value of the business will decrease.”

Investment and brand
support are key

The key to success, according
to Duignan, is scale within each category of products. “Companies must be able
to produce at low cost and have strong customer relationships. They must invest
in a continual supply of new products to keep the market alive and get the product
to market quickly. Where a company has brands it must support them to keep the
consumers buying. Companies can no longer rely on population growth and inflation
to save them.

between the UK & the US 45% more likely to preserve shareholder value”

Of course, if the industry
was starting in a different place there may be a different argument. Take Kraft
and its recent purchase of Nabisco. These companies could have built new plants
or added new brands, but today that will result in overcapacity, which in turn
increases the pricing power of the retailers.

The optimum strategy often
is to consolidate and in Nabisco’s case, if it had consolidated with Kraft earlier,
they would have been in a better position because they would have been able
to go after United Biscuits on their own rather than having to tie up with a
private equity company.

Duignan says: “Mergers and
acquisitions do work for those that achieve scale. But many companies don’t
face up to the harsh realities. They want to be bigger and stronger, but they
don¹t want to spend the money necessary to achieve that.”

Hard and soft keys to

So if companies have very
little choice in whether to take the M&A route or not, is there anything they
can do to ensure success? The answer is yes. KMPG’s Kelly said: “Our research
highlighted that to extract the full value from a deal, acquirers must find
the right balance between activities focused on financial performance and those
related to the people and cultural aspects.”

The company identified a
set of hard and soft keys to unlocking the maximum potential of the enlarged
company. The hard keys (business activities) were: synergy evaluation, integration
project planning and due diligence. The soft keys (people issues) comprised:
selecting the management team, resolving cultural issues, and communication
– especially to their employees. Only nine companies in the survey instigated
all six criteria and each was successful.

companies don’t face up to the harsh realities – they want to be bigger
and stronger but they don’t want to spend the money necessary to achieve

Kelly said: “Too often companies
concentrate on the hard mechanics to extract value from an acquisition. No matter
how intensive the planning, how innovative the financing or watertight the contract,
our research showed that it is the soft issues such as people that are key to
achieving the realisation of value.”

Frans Fontein, managing
director of food and drink M&A specialists Fontein Business Development, considers
there are three laws for success: synergy, profitability and good management.
He says: “Synergy can only be realised if the merging companies are already
efficient on their own. If they are not, they must be made profitable first
and integrated afterwards.”

But synergy stretches further
than profitability according to Fontein. “The culture must also be equal. If
one company is seen as the weaker or stronger partner, the merge will not work.
Companies must also foster a culture of investing in the people and the company
they are managing.”

But before boardroom members
rush out to put the words of advice in place, it could be worth taking note
of some further KPMG findings. In its cross border research it found that deals
between the UK and the US were 45% more likely than average to preserve shareholder
value. Deals involving the UK were 32% more likely to succeed. In the case of
deals between the UK and Europe the figure was 19%. However, deals between the
US and Europe were 11% less likely to succeed.
Kelly said: “These statistics confirm the importance of cultural and linguistic
issues in cross-border deals. The UK is much closer to the culture of its continental
European neighbours than the US, but the UK and the US share mother tongue,
cultural similarities and extensive M&A experience.”

*Thomson Financial Securities
Data 1999

By Sue Barnard (an independent business journalist and consultant specialising
in the retailing and manufacturing industries worldwide. She is based in the UK.
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