Cooking Up Deals: Why 2010 Is the Year of Food and Beverage Acquisitions
Posted by Walter Rach on Tue, Jul 27, 2010 @ 12:00 PM
In my many years in this business I’ve learned a very important rule: You never know what to expect when performing a search. This year I was working very closely with the American Italian Pasta Company when it was announced that a large, primarily private label manufacturer would acquire the pasta maker. Many of you are probably familiar with the deal where Ralcorp Holdings has agreed to purchase AIPC for around $1.2 billion – right in the middle of my search! It got me thinking about the increased merger and acquisition activity in the food and beverage industry this year, which has actually been a little surprising considering how quiet the market was only twelve months ago.
There are several lucrative, stand-out deals – Kraft and Cadbury; Diamond and Kettle; and GS Capital and Michael Foods– all come to my mind immediately. There are also significant deals on the horizon. From the Cott Beverage and Cliffstar Corporation business combination, to the agreed upon merger between Snyder’s of Hanover and Lance, to Sara Lee seeking a buyer for its bread unit, there are many more deals to come this year. All of this activity follows a conservative '09 where many companies were sitting on the sidelines waiting it out. Looking at the big picture, food and beverage has fared far better during the economic downturn than other industries. What are the reasons for this phenomenon and why are we seeing an increase in deals?
First, the food and beverage industry – unlike, say, housing – is somewhat insulated from shifts in the overall economy. Consider also that, in general, the economy is improving (albeit slowly) and that means easier access to capital funding, and therefore more deals are made. Plus, there is a psychological component in play as companies feel the need to “do something” to stimulate growth, and increase profitability; oftentimes this is accomplished by getting into a new or complimentary businesses, exploring alternative channels, or seeking international expansion through M&A activities.
There are, however, caveats to the M&A panacea. In troubled economic times, it is critical to make the right acquisition because there is less room for error. Companies invest countless hours in due diligence and sometimes overlook the effect an acquisition will have on corporate culture and hiring. To illustrate my point, recent news articles report that five senior executives from Cadbury are leaving Kraft after the merger. The biggest loss is Mark Reckitt, Cadbury’s chief strategy officer, who steps down at the end of this week.
A bad acquisition in challenging times can sink a company faster than you can spell let’s make a deal. For that reason, we will allot the next two blogs to examining the impact of acquisitions on corporate culture and hiring.