Many successful businessmen and women have concluded that the most successful acquirers are also the most disciplined. In order to secure a lucrative and profitable acquisition all strategic alternatives ought to have been considered and prudently explored. Furthermore, a clear operating strategy post-acquisition is something that must be in place pre- acquisition. Despite this notion, many acquisitions seem to be driven by an urge to generate synergy, without any specific operating strategies in place.
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For example, Quaker Oats acquired the ice-tea and juice drink producing Snapple in 1994 to a price of $1. 7 billion, an acquisition where all strategic alternatives was not considered. The Snapple acquisition provides several great examples of what could have been done differently. This examination discusses both companies internal goals pre-acquisition, the underlying reasons why Quaker Oats decided to acquire Snapple and which bias-traps Quaker Oats fell victim to when deciding to acquire Snapple. In addition, an exploration of the reasons why the acquisition failed, effects post-acquisition, and future recommendations will also be included.
Internal Goals and Company Mentality Pre-Acquisition
In order to fully understand and appreciate the underlying reasons why companies engage in acquisitions, it is crucial to explore the internal goals, structure, and underlying mentality of the companies involved pre-acquisition. First, Quaker Oats, one of the most widespread American food companies, has focused on diversification since its foundation in 1901. Quaker Oats expanded from the cereal industry into food, groceries and toys. This diversification trend continued when William D.
Smithburg accepted the role as the CEO in 1979. Smithburg diversified into clothing and optical industries along with a new, cutting-edge program that aimed to streamline their production through chain management. With this diversification spirit in mind, Quaker Oats acquired Stokely-Van Camp in 1983. Stokely-Van Camp, the producers of Gatorade, proved to be a truly successful acquisition. According to Smithburg “ had we not bought Gatorade in the 1980´s, Quaker would not have existed beyond that time”. At the time, Gatorade was the golden goose of Quaker Oats, and continues success as a brand today with an 80 percent market share.
On the other side of our analyzed acquisition is Snapple. Snapple was founded in 1972 under the name “ Unadulterated Food Products, Inc”. The three founders, Arnold Greenberg, Hyman Golden and Leonard Mash began selling healthy fruit drinks to local food stores in the Greenwich Village in New York. However, the major success of the company came with the introduction of Snapple’s iced tea drink, in 1987. This success caught the attention of the Thomas H. Lee Company of Boston who purchased Snapple in 1992 and took it public in 1993.
Thomas H. Lee decided to focus heavily on advertising in order to create a unique Snapple image. The main focus in their advertising campaigns was a focus on “ customer relations, regular people”. Snapple wanted to create a fun image that suited the lifestyle of regular people. Another distinct feature of Snapple was the employee loyalty and aggressive distribution strategy that they put in place. Snapple focused heavily on a network of independent distributors, allowing the distributors to sell additional brands other than Snapple. In addition, Snapple also focused on a people oriented management style, putting the individual employee in focus.
Quaker Oats and Snapple had two distinctively different mentalities and strategies in place pre-acquisition. Quaker Oats was prominently focused of diversification and growth with a large corporate mentality. This was in stark contrast to Snapple’s “ customer relations, regular people” image and heavy reliance on independent distributers. These two distinctive mentalities would create complications when Quaker Oat acquired Snapple in 1994 – a difference that seemed to have been left out in the pre-acquisition discussions.
Quaker Oats Reasoning: Why Acquire Snapple
Leading up to 1993-1994, Quaker Oats wished to expand their successful Gatorade section into one large beverage division. The creation of a new beverage division would have an instant benefit for Quaker Oats making them the third largest beverage company in the US. Furthermore, high confidence was expressed by CEO Mr. Smithburg, who had managed to increase Quaker Oats’ net value from $220 million to $3 billion by acquiring Gatorade.
Smithburg considered himself an expert regarding acquisitions and confidently stated “ we have an excellent sales and marketing team here at Gatorade. We believe we do know how to advance Snapple as well as Gatorade to the next level.” Finally, Quaker Oats believed it could advance Snapple in the same way as Gatorade and utilize perceived synergies in beverage distribution to take the Snapple brand global. For those reasons, Quaker Oats formed the aspiring beverage division composed of Gatorade and Snapple in 1994.
Bias Trap: What Quaker Oats Did Not Consider
Synergy, commonly defined as “ the ability of two or more units or companies to generate greater value working together than they could working apart”, is a lucrative concept with an implementation process far more complex than its definition. Michael Goold and Andrew Campbell, authors in a Harvard Business Review about synergy, explain how “ the pursuit of synergy pervades the management of most companies”. The Quaker Oats management, along with Mr. Smithburg, seems to reason in accordance with Goold and Campbell’s theory, falling victim to a synergy bias by discussing the acquisition of Snapple as if its success was a foregone conclusion.
Goold and Campbell also state “ in our years of research into corporate synergy, we have found that synergy initiatives often fall short of management´s expectation”. They argue that “ many companies often justify acquisitions or related business by pointing to the synergies to be gained from sharing resources”.
This conclusion is in align with what occurred at Quaker Oats when deciding to acquire Snapple. The Quaker Oats management concluded that they would be able to use Gatorade’s distribution channels, post acquisition. Instead of realizing that different brands and companies are successfully managed and distributed differently, Quaker Oats decided to mold Snapple in a similar direction as Gatorade hoping to generate synergy.
Skills and parenting biases are also apparent in the Quaker Oats-Snapple acquisition. As mentioned above, CEO Mr. Smithburg not only wanted to compel synergy by creating a new beverage division, he also had a lot of confidence regarding acquisitions based on his success with Gatorade.
Paul C. Nutt, author of “ Expanding the Search for Alternatives During Strategic decision-making”, explains how “ Smithburg acquired Gatorade impulsively, basing the acquisition on his taste buds”. Other authors have concluded that the main reason for the failed Snapple acquisition was the previous Gatorade success. The management, along with CEO Smithburg, was too confident when it came to acquisitions in general and felt the urge to get involved when they saw a perceived opportunity.
In addition to the synergy, skills, and parenting biases mentioned above, Quaker Oats was also guilty of upside bias when acquiring Snapple. With upside bias, “ in evaluating the potential for synergy, corporate executives tend to focus too much on positive knock-on effects while overlooking the downsides”.
In an interview with the New York Times Mr. Smithburg stated that the Snapple acquisition had the “ ability to generate growth”. Mr. Smithburg also explained that the acquisition “ was not about defense at all, it’s about offense” adding that “ we basically see our future as a strong independent company”. These statements demonstrate Quaker Oats’ upside bias when viewing the acquisition of Snapple. By focusing on offense, Quaker Oats ignored the downside, or defense, of the acquisition.
Reasons For Failure
As noted above, Quaker Oats made several mistakes leading up to and during its ownership of Snapple. This section includes the most significant miscalculations when acquiring Snapple. First, Quaker Oats quickly found out that assimilating the once unique and artsy Snapple with Quaker Oats corporate temperament was more difficult than they anticipated. For example, Quaker Oats decision to alter Snapple’s successful image damaged the brand’s relationship with its customers, as many of Snapple’s fun aspects that once attracted a very unique audience were taken from the brand. The fun image of Snapple pre-acquisition was vital for its success and something that ought to have been preserved.
Secondly, Quaker Oats’ attempt to distribute Snapple in larger quantities, as it had previously done with Gatorade, also failed. As noted above, Snapple’s distribution system was originally based on small distributors serving hundreds of thousands of lunch counters and delis, which sold single-serving, refrigerated beverages consumed on the premises. This distribution system was in stark contrast to Gatorade’s, which focused on mass production and distribution to large supermarkets.
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Similarly, Quaker Oats attempt to create a hybrid distribution center, offering Snapple distributors the right to deliver, cold, single serve Gatorade was proven unsuccessful for several reasons. Snapple’s distributors realized that the profit margins they would have from selling Gatorade would be much less than what they would make solely distributing Snapple. As such, the Snapple distributors quickly grew to mistrust the Quaker Oats management, convinced that they would have to compromise their more lucrative accounts to be able to deliver Gatorade to mom-and-pop stores.
These distribution issues took a toll on Quaker Oats’ marketing plan for Snapple as it could not incorporate the procedures, promotions, and advertising which were necessary in order for the plan’s effectiveness. In addition to the problems in assimilation and with the distribution channels mentioned above, Quaker Oats also decided to remove Wendy “ The Snapple Lady” Kaufman from its Snapple commercials.
Ms. Kaufman debuted in the Snapple commercials in 1993, which resulted in sky rocketing sales of approximately $10 millions. During the same year, Quaker Oats also decided get rid of Snapple’s main spokesman Howard Stern, a person who had great impact of the successful Snapple brand and image. These two decisions surprised many – for example, publisher John Sicher told the New York Times that “ a lot of people are looking back to better times as Snapple, and those better times are the Wendy ad”.
Effects Post Acquisition
After buying Snapple for $1. 7 billion, Quaker Oats immediately started losing money. Snapple’s purchase was made just as sales in the category were slowing down and competition from newcomers and large beverage giants such as Pepsico and Coca-Cola was heating up. In fact, critics claimed that Quaker Oats had paid at least $1billion more than Snapple was actually worth. The mistakes Quaker made in marketing, assimilating two corporate cultures, and in incorporating Snapple’s independent distribution forced the company to sell its struggling Snapple brand after just 27 months – ultimately selling Snapple to Triarc for $300 million.
In those months, the acquisition wiped $1. 4 billion off of Quaker Oats’ book value – $2 million for each day Snapple was owned – in addition to a combined $160 million in operating losses in 1995 and 1996. Moreover, Quaker Oats’ stock price during the period remained stagnant, while the stock market as a whole doubled. After purchasing Snapple, Triarc seemed to learn immediately from Quaker Oats’ failures. Triarc brought back the previously successful marketing campaigns and re-instituted Snapple’s regional, independent distribution network. In just three years, Snapple had regained brand value, and was sold along with two smaller brands to Cadbury Schweppes for $1. 45 billion.
Though it committed many mistakes in its acquisition of Snapple, Quaker Oats may have been able to realize the potential of its purchase with a few actions. First, more pre-acquisition analysis of Snapple as a whole was needed before the purchase became final. In analyzing the key reasons for Snapple’s success, Quaker oats may have been able to understand that the desire to take Snapple global and capitalize on potential synergies may be unrealistic, especially given how different those factors were from the operational successes of Gatorade. Second, Quaker Oats could have allowed Snapple to continue to stand on its own rather than try to assimilate it into foreign business process and culture.
Though this option would have proved more expensive than Quaker Oats had anticipated, it also would have meant that Snapple continued its history of success by requiring Quaker Oats to work closer with the established, regional distributors. Finally, Quaker Oats needed to scale back its estimation of its corporate capabilities. Although the company continued to be successful with Gatorade, Quaker Oats’ chances of success with Snapple would have greatly increased had Quaker Oats realized the true differences in the two brands and not overestimated its ability to bring big profits to each of its acquisitions.
Though the acquisition of Snapple by Quaker Oats was done with the idea that profitability was a foregone conclusion, the deal was doomed to fail from the outset. Because management fell victim to multiple biases in pursuit of synergy, Snapple’s acquisition led Quaker Oats to a massive write-off rather than the large successes it anticipated. Had Quaker Oats undertaken a more thorough analysis of Snapple’s acquisition as a whole before proceeding with the purchase, Quaker Oats may have not only been able to avoid a $1. 4 billion loss, but it may have also been able to generate some of the expected additional revenues.
[ 1 ]. Sirower, Mark L, How Companies Lose The Acquisition Game: The Synergy Trap. New York: The Free Press, 1997. p. 31-32. Print [ 2 ]. Tuck School of Business at Dartmouth, “ Quaker Oats and Snapple”, no 1-0041, p. 1 [ 3 ]. Interview with William D. Smithburg, former CEO of Quaker Oats, 18 January 2001 [ 4 ]. Tuck School of Business at Dartmouth, “ Quaker Oats and Snapple”, no 1-0041, p. 1 [ 5 ]. Iturralde Collantes, Aitor, and Manuel Nacha Jiménez. “ Why do the Majority of Mergers and Acquisitions Fail?” Umeå School of Business and Economics 11 June 2007, p. 45-51 [ 6 ]. www. snapple. com, 2 May 2007
[ 7 ]. Tuck School of Business at Dartmouth, “ Quaker Oats and Snapple”, no 1-0041, p. 2 [ 8 ]. Ibid.
[ 9 ]. Iturralde Collantes, Aitor, and Manuel Nacha Jiménez. “ Why do the Majority of Mergers and Acquisitions Fail?” Umeå School of Business and Economics 11 June 2007, p. 45-51 [ 10 ]. Ibid.
[ 11 ]. Finkelstein, Sydney, Why Smart Executives Fail
[ 12 ]. Tuck School of Business at Dartmouth, “ Quaker Oats and Snapple”, no 1-0041, p. 3 [ 13 ]. Goold, Michael, and Andrew Campbell, “ Desperately Seeking Synergy”, Harvard Business Review, p. 133 [ 14 ]. Goold, Michael, and Andrew Campbell, “ Desperately Seeking Synerg”, Harvard Business Review,
p. 131 [ 15 ]. Ibid.
[ 16 ]. Goold, Michael, and Andrew Campbell, “ Desperately Seeking Synergy”, Harvard Business Review, p. 133 [ 17 ]. Goold, Michael, and Andrew Campbell. “ Desperately Seeking Synergy.” Harvard Business Review, p. 134 [ 18 ]. Nutt, Paul C., “ Expanding the Search for Alternatives During Strategic decision-making”, p. 5 [ 19 ]. Finkelstein, Sydney, Why Smart Executives Fail
[ 20 ]. Goold, Michael, and Andrew Campbell. “ Desperately Seeking Synergy.” Harvard Business Review, p. 136 [ 21 ]. Collins, Glenn. “ Company Reports: Quaker Oats to Acquire Snapple.” New York Times, 3 Nov. 1994, Web. 3 Apr. 2012
[ 22 ]. Collins, Glenn, “ Quaker Oats may bring back the Snapple Lady”, New York Times, 20 Dec. 1996, Web. 3 Apr. 2012. [ 23 ]. Feder, Barnaby. “ Quaker to Sell Snapple for $300 Million”, New York Times, 28 Mar. 1997, Web. 3 Apr. 2012