The takeover risk was not only present; several major chocolate producers had also really proceeded to acquisitions between 1983 and 1988. As it is rather difficult to build out a competitive advantage based on manufacturing process or on product features, extra profits could be gained through increased economies of scale. Those were more easily achieved in the production of block chocolate and countlines. So this means that there was a potential risk that a company specialized in block chocolate would be taken over by a firm with major strengths in countlines or the other way around.
Whereas chocolate industry had experienced a 2,8% growth between 1982 an 1987, it was especially the countlines segment that was doing extremely well with average annual growth being 7%. In contrary, the block and boxed chocolates were facing a slight fall in demand. In Europe, the United Kingdom being the biggest chocolate consumer was a well-established market. Any firm seeking for growth may well find opportunities in entering the British market and concentrating on countlines production. Only 13% of the British market is owned by less known brands, which indicates that British are rather faithful to the traditional brands. So, the only way for a company to increase the market share into the British market was by acquiring a British-based confectioner with good reputation and well-established brands.
Rowntree’s potential attractiveness as takeover target
In 1987 Rowntree was primarily a confectionery company with major strengths in boxed chocolates and the fast growing countlines segment. In 1988 Rowntree’s management announced its intentions to concentrate on its core business, which is confectionary, retailing and UK grocery activities. Thus a company who took over Rowntree with the aim of expanding its chocolate business would not have to bother about the sidelines in which it is not interested.
Another reason for which Rowntree was a really good target of takeover was that its major market was the United Kingdom in which it owned 26% market share. The UK and Ireland accounted for 40% of the group’s total turnover. The Rowntree group had expanded rather quickly and by 1987 it was operating in nine different countries among which France, which together with the UK accounted for about 70% of European boxed chocolate consumption. Rowntree’s market share in France being 26% was the biggest among the six major chocolate manufacturers.
Given the fact that it is extremely hard and costly to launch a new brand and to increase its market share, possessing a portfolio of well-established brands is definitely a competitive advantage. Here again the attraction to Rowntree is very high as the essence of its strategy was branding. As indicated above, consumers have tendency to go back to the “old familiar” brands. The most popular ones are over fifty years old, which is definitely the case for Rowntree’s extremely popular Kit Kat that was introduced in 1935. Rowntree’s brands have identity on their own, which means that their success does not depend upon the name of the parent company. So, this means that these well-known products would nicely fit into the product portfolio of any company that took over Rowntree without affecting the sales in a negative way.
More so because between 1982 and 1987 Rowntree had invested nearly £400 million to upgrade manufacturing facilities and develop high volume, product-dedicated equipment for several of its leading global brands and because Rowntree’s share price didn’t reflect the value of those brands, it became extremely prone to takeover.
Rowntree’s attractiveness in particular to Nestlé and Jacobs Suchard
For both Nestlé and Jacobs Suchard, the Rowntree product portfolio would put them in leading position what countlines and boxed chocolate is concerned. In addition, these segments presented perfect compliments to the major strength of both Jacobs Suchard and Nestlé, which was block chocolate. As scale economies are more easily achieved in the production of block chocolate and countlines, acquiring Rowntree would also in this perspective represent a major advantage to Jacobs Suchard and Rowntree.
In Europe, the rank of the brand matters a lot, as retailers tend to stock only the leading brand and number two. It is obvious that the first position went to Mars who owned 19% of the market. Rowntree possessing 12% would make Nestlé number two with a market share of 18%. Jacobs Suchard would become overall leader in Europe with 22% market share.
The chocolate industry as a whole provided healthy rates of profitability. Trading profit on sales averaged 9,3% and trading profit on assets averaged 16,1%. Rowntree’s performance being 8,3% in terms of trading profit on sales and 25,5% in terms on trading profit on assets was far better than Jacobs Suchard’s performance, who’s trading profit on sales was 5,9% and trading profit on assets being 12,3%. So, Rowntree is a well performing healthy company.
Both Nestlé and Jacobs Suchard were companies that grew by acquisitions. Between 1983 and 1985 Nestlé had acquired 20 companies to extend its product portfolio. Also Jacobs Suchard had acquired six firms between 1986 and 1988. It is obvious that both companies will continue seeking for strategic targets in order to position themselves among the major players in the chocolate business. In addition, Nestlé possessing at the beginning of 1988 SF6,961 billion of liquid assets or c. £2,709 billion (SF6,961 billion/SF2,57) was obviously ready to proceed to a new wave of takeovers. As we look at the financial data covering the period 1984-1987, we see that since 1985 Nestlé has increased their liquid assets by c. SF3 billion or c. £1,167 billion (SF 3 billion/SF2,57), so they can easily use this money make a cash offer to Rowntree shareholders. The share’s market price was at £7 after the bid by Suchard. As Suchard offered the shareholders a 30% premium, Nestlé will at least have to pay c. £9 (£7*1,3) to the shareholders in order to acquire the Rowntree shares. As a consequence, Nestlé will possess approximately 129 million Rowntree shares, which is about 60% of the common stock! Another possibility that Nestlé could have considered is this: the respective P/E-ratios at the beginning of 1988 for Nestlé and Rowntree are 17,4 and 11,7. This clearly shows that Nestlé shares are much higher valued than Rowntree shares. This puts Nestlé in a very good position to bid on Rowntree with an all-equity offer, because Rowntree shareholders will approximately obtain a 50% premium in case of a 1 to 1 offer.
Conclusion: Given the information above, it is obvious that the takeover bids by either Jacobs Suchard or Nestlé were rather predictable. However, Rowntree was completely surprised. Taken the clear indications mentioned above into account, it should have been more aware of its potential attractiveness towards its competitors as a premier acquisition target. As a result Rowntree should have been better prepared to handle the situation, the more because Nestlé had already proposed alliance with Rowntree (the discussions were going on for over a year!) and because Suchard had already made position of 5% on Rowntree stocks in less than a month time! The only option left for Rowntree to remain independent was by immediately buying back its own shares. Unfortunately, Rowntree would also have to offer at least a 30% premium! Looking at the evolution of the liquid assets from 1983 to 1987, Rowntree could in a crisis situation like this, use c. £70 million (if we compare liquid assets of 1987 to those of 1983). With this cash position it would only have been able to buy back c. 3,6% of the common stock.
