In addition, Quaker Oat’s food products can give Pepsi a well-balance portfolio of products that can target all different age groups of consumers. Currently PepsiCo only covers the domain of unhealthy and salty snacks such as Doritos, Tostitos and Fritos corn chips through the merger of its Frito-Lays division. The products of nutritional snack that Quaker Oats manufactures can complement PepsiCo’s salty snacks and help PepsiCo to establish a presence in the nutritional snack industry. Therefore PepsiCo can be able to extend its reach into the categories of grain-based snacks and the morning on-go-foods. These foods are especially good for the kids. If both companies can combine, Pepsi’s Frito-Lay unit could be able to distribute Quaker’s Chewy snacks for estimated incremental revenue of $200 million and operating profits of $34 million by 2004.
Furthermore, the major cost saving benefit to the combined companies could come from the sales-and-distribution channels that each company has individually established. PepsiCo used a Direct Store Delivery (DSD) system. It was much more expensive, and used to amount 15%-20% of sales. It could give PepsiCo direct control over product selection, in-store visibility and the size of the product displays. By using the DSD system, which can provide point of sale displays that are highly visible in stores and occupy large shelf space. It is especially important for the retail business. PepsiCo can take this advantage to increase sales volume of Quaker products. If Pepsi acquires Quaker and uses its warehouse brokers’ distribution system, it can enhance PepsiCo’s position in the $7 billion nonrefrigerated juice segment. By using the same channel of Quaker can potentially save $45 million in operating costs and generate additional $400 million sales through Quaker’s product lines. Therefore the merger of PepsiCo and Quarter Oats can create important cost and selling synergies and can approximately save $60 million annually in the costs of raw materials and supplies, and expects to reach saving $65 million annually by 2004 in manufacturing, warehouse, delivery and logistics systems.
Finally, if the acquisition succeeded, Quaker’s nonsnack food businesses can represent 10% of the combined company’s sales. These businesses are highly profitable and are expected to generate substantial free cash flows and modest growth over the foreseeable future.
As a whole, PepsiCo has a great opportunity to tremendously increase its revenues and value to its shareholders by acquiring Quaker Oats. The gain to shareholders is based on achieving synergies from cost savings, revenue enhancement, process improvement and financial engineering. The revenue enhancement is the most important factor to create synergies in this merger. The increased sales create from Tropicana juices through Gatorade distribution channels, to increased sales of Quake Oats snack products through the Frito Lay distribution channels.
