Mars, the maker of M&Ms and Snickers, will acquire VCA, a veterinary company, for $7.7 billion. VCA owns about 800 animal hospitals a lab business and dog day care franchises and has about $ 2 billion in revenue.

Although it may seem strange for a candy company to acquire a pet company, Mars already owns 39 petcare brands including IAMS, Pedigree and Whiskas and the acquisition will make the petcare division the company’s largest. The deal also makes sense for Mars’ long-term growth. The company, like many packaged good companies, is facing declining sales as many consumers today prefer healthy, fresh foods over packaged goods. While the CPG market may be in decline, fortunately, the petcare market is growing. In 2015, $35 billion were spent on vet care in the U.S.

Identify the Right Market for Growth

The transaction illustrates how finding the right market for growth can set you up for long-term success. For Mars, the acquisition of VCA is an opportunity to capitalize on a booming sector.

Many companies, when pursuing mergers and acquisitions think about a list of companies to buy and don’t spend much time analyzing the market. Unfortunately, this may mean acquiring a company that despite being a winner in today, is in a declining market.

Take the time to conduct a market analysis to explore the best opportunities for your company.  When faced with stagnation or contraction in your current market, you can use strategic acquisitions to pivot into a new high-growth market to ensure your long-term success.

What Business Are You Really In?

Another lesson from this transaction is the importance of really understanding your business. It’s easy to go with the most obvious choice when defining our business. If Mars simply stopped short and said “we are a candy company,” this deal would never have been executed. What’s worse, Mars could be facing serious challenges since demand for packaged goods is declining.

It’s important to take a step back and look at the big picture when you think about growing your business. What is your business really about? Don’t understate the power of this simple question. Your answer will impact the trajectory of growth you choose.

Photo credit: Leonid Mamchenkov via Flickr cc

Consumer demand for healthy snacks is on the rise. In 2015, sales of conventional products were mostly flat (1.6%) while sales for specialty products grew by 6% and sales for natural products grew by 12.6%. U.S. natural and organic food and beverages sales also grew by 10.7% last year.

Not only are consumers more health conscious, they are also snacking more often; one in five adults eats on the run. Millennials also snack significantly more than any other demographic and tend to eat snacks in place of meals.

Given the current industry, it’s no surprise that food and beverage companies are offering a host of healthy snacking options. There are a brands, such as KIND, that specialize in offering niche, innovate snacks. Large, traditional companies also want to tap into this fast-growing market and are using acquisition to stay on top of consumer trends, compete with rivals, and capture a piece of the growing (healthy) pie.

A recent example is Kashi acquiring Pure Organic, a maker of organic nutrition bars and fruit snacks. Interestingly, Kashi was acquired by Kellogg in 2000, years before demand for natural foods boomed. Unfortunately, the Kashi brand has struggled under Kellogg in recent years and has been a “source of weakness.”  This was in part due to Kellogg’s mismanagement of the brand, differences in corporate cultures, and increased competition from rivals.

With the acquisition of Pure Organic, Kashi is able to swiftly react to consumer demand and realign its strategy. While Kashi may also develop new products in-house to reach new customers, the advantage of buying rather than building is that Kashi has immediate access to Pure Organic’s product mix and existing customers.

The deal is just one example of the importance of understanding future demand in order to successful grow your business. Below are some questions to help you think through your current situation and your company’s strategy.

  • What is your growth plan for the next 3-5 years?
  • What are some trends in your industry?
  • How will you respond to changes in customer demand?
  • What tactics will you use to achieve this growth? Will you develop a solution in-house, partner with another firm, or acquire?
Photo Credit: Elliott P. via Flickr cc

 

Packaged food company ConAgra Foods plans to divest its private label branch Ralcorp after acquiring it in 2012 for $5 billion.

Why is ConAgra spinning off this private label business so quickly after acquisition?

The many reasons include pressure from activist investors, poor performance, increased competition, and tighter margins. Ralcorp’s revenues dropped by 6 percent over the past few years.

One key reason lies in ConAgra’s original acquisition strategy. When it acquired Ralcorp after chasing the company for over a year, ConAgra focused mainly on cost savings. At the time ConAgra stated the acquisition would “provide significant annual cost synergies.”

“ConAgra Foods intends to use its strong infrastructure and productivity capabilities to drive significant cost synergies from this transaction, primarily in the areas of supply chain and procurement efficiencies. It expects to achieve approximately $225 million of cost synergies on an annual basis by the fourth full fiscal year after closing.”

Unfortunately for ConAgra, focusing on the cost synergies of the deal has been unsuccessful. ConAgra has struggled to expand its private label business despite a growing private label sector. It has been unable to respond to increasing competition and shrinking margins. Cost-cutting has a place, but it can’t grow revenues or help your business stand out from the competition. This is why I recommend against focusing on cost savings in M&A. You can only reap the benefits of cost synergies once and then you need a new plan for growing your business.

Rather than focus on cost cutting, successful acquirers target adding long-term growth to business.

There are many reasons for acquisition other than cost-cutting, including:

  • Adding a new technology or capability
  • Entering a new market or sector
  • Adding talent
  • Enhancing your brand and reputation with customers
  • Blocking a competitor

Acquisition is a costly undertaking, both in terms of finances and time. ConAgra spent about a year and a half chasing Ralcorp only to divest it less than three years later. Don’t let your acquisition efforts go to waste. Make sure you have a compelling strategic rationale for the deal — one that is focused primarily on growth.

Photo Credit: Neubie via Flickr cc

Burger King and Tim Hortons plan to merge in an $11 billion deal that will create a new fast food powerhouse. The merger has received significant attention from the media, dealmakers, regulators and consumers. Capstone’s infographic will show you what you need to know about this exciting transaction. Click on the image for a closer look.

Burger King Tim Hortons Merger Infographic

Interested in learning more? Read CEO David Braun’s analysis: Burger King – Tim Horton’s Mergeris Unappetizing Deal

Feature Photo Credit: Richard Hsu via Compfight cc

Burger King and Tim Hortons announced on Sunday that they would merge into a single enterprise with $22 billion in revenue and 18,000 restaurants worldwide. A new parent company headquartered in Canada would be created in what technically is a tax inversion, although tax savings are not driving the merger itself. The main strategy is to become more competitive with McDonalds and Yum Brands, the owner of Taco Bell and KFC.

It’s no secret that the quick service restaurant industry is struggling for growth. Consumers are choosing healthier options like Chipotle over traditional fast food restaurants. Consolidation is needed, but I’m not convinced this is a good marriage.

While Burger King and Tim Hortons claim the acquisition will make them more competitive with McDonalds and Yum Brands, how will the combined companies continue to grow? Will they get more purchasing power with suppliers or leverage economies of scale? Yes, the company will have more stores and a bigger bite of the burger, but the fast food market as a whole is shrinking. Tim Hortons was owned by Wendy’s from 1992 to 2006, when it was spun off in an IPO, so how will this transaction be any different from Wendy’s ownership?

If the transaction goes through, branding will be a real challenge.

Burger King is an American fast food burger restaurant founded in Florida, famous for its Whopper. Tim Hortons is a dominant brand in Canada co-founded by Canadian hockey player Tim Horton. The store is well-known for their coffee, donuts, bagels and other breakfast options. Tim Horton (the hockey player) is a well-recognized name in Canada, but I am skeptical that the brand will resonate with Americans.

So will they co-brand? Drop one brand? Create a new brand? Without a single brand it will be hard to contest the dominance of their competitors. But a single brand will come with obvious costs, in the loss of at least one well-known name.

Putting aside my doubts, I brainstormed a couple of ideas:

  • Breakfast for lunch – Tim Hortons could add additional lunch items to its menu and Burger King could add more breakfast and coffee options, leveraging the strengths of each company to provide meals throughout the day.
  • Branded products – Similar to offering an expanded menu, they might choose to offer a smaller selection of well-known branded products at different restaurants, for example, offering Tim Hortons coffee at Burger King.
  • One-stop shop – Burger King and Tim Hortons may function as two restaurants in one building. You could go to one counter for a burger and another counter for a donut. Yum Brands has done that with Taco Bell and Pizza Hut. In fact, this is similar to how some Tim Hortons restaurants operated when owned by Wendy’s.
  • No brand integration – Tim Horton’s and Burger King may remain as separate restaurants with separate brands. This could mean keeping Tim Hortons restaurants concentrated in Canada where it has a strong, recognized brand name, or they might choose to expand both stores geographically.

It will be very interesting to see if this transaction is successful. Fast food restaurants need to change in order to remain profitable, but to me this is an unsavory pairing. If were up to me, I would have imagined something more along the lines of a Dunkin Donuts – Tim Horton’s merger.

Photo Credit: JeepersMedia via Compfight cc

Two of the largest chicken producers, Pilgrim’s Pride and Tyson Foods, have been fighting over Hillshire Farms. On Monday, Tyson Foods raised its offer to $63 a share in cash, which values Hillshire at $7.7 billion. Last week, Pilgrim’s Pride had raised its bid 22% to $55 a share; however Pilgrim’s Pride has withdrawn its offer.

Acquiring Hillshire’s well-known brand names will give Tyson access to higher-margin products and is worth the steep price. Most of the focus has been on the Tyson – Pilgrim’s Pride bidding war, but Hillshire may still stick with its original strategy of acquiring Pinnacle Foods. The unsolicited bids from Pilgrim’s Pride and Tyson Foods came after Hillshire announced its acquisition of Pinnacle Foods for $4.3 billion on May 12.

The activity surrounding Hillshire indicates continued consolidation in commodities. Volume is so important in this industry so companies are investing in vertical integration and acquiring competitors in order to achieve scale.

Tips for Strategic Acquirers

There are a couple of lessons from the Hillshire deals for strategic acquirers.

Bidding wars and auctions drive up the price and can get ugly very quickly. Try to stay away from public auctions by pursuing not-for-sale, privately held companies. Emphasize your shared strategic vision for the future with company owners rather than price and you may find they are willing to choose you over a higher competing offer.

Understand your strategic reason for acquisition. This one reason should drive your entire M&A process. Although we don’t know the details of Tyson’s strategy, acquiring a strong brand name like Hillshire may be central to the company’s growth. You can overpay for the right acquisition and recover, but you can underpay for the wrong acquisition and never recover.

Photo Credit: Melissa Hiller via Flickr cc

Chinese firm Shuanghui International Holdings announced its intention to buy Smithfield Foods Inc for $4.7 billion. The total of the transaction, including debt, would be $7.1 billion.

That’s big news for M&A watchers in the food industry, an arena that has captured my attention since my firm managed the acquisition of shrimp specialist Empress International by the popular tuna brand, Chicken of the Sea

Shuanghui International Holdings owns Henan Shuanghui Investment & Development Co (000895.SZ), the largest pork producer in China. US-based Smithfield (SFD.N), is the world’s largest producer of pork, raising 16 million hogs a year.  It was founded in 1936 as a meatpacking plant in Smithfield, Va and earned $13.1 billion in revenue in 2012.

There are a couple of obvious reasons Shuanghui International is buying Smithfield: to support its growing middle class and to diversify its markets.

However, a key reason that’s not being addressed is Shuanghui International’s desire for vertical integration. To put it simply, the Chinese company is acquiring Smithfield for its talent.

The term “Acqui-hire” has been used to describe the practice of many technology companies acquiring small startup firms for their talented employees; for example, Marissa Mayer’s acquisition of small tech companies during her tenure as Yahoo’s CEO.

Buying a company for its talent is not a new concept and is a strategic approach to acquisition when there often is no other way to recruit these valuable team members.

For Shuanghui International, Smithfield is a global company that provides experience and talent the Chinese company cannot get anywhere else. Smithfield has people that understand how to manage an established company with multiple famous brands, including Armour, Eckrich and Farmland, in a commodity industry.

They have operational excellence and business experience. Shuanghui needs the western MBAs to manage and expand successfully in business into U.S. markets.

In addition, Smithfield has its own experience with acquisitions. The company expanded significantly by purchasing nearly 40 companies between 1981 and 2008. These acquisitions were transformative for the U.S. pork industry. If this transaction is approved, it likely will bring about another big change for the industry, one that Smithfield has experience in managing.

Photo Credit: ** Maurice ** via Compfight cc