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.