General Mills is a major manufacturer and marketer of consumer foods in partnership with Pepsi Co. and Nestle. General Mills’ revenue is about 7.5 dollars with a market capitalization numbering to about 11 billion dollars. Its products are cereals, snacks, yogurt and many more and with this, they have to decide about an acquisition of another business which complements their products for them to be able to create more shares of stocks for the personal growth of the company. The company which they want to acquire is Pillsbury which is owned by Diageo PLC. Diageo PLC is considered as one of the leading consumer goods companies in the world. Owned by Diageo, Pillsbury operates as an independent company which produces refrigerated dough and baked goods which is related with the business of General Mills. Pillsbury‘s earning on year 2000 is $6.1 billion with reasonable debt structure.
This transaction requires General Mill to issue 141million shares of its common stock to Diageo, making him own 33% of General Mill’s outstanding stocks. It also included an assumption of $5.142 billion of Pillsbury debt by Diageo. The first two statements when added would total to the asking price of Diageo which is $10.5 billion that is $500 million larger than the proposed payment of Gen. Mills totaling to $10 billion. Another is a contingent payment by Diageo of up to $642 million to General Mills upon the first anniversary of the transaction depending on General Mill’s 20days share price at that time. If the transaction would be completed, General Mills would then own 100% of the Pillsbury’s stock as it would already be owned by General Mills.
In relation with the terms set in the transaction, General Mills didn’t like to issue one third of its shares to Diageo that is actually equal to 33%, which is what Diageo wanted. Another is that General Mills didn’t want to lose value it its investment grade bond rating.
Positive results if transaction is approved:
1. General Mills will achieve growth because sales that will be made by
Pillsbury will now be added to the sales made by General Mills and that goes with an increase in revenue for General Mills. This result will then benefit GM’s share-holders. 2. The two companies’ products are related and thus there would be easier management and operation since they could combine materials and resources and be able to choose which are the better suppliers bases on what the two companies currently have. Upon acquisition, they joint companies could now remove and retain what is better for them to have for better production.
In relation to this, they would then be able to save costs maybe from production or others like taxes. 3. Merger of brand names could increase the value of the company with regards to their popularity. 4. According to Porter, there is rivalry in industries and as a Hotel and Restaurant Management graduate, I could say that the competition within the food industry is very intense because of low barriers to entry. So, the joining of two big companies is essential for them to be able to create stronger barriers to diminish competitors and therefore earn more than usual.
Price of stocks on transaction date, July 14, 2000 is $36.31
Total stocks: 141million * 3 = 423million
Total price of stocks as of Nov. 27, 2000
423million * $36.31 = $15.359 billion
The latest price of stocks of General Mills is equal to $40.49 as of Nov. 27, 2000
Remaining stocks after transaction:
423-141 = 282million
Total price of remaining stocks after transaction:
282million * $40.49 = $11.418 billion
*This would show that General Mills did not lose so much since there was increase in the price of their stock that means that it would be receive payment from Diageo amounting to $642 million which it could use to buy back some of its stocks.
Possible negative Effects of Acquisition:
1. Possible increase in their debt since according to exhibit 5, General Mills have a total debt to equity ratio of 12.048 with a long term debt to equity ratio of 6.179. 2. Possible loss of employment because of cost saving and duplication in the position of employees for the joint company.
In conclusion, I think that they should agree with the transaction because of the more positive result it will bring compared to the negative effects that it could give. The losses they will have will surely have a great return after they have polished everything in their marketing, production, management operations and in regards with whole new company.