Mergers and acquisitions: Pringles sold by P&G to Diamond Foods.

BBC News, April 5, 2011, Pringles was sold to Diamond Foods for $2.35bn (£1.44bn). Diamond will pay $1.5bn for Pringles and take on $850m of its debt. Bob McDonald, chief executive of P&G said it was a "terrific deal for our shareholders". If it is a bad deal which does not create P&G shareholders’ wealth, why P&G keep going on the deal. In P&G chief executive position, Mc Donald wants to increase the value of deal in purpose by stating the quote. In reality, P&G’s core business is a personal care and household products. Pringles as a food bands stood as the exception in P&G’s portfolio. It might not bring many benefits to P&G as it imaged. It would be difficult to manage business in two different kinds of industries. It would made P&G forget about it core business. Thus, I think the decision to sell Pringle is the right decision for P&G business and shareholders.
In 2010, Diamond Food had bought Kettle Foods Chips for $615 million from Lion Capital. In both case, they are both mergers deal but merger strategies are different. I am confusing whether Kettle deal are horizontal merger or conglomerate merger. Base on the definition, in horizontal merger two companies which are engaged in similar lines of activity are combines. The past core business of Diamond are popcorn and nuts while Kettle’s business is potato chips. Is it in the similar line of activities? In contrast, a Conglomerate merger is the combining of two firms which operate in unrelated areas. Diamond’s previous business and Kettle’s business are in the same industry, food industry. Is it irrelevant? In Pringle deal, I am sure that Diamond Foods conduct Horizontal merger in which Pringles Chips are combined with Kettle Food Chips of Diamonds Inc.
The motivation purposes of two mergers are different base on the different strategic merger. In Kettle merger, the motivation is entry to new market. Compare to precious business, Potato Chips market is completely different one to Diamond Inc. Thus, the quick way to enter potato Chips market is merger. One more motivation makes Diamond enterprise decided to buy Kettle Chips is risk diversification. The investment portfolios of Diamond were diversified when firm bought Kettle. The overall income of company will be less risky if profits of popcorn and/or nuts reduce. In another hand, the motivation of acquiring Pringles is different. One of the forces driving the acquisition is the attempt to increase market power of Diamond. Diamond already owes Kettle chips, and then bought Pringles will increase ability to control over the price of product in theory. However, I wonder that Diamond still keep the previous brand name of products separately, Pringle and Kettle, can this increase its market power or compete between two brand in the same company? I think it fails to control selling price in term of customer power. However, in term of supplier power, Pringles merger will reduce supplier power as a result, Diamond could control price over price of inputs instead of outputs. Another significant advantage of Pringles acquisition is the ability to exploit economics of scales. Merger Pringles to Kettle Foods helps Diamond save money in manufacturing capital, distribution channel, R&D, administration. Although two deals’ motivation has some differences, they might have the same motivation which is managerial motives. The acquisition might lead to mangers’ higher salary, power, and achievement satisfaction.

In the previous merger, Kettle deal, Diamond paid by cash to Lion Capital. It brought benefits to Diamond that are to retain the same level of control of shareholder over their company and the transaction gave greater chance to success because cash have obvious value then cash is more preferable. However, if Diamond borrowed the cash to pay for the Kettle deal, it might affect financial gearing of company. Investors do not prefer company which have high gearing ratio. From my point of view, just because the value of deal is not much $625 million, the decisions paying by cash of Diamond did not negatively affect shareholders’ wealth. It created Diamond shareholders’ value. In contrast, Pringles deal is a big deal compared to Kettle, $2.35 billion, so applying by cash is impossible. Diamond decided to pay $1.5 billion in stock market and $850 million in debt. Because it is a big deal, so paying by shares would not ruin the cash flow of Diamond intermediately, but it will affect the power of existing shareholders’ position. Diamond shareholders own about 43% while  P&G shareholders will own the rest. In this case, I think the company, which creates more shareholder value, is P&G rather than Diamond.

The stock price of Diamond increases because of the acquisition decision.(http://www.nasdaq.com/symbol/dmnd/interactive-chart). Diamond shareholders were happy about that. The Pringles acquisition might go well as both enterprises expected unless there is no Department of Justice’s investigation in Diamond accounting practices in 2012. The stock market of Diamond went down more than 60% value after DOJ reported which make Diamond be unable to finance the Pringles deal. February 10, 2012, the stock price of P&G fell down 0.3% as the result  P&G has decided it will cancel its sales of Pringles snack to Diamond Food Inc. If the sales were in process, the stock market price of P&G fell down more than that. Fortunately, after terminating its deal with Diamond Foods, P&G has now entered into an agreement with Kellogg to sell its Pringles for $2.7 billion in cash which makes P&G’s stock price grow to $72.   

In conclusion, the Kettle deal has expanded Diamond’s business and created Diamond’s shareholders wealth. In contrast, Pringles acquisition between Diamond and P&G did not complete and brought benefit to both companies. It ruin shareholder’s wealth of both companies especially, P&G. The reason for the merger failure is an unexpected and unmanageable reason which is DOJ financial investigation.      

Sources:

http://www.bbc.co.uk/news/business-12973728

http://www.forbes.com/sites/greatspeculations/2012/02/21/pg-puts-down-the-pringles-stock-going-to-72/   

http://www.bloomberg.com/news/2012-02-10/p-g-said-to-seek-termination-of-pringles-sale-to-diamond-foods.html

http://business.time.com/2012/02/15/kellogg-to-buy-pringles-pg-diamond-end-deal/