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Tag Archives: mergers

Baked beans on toast for two of the world’s richest men

Kraft-Heinz-Main-BrandsBrazil’s richest man Jorge Paulo Lemann has teamed up with Warren Buffett to engineer a deal to merge with Heinz which will not generate much enthusiasm amongst the gourmet elite of this world.  But the Kraft Heinz merger has everything it takes to get financial markets excited, with the promise of USD 1.5bn annual savings by 2017 and combined sales of USD 29bn, making the future group North America’s third largest food and drink company and the world’s fifth.

Two unknowns remain.  Will the Kraft Heinz Company manage to generate growth beyond the annuity it will derive from savings in overhead costs?  And can it develop new product lines to evolve away from the very 1970’s image that characterizes much of the present range?

Why Oscar Mayer dogs, Mayo®, HP Sauce®, Jell-O®, Philadelphia® and Kool-Aid® can still generate billions

Changing living patterns and the increasing involvement of women in full-time employment created fast growing demand for time-saving foods through the 1950s until the early 1980’s; this was an era of instant coffee and Wonder Mash® which also witnessed the global expansion of fast-food restaurant chains.  But the world has moved on since the days of Macaroni and cheese.  Improvements in Supply Chain efficiency combined with advances in food science now allow supermarkets to offer a broad choice of ready meals of increasing sophistication.  Today, “convenience” also includes anything from fresh ready-to-eat mango salad to ready-to-cook peeled vegetables, as well as meal modules which consumers can combine to produce healthy balanced meals, with a starter, a main course and a dessert if they so desire, that provide the taste, nutrition value and visual appeal of the “real thing” without all the fuss of starting with basic ingredients.

So with every consumer survey telling us that people are now opting for organic or at least more natural foods from sustainable sources, and with the abundance and variety of quality foods on today’s supermarket shelves, how is it that companies such as Kraft and Heinz still manage to achieve sales that combine to USD 29 billion?

Karft-Portfolio
Kraft’s broad portfolio of brands will add to the Heinz range.
Now spot the missing item : the healthy option

Part of the explanation is to be found in the significant price gap between today’s high quality fresh products and run-of-the-mill heavily processed foods.  The average household’s budget priorities have changed over the past decade, with electronic gadgets, leisure and entertainment claiming an increasing share of the consumer’s wallet.  It is tempting for large families or for those on lower income to make savings on food when cheap alternatives can provide the same feeling of satiety at a fraction of the cost of the fancier items beautifully displayed on the supermarket shelves.

Secondly, one also needs to bear in mind that decades of mass-produced processed foods have created a degree of addiction to sugar, fat and salt, so that the consumers who opt for a large plate of French fries smeared with a generous layer of Heinz Ketchup may do so by choice rather than as a result of financial constraints.

There is, however, pressure from all sides to move consumers away from the heavily processed and generally unhealthy types of foods that come off the production-lines of companies such as Heinz and Kraft.  Eating habits do not change overnight, but the change will happen gradually.  Increasingly, the cost saving will become the only justification for buying “junk” food, and when that is the case, consumers guided by the need to make savings might opt for a supermarket’s own brand or a completely generic product rather than “premium branded” processed food.  This is not good news for the future Kraft Heinz Company in the longer term.

Management style will change things faster than eating habits

When Brazilian 3G and Warren Buffet’s Berkshire Hathaway acquired Heinz in 2013 and took the company private, it must clearly have been part of their plan to make another acquisition in that sector to create a paradigm shift within Heinz and change the balance of forces on the market.  Merging with Kraft turns that potential into a reality.  The shake-up is about to begin.

Jorge Lemann
3G’s Jorge Lemann
Warren Buffet
Warren Buffet

3G have acquired a reputation for very aggressive cost cutting, not just the excess or even the frills, but deep cuts everywhere possible whilst also challenging the priorities and seeking solid justification for any capital project or major item of expenditure.  Advertising costs are therefore most likely to be put under close scrutiny.  In my first job in the 1970’s as advertising research executive in one of London’s major advertising firms, my line manager told me “advertising is a unique product: we don’t know how it works, the client cannot tell for sure whether it works or not, and if it doesn’t the client doesn’t get his money back”.  3G surely won’t see it that way and today’s advertising gurus will need to come up with convincing reasons to justify every dollar of advertising spend if they want to retain the Kraft Heinz Company’s account.

Once the fat and duplication has been trimmed off the combined business and further savings are achieved through wiser allocation of sales and marketing funds, let us hope that the Kraft Heinz Company will re-invest some of their USD 1.5 billion annual saving into developing new lines of food to regenerate their portfolio, fuel longer term growth, and preserve the notoriety of those household brand names.

No celebrations for the banks this time

As not all mergers end up being successful, conventional wisdom would say that mergers and acquisitions present shareholders with the potential for value creation, whereas they offer banks and advisers immediate value through fees and financing arrangements.  The deal struck by Warren Buffett and Jorge Paulo Lemann is about to cause a serious dent in that conventional wisdom.

A merger of the magnitude of Heinz and Kraft’s would normally be toasted with champagne by the investment banks whose names invariably pop-up each time a deal is struck.  But in this particular case, the only toast will be the one covered in humble Heinz baked beans, because the two giants behind the deal are sitting on huge cash reserves and will not need big financing.  This means that Wall Street’s major banks will all miss out on their share of what is currently being tagged as the biggest M&A deal of 2015.

Oh well, we’ve only just reached the end of Quarter 1, there is still some time for other big guys to spark off a few more “biggest M&A deals of 2015” during the coming nine months.

Consumers’ interests acknowledged

For almost a year, ever since announcing their intention to merge and become the world’s largest airline (admittedly they never promised to become the best), United Airlines and US Airways have behaved as though this was a fait accompli.  But the Justice Department saw things another way, forcing the two airlines to abandon their dream.

american-us-website

I shall remember for a long time the frustration I felt on June 11th in Washington DC’s Dulles Airport when, arriving from London on a delayed United Airlines flight, a number of stranded passengers were waiting in line with me, surrounded by banners hailing the advent of the world’s largest airlines, when late at night United Airlines only had one single person at ground staff to attempt to rebook those passengers that had missed their connections and who, like me, were offered no alternative other than to sleep on the airport’s benches.

United Airlines could not, for whatever reason, re-book me on an early flight on the next morning on US Airways, their future merger partner, and sent me to the other end of the terminal to negotiate a flight ticket there, but there was nobody at their desk.

Shaking hands over a deal that shall not be

And so maybe it is time to hold airlines to account and request that the service they provide to their customers resembles in some way the claims made in their advertising campaigns.  Clearly, the pressure on airlines to contain their costs is harsh, but reducing the competition between airlines on key routes would allow service levels to drop to unacceptable levels.  It was bad enough on the return transatlantic flight (delayed by four hours) to have to wait 50 minutes after take-off in business class before even being offered a beverage (most passengers including myself had fallen asleep well before any dinner was served).  The very kind and apologetic flight attendant was apologizing for the fact that there were only two of them to attend to a full business flight cabin…

Lack of competition in the airline industry can already be felt within some of the alliances, and the impact on fares for routes that are operated by several operators all belonging to one same alliance is already clear to see. Merging companies would only reinforce what is already an oligarchy when it comes to setting air fares.

The only measure that can effectively counteract a continuing fall in customer service standards is to maintain a healthy level of competition.  A big thank you to the Justice Department for having understood this and threatened legal action against United and US Airlines if they went ahead with their merger plan, in order to preserve what they called true market-driven competition.

Greater clarity regarding the merging of major airline operators

United and US-Airways, now turning their back on each other
United and US-Airways, now turning their back on each other

For many years, there was clear opposition against the merging of major airlines, but by 2006 it became clear that something had to change in the airline industry after some of the major players had collapsed.  This prompted the authorities and justice experimented a little in that field, allowing Continental to merge with United, Northwest to joint Delta, and US Airways to merge with American West.  But now, two of the above mentioned airlines turn up again for a second round of mergers and this has clearly prompted new thinking.  Breaking away from a trend which had been taken for granted, the Justice Department is now saying “enough is enough”.

Back to the drawing board

United Airlines have lost almost $ 1 billion since the merger deal was proposed last year.  US Airways is seeking ways to remain competitive in an increasingly competitive industry.  Further mergers between any of the top-top players are unlikely to be given the green light in the foreseeable future; so this means that the further consolidation of the industry will need to focus on sweeping up some of the small or medium sized players, and this is clearly the focus US Airways will be taking.

Loss-making United Airlines had probably best concentrate on fixing it’s own structure, costs and offering rather than add a further layer of complexity to the business by grafting on some other airlines onto its already ineffective business.  With little left to save on costs, it is surprising that no major airline in the United States has attempted to differentiate itself on service.  From my recent experiences with United Airlines, it would not take much to make flying with them a more pleasant experience than it is at the moment.  Probably not very costly to implement, and with a guaranteed noticeable impact for their customers.  This could be a good place to start.

It is widespread knowledge that 50% to 80% of all mergers and acquisitions fail to deliver the benefits described in their business case, and a sign of blissful ignorance that so many companies continue to embark on major acquisitions or mergers whilst ill-prepared, confident that they will reach a successful outcome when in fact the odds are seriously stacked against them.

On the other hand, numerous case studies show us that companies that have grown through a series of mergers and acquisitions demonstrate repeated success in integrating these new businesses.  This proves that there are lessons to be learnt, and that repeated experience is essential to be able to plan, prepare and execute a complex integration to deliver a positive and value-creating outcome.

Business as “unusual”

Integrating companies has very little in common with “business as usual” : it requires the ability to execute a complex business transformation programme whilst driving two businesses, rather than one, which are most probably both destabilised and whose employees’ effectiveness may dip as a consequence of the distraction and uncertainty caused by the merger, whilst also reaching the commercial targets set in the business plan, the synergies expected from the merger or acquisition, and creating the target organisation with fully integrated processes, ways of working and culture.

The challenge for the team at the top is therefore huge;  it actually becomes an impossible task unless additional resources are called in and responsibilities clearly segregated between maintaining the day-to-day business on track and driving the integration effort.

What really matters

Integrating business is an art : the combination of skill and talent.  The skill is in the way one can achieve one of the essential components of a successful integration : speed.  Speed requires preparation and excellent programme management.  The talent is that of good leadership to drive durable change.  This is why serial acquirers are remarkably good integrators : they know what can be prepared in advance, they are aware of the interdependencies that need to be managed throughout the integration programme, they have learnt to plan for the usual hurdles which appear in such business transformation initiatives and have developed a flair to pre-empt issues in their early stages.  They also know what traits of leadership are essential to drive change and how gaps in some individuals’ talent can be overcome.

There’s always a first time

Before becoming an excellent serial acquirer, every company has had a “first” and learnt from someone who had the experience and the ability to transfer that knowledge onwards, someone who has successfully driven numerous business integrations, often on a continental scale.  By working with the Executive team of the company, that experienced specialist allows the business to manage the dual focus of on-going commercial activity and integration.  This approach has the added advantage of leaving  a lasting legacy, because the organisation progresses along a learning curve during this first integration, gathering a capital of knowledge and new experience which will be of immense value for the integration of the next acquisition.