In his book, “The Wisdom of Finance: Discovering Humanity in the World of Risk and Return”, the Harvard Business School professor Mihir Desai compares company mergers with marriages. He writes that both are fraught with difficulties, and warns:
- Due diligence is vital
- Filling a hole in your organization is not a merger strategy
- Racing against the clock leads to bad decision-making
- Synergies are always overstated
- The costs of integration are always understated
- Asymmetric mergers are easy but of limited value, and mergers of equals are horribly difficult but potentially very rewarding
- Serial acquirers are problematic
- Ultimately, it’s all about culture, “doing the work”, and execution. As Thomas Edison once said, “Vision without execution is hallucination”.
This past week brought news reports that ADM’s projected acquisition of Bunge is progressing faster than expected, and that an announcement could be soon.
ADM has revenues of $62.3 billion and a market value of $23 billion; Bunge has revenues of $42.7 billion and market value of $11 billion. ADM is the most U.S.-focused of the major grain companies and a takeover of Bunge would help it grow in South America, where Bunge is the largest exporter in the agriculture market, posting revenues of 40 billion reais or almost $13 billion.
Bunge is not only a big agricultural exporter from South America; it is also a big producer in the region, most notably of sugar and ethanol. The company owns and operates eight sugarcane-crushing mills in Brazil with a combined capacity of over 20 million tonnes, making Bunge the third biggest producer after Raízen Energia, which is backed by Cosan and Royal Dutch Shell, and Biosev, a subsidiary of Louis Dreyfus.
The FT once described the sugarcane mills as “a financial millstone for Bunge”, although the mills are now expected to report an annual operating profit of $75m .
In November 2017 Bunge announced that it was in the process of separating the finances of its sugarcane unit from the rest of the company as part of an effort to reduce its exposure to the operations, and was considering selling the unit in an IPO. An analyst at the time valued the unit at between $1 billion and $2 billion.
Also last week, soda-seller Dr Pepper Snapple Group and coffee maker Keurig Green Mountain (owned by serial acquirer Luxembourg-based JAB Holding Co) announced that they were joining forces to create a beverage company with $11 billion in annual revenue. The combined company will be called Keurig Dr Pepper, or KDP, and is targeting $600 million in synergies on an annualised basis by 2021. Keurig’s CEO said,
“Our view of the industry through the lens of consumer needs, versus traditional manufacturer-defined segments, unlocks the opportunity to combine hot and cold beverages and create a platform to increase exposure to high-growth formats. The combination of Dr Pepper Snapple and Keurig will create a new scale beverage company which addresses today’s consumer needs, with a powerful platform of consumer brands and an unparalleled distribution capability to reach virtually every consumer, everywhere.”
I have quoted that statement in full because it highlights the most important market shifts in recent decades: the transfer of power from the producer to the consumer. It also highlights the importance of distribution networks, getting products in front of consumers.
Both Keurig’s acquisition of Dr Pepper and ADM’s possible acquisition of Bunge have one thing in common: a heavy sugar component. Some analysts questioned whether Keurig’s move into soda was the right one given the trend away from sugar and sugar-containing sodas. Sales of soda drinks decreased about 1.2 percent in the United States in 2016, falling for the 12th year in a row.
One analyst wrote that from Dr Pepper’s perspective, the merger “makes a lot of sense…they needed to diversify their business line from sugary drinks, so I think that this is a really good deal.” Bulking up is a way to boost efficiency in the business at a time when soft drink sales are falling as consumers cut down on sugar. “If your truck is becoming less full because volumes are declining, you should have other beverages to fill that spot,” he added.
Just last week a survey was published that found that most Americans now believe that sugar is more harmful to health than marijuana. The Wall Street Journal/NBC News survey found people rank cigarettes, alcohol, marijuana and sugar in that order in terms of harmfulness. A surprising 21% of respondents said that sugar was the most harmful of the four.
So what are Keurig and ADM doing buying into the sugar business? Is, as one analyst suggests, Keurig just buying empty space on Dr Pepper’s fleet of delivery trucks? And does ADM really want to buy Bunge’s sugar mills, or do they have no choice in that they are being thrown in as part of a take-it-or-leave-it package deal?
Or are both companies betting that the anti-sugar trend has over-extended itself and is about to correct? Although there is little evidence in the media to that effect, a recent study found that sugar taxes do little to reduce sugar consumption, and that even if they did the resulting reduced sugar consumption would have little meaningful impact on health.
At some stage or another, people will eventually realise that sugar is not the cause of the obesity epidemic, and that cutting sugar consumption is not the silver bullet that many people expect it to be.
As such, ADM and Keurig should probably worry less about the sugar components of their deals, and more about the other potential difficulties that Professor Desai warns about in his book.