Accounting

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2

Financial Review

and Pro Forma

Analysis

MARKET VIEW

The Quaker Oats Company—

The Significant Cost of Valuation Errors

The Quaker Oats Company’s $1.7 billion purchase of Snapple in late 1994

stands as one of that decade’s worst acquisitions. With Snapple’s poor operating performance dragging the consolidated operating results down, Quaker’s stock price stagnated while the Dow Jones industrial average moved up

by more than 70 percent. So now that Quaker has sold the beverage company,

should Quaker shareholders celebrate?

Mourning would be more appropriate. The price Quaker paid for its softdrink misadventure goes well beyond the $1.4 billion in losses directly associated with the sale of Snapple to Triarc Company for just $300 million. In

addition, Quaker absorbed more than $100 million in cash losses and charges

related to Snapple from 1994 to 1997. And since the deal damaged its balance

sheet, Quaker’s credit rating suffered, raising its cost of capital.

Another cost: Quaker helped pay for the acquisition by selling its petfood

and candy businesses that had given it a larger scale, steady earnings, and international reach. It also paid punishing capital-gains taxes on those sales.

The total losses associated with the Snapple acquisition may well exceed

the original acquisition price.

Adapted from G. Burns, “What Price the Snapple Debacle?” Business Week, 14 April

1997, 42.

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Valuation: Avoiding the Winner’s Curse

Why did more than 50 percent of the major mergers and acquisitions in

the United States completed in the 1990s, according to Business Week

magazine, erode shareholder value? And why did more than 77 percent

of those transactions, according to Forbes magazine, not earn a rate of

return at least equivalent to the cost of the capital necessary to finance

them? The answer to both questions is often the same: overestimation...