The agricultural behemoth recently put forward another
multi-billion-dollar takeover proposal of close rival Syngenta. US-based
Monsanto has been working to acquire the Swiss company since 2014, claiming
that a deal would “create significant value for growers to ultimately meet the
needs of broader society”. While it hasn’t yet been approved, if the
Monsanto-Syngenta deal does go through, it would be one of many mergers and
acquisitions in the food sector this year.
Last Wednesday, shares of Belgian supermarket operator
Delhaize and its Dutch counterpart Ahold jumped on speculations of an imminent
merger. One analyst estimated the value of the deal at €550-650m ($622-735m)
per year. Last month, just two years after acquiring HJ Heinz Co for $23.2bn,
Brazilian private equity firm 3G Capital and Berkshire Hathaway orchestrated a
deal to buy Kraft Food Group Inc that is expected to save roughly $1.5bn
annually.
The recent wave of attempted mergers in the food sector could
be foreshadowing trouble. Large mergers cause organizational disruptions, and
increase the likelihood that managers make costly mistakes. This is bad news
not only for the companies, but also for society.
The pursuit of synergies is fueling rapid change through
mergers and acquisitions. But these changes can come at a cost. Implementing
mergers and integrating assets often distracts companies. To understand the
differences in growth strategies on sustainability, we undertook original
research to find out (along with a third researcher, Mati Morales of the
University of Granada) the effects of the growth strategies of Coca-Cola and
PepsiCo Inc. There are few companies more similar than these two, both holding
assets of approximately $70bn in 2010.
We found that Coca-Cola favored the rapid growth through
mergers and acquisitions. PepsiCo preferred to grow organically. From 2000 to
2010, Coca-Cola engaged in 53 mergers and acquisitions, compared to PepsiCo’s
27.
However, Coca-Cola had a much harder time with corporate
social responsibility during this period. Absorbing a merger, especially a mega
merger, distracts management from long term planning and R&D, as their
attention and efforts are redirected to more immediate challenges such as
aligning people, systems, and cultures. It is not uncommon for companies to
lose sight of the big picture and take their eye off the ball during the
integration process. It is no wonder that Coca-Cola ran into trouble.
For example, when Coca-Cola introduced Dasani water to the UK
in 2004, they failed to fully undertake market tests. They didn’t realize that
UK customers wanted real spring water instead of mineral-enhanced tap water. To
add to their troubles, Coca-Cola also inadvertently stocked shelves with Dasani
water tainted with bromate, a known carcinogen. The company estimated that this
mishap alone cost £25m ($38m) in cancelled production contracts and advertising
deals. Analysts estimated the damage to the company’s reputation to be 20 times
that figure.
We found that Coca-Cola experienced 26 mishaps from 2000 to
2010, relative to PepsiCo’s nine. Rapid growth through mergers and acquisitions
puts companies at risk of making mistakes. Indeed, KLD (now owned by MSCI)
rated the environmental, health and governance (ESG) practices of both
companies and identified 110 concerns for Coca-Cola and only 59 for PepsiCo in
2010.
Jantzi Sustainalytics, another ESG rating agency, has also
been critical of Coca-Cola’s policies. Coca-Cola has yet to make a formal
commitment to healthier products and does not disclose a policy specifically
about product health issues. In comparison, PepsiCo has moved significantly
into healthier product categories, such as baked grain snacks and fresh dips,
while reducing sugar, sodium and saturated fats in its existing brands. At a
time when PepsiCo has been capitalizing on the growing healthy food and
beverage trends, Coca-Cola seems to be too busy determining its next merger
target.
Creating synergies through mergers is seductive, but
integrating a merger is difficult and distracts management. Managers are unable
to spot bigger trends, and capitalize on these trends, as they focus on the
day-to-day tasks demanded when integrating two companies. They are also seeking
to cut costs as they seek synergies. Sustainability and responsibility are
often furthest from their mind. When 3G Capital led InBev’s hostile takeover of
Anheuser-Busch in 2004, for instance, it quickly cut 1,400 jobs from the American
company. At least to this point, there is no indication that Anheuser-Busch has
taken a proactive, sustainable stand to its business.
Frequent mega mergers are the antithesis of strong,
sustainable corporate cultures. All bets are off on the sustainability
leadership of companies undergoing mega mergers.
-The Guardian
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