Pepsi Cola

9-801-458 REV. OCTOBER 24, 2008 CARLISS Y. BALDWIN LEONID SOUDAKOV PepsiCos conjure for aloney Oats (A) mental institution By the end of 1999, followe a multi- class restructuring effort, PepsiCo had once a build be bang i of the just just about thriving consumer reapings companies in the world. In slight than four years, it had achieved an 80% join on in take in income, on 30% lower gross gross gross revenue, and with 75% fewer employees. endangers 1 through and through 3 contain the portender-ups recent financial statements. PepsiCos study subsidiaries were the Pepsi-Cola Comp whatsoever, which was the worlds secant thumpingst refreshment throwing comp whatsoever, Frito- profane, Inc. the worlds largest manufacturer and distri aloneor of raciness chips, and Tropicana Products, the largest trade iner of scratched succuss. PepsiCos cresting instigants include lurch soft drinks (Pepsi, Diet Pepsi and big bucks Dew), AquaFina feeding bottled water supply , Tropicana juices and juice-based drinks, Lipton tea-based drinkables and Frappucino ice coffee, as considerably as Fritos and Doritos corn chips, Lays and Ruffles white potato vine chips, and Rold Gold pretzels. Throughout 1999, PepsiCo was endingly track some(prenominal) potential strategical skills. In the blow oer of 2000, it appe ared that the right moment for an right- payd acquisition had arrived.At this era, PepsiCo dash refractory to initiate surreptitious discussions with The protagonist Oats Comp all about a potential specify of reapings subscriber line conclave. Gatorade, a bring out brand in admirers portfolio, had long been on PepsiCos press list. On October 5, 2000, an investment-banking police squad from Merrill Lynch met with the bakshis executives of PepsiCo to discuss a possible strain combine between PepsiCo and admirer. The goals of the meeting were to respect the value of tremblers championshipes to approximate potential s ynergies associated with a Pepsi- booster jointure and to come up with an effective negotiation strategy. PepsiCo executives were footsure that tremblers boozing and eat diet businesses could contri preciselye to Pepsis birthing come upth in convenience nutrients and boozings. However, PepsiCos managers, led by CEO Roger Enrico and chief financial officer Indra Nooyi, were committed to upholding the value of PepsiCos components, and as a result, they were determined non to pay besides much for supporter. ________________________________________________________________________________________________________________ Leonid Soudakov (MBA 01) prepared this baptistry from make sources at a lower place the supervision of prof Carliss Y.Baldwin. HBS typesetters cases are educateed solely as the basis for class discussion. Cases are non intended to serve as endorsements, sources of powericular data, or illustrations of effective or uneffective management. Copyrigh t 2001, 2002, 2008 President and Fellows of Harvard College. To order copies or request authorization to reproduce materials, call 1800-545-7685, write Harvard condescension School Publishing, bully of Massachusetts, MA 02163, or go to http//www. hbsp. harvard. edu.No g all overnment agency of this issue may be reproduced, stored in a retrieval system, utilize in a spreadsheet, or transmitted in some(prenominal) form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard vexation School. 801-458 PepsiCos statement for admirer Oats (A) PepsiCos Origins and bill In the pass of 1898 Caleb D. Bradham, a young pharmacist from northernmost Carolina, looked for a delineate that would best advert the Brads Drink, his concoction of carbonate water, sugar, vanilla and kola nuts.He decided to spoil the name Pep Kola from the local anaesthetic competitor, which he later departd to Pepsi-Cola, maintaining that the crapu lence support in curing dyspepsia, or indigestion. In one hundred ni kaley2, Bradham applied for federal trademark egis and founded the first Pepsi-Cola conjunction. As a result of Bradhams gambling on the post-World state of war I expense of sugar, the conjunction went recrudesce in 1923, and its pluss were inter diverseness for $30,000. It was reorganized as the National Pepsi-Cola keep company in 1928, completely to go bankrupt again collar years later. Emerging from bankruptcy with vernalborn admiters, the follows fortunes changed uddenly in 1934. That year, in the middle of the Great Depression, it introduced a 12-ounce bottle of Pepsi Cola for just a nickel. Its changes soared, and the Pepsi-Cola conjunction em forgetked on six decades of carry on and receiptsable offshoot. In 1965, the federation coordinated with the Texas-based insect bite manufacturer, Frito-Lay, Inc. In 1970, its total sustenance and swallow gross gross revenue passed the $1 j illion mark. The major(ip) convergences in its portfolio at this duration were Pepsi-Cola, Diet Pepsi and Mountain Dew beverages, plus Fritos, Lays, Ruffles, Doritos, Cheetos, and Rold Gold sharpnesss.The confederation, straight called PepsiCo, continued to grow through the 1970s and 1980s. During this period, it used acquisitions to ray out of its pro pictureable, but relatively slow- proceeds beverage and snack businesses, acquiring North American Van Lines, a trucking friendship, in 1968 Wilson Sporting Goods in 1970 Pizza hutch eating places in 1977 and the Taco Bell profligate food chain in 1978. In 1984, PepsiCo was re grammatical constructiond to focus on soft drinks, snacks and eating houses, and the tape drive and sporting goods businesses were interchange.To strengthen its restaurant variableness, PepsiCo acquired Kentucky hot up Chicken in 1986 purchased an equity post in California Pizza Kitchen in 1992 and acquired East Side Marios Restaurants and DAngel o Sandwich Shops a year later. By 1995, PepsiCo gross barters had upseted $30 jillion, and it had 470,000 employees worldwide. It was the worlds third largest employer. Restructuring in the Mid-1990s In the mid-1990s, PepsiCo began to recover severe problems in its world(prenominal) bottling trading trading trading operations and in its restaurant division.In August of 1996, PepsiCos long- term archrival, The CocaCola ships company, bought Pepsis largest Venezuelan bottler, and PepsiCo was left with no presence in that merchandise a great deal all-night. In Brazil and Argentina, a bottler together with owned by PepsiCo and local investors, came shut down to bankruptcy. The bottlers debts were converted into equity, a race that essentially eradicated Pepsis claim PepsiCo subject a one(a)-time bolshy of $576 one meg million million as a result of this restructuring. Simultaneously, the confederation suffered account book and derive declines in its restaurant b usinesses.Between 1988 to 1994, PepsiCo had invested jam to $7 one million million million to acquire thousands of steadfast food and fooling dining outlets. solely the operational complexity of these businesses was a appraise on PepsiCos management. moreover, because of their keen intensity, hitherto profitable restaurant chains could non maintain high returns on invested seat of government without commensurately high levels of debt. Finally, PepsiCos beverage sales to other restaurant chains suffered because of the companys dual role as a beverage supplier and a major competitor through its own fast food chains. 2PepsiCos scream for protagonist Oats (A) 801-458 In April 1996, Roger Enrico, formerly the bespeak of the Frito-Lay division, became the CEO of PepsiCo. He acknowledged that the company had invested too much money too fast, trying to achieve heroic overnight success where, in retrospect, the odds were tougher that they watchmed. 1 In the restaurant divisio n, Enricos group began by divesting PepsiCos restaurant confer and statistical dispersion company and the littler casual dining businesses. Simultaneously, the company announced contrives to crook off its meat restaurant businesses into a separate company.In 1997, PepsiCo have its collar restaurant businesses, Pizza Hut, KFC and Taco Bell, into a pertly somatic entity, Tricon Global Restaurants. PepsiCo received $4. 5 gazillion in bills from Tricon as repayment of sure amounts receivable and a dividend Tricons distributes were then distributed to PepsiCos circumstancesh erstwhile(a)s, and at the same time listed on the NYSE. These moves created a parvenu earthly concern company, with $10 billion in sales and a mart capitalization of $4. 5 billion. Altogether, the divestitures of the restaurant businesses brought $5. 5 billion of change output to PepsiCo.At the same time, PepsiCos managers em stripeked on a major restructuring of the plaprofitary beverage divis ion. The goals of the program were to lower fixed lives, write down underperforming assets, and divest noncore businesses. Following the lead of Coca-Cola, the company consolidated its previously outspread bottling operations into the hands of a few large, well capitalized anchor bottlers, who were focused solely on manufacturing, bewraying and distributing Pepsis line of beverages. The new bottlers were designed to be counterweights to large sellers, interchangeable Wal-Mart and Carrefour, in the rapidly consolidating sell marketplace.Thus in 1998 PepsiCo created the Pepsi Bottling Group (PBG) with $7 billion in sales, and bottling operations in countries ranging from the fall in States to Russia. This move separated the bottling and concentrate move of the business, and allocated responsibility for building operational power to the bottling companies. Retaining a 35% non interpretling interest, PepsiCo sold 65% of PBGs equity in an sign public offering in 1999. The sale brought $1 billion in capital onto Pepsis balance sheet, and led to a substantial reduction in the companys asset base.Signaling managements confidence in the new corporate strategy, PepsiCo used the funds taked by the restaurant and bottling divestitures to launch a share salvation program. It bought back 54 million shares in 1996, 69 million shares in 1997 and 59 million shares in 1998. Management was now able to focus on building a vigorous portfolio of brands in beverage and snack foods. In 1998, PepsiCo acquired the Tropicana juice business from Seagrams for $3. 3 billion in capital. The acquisition gave the company a strong market presence in the fast- festering(prenominal) uncarbonated beverage segment.Compared to Pepsis real businesses, Tropicana provided a lower return on assets and invested capital, but PepsiCos managers, especially Enrico and Indra Nooyi, the chief financial officer, apothegm a great opport social unit of measurementy for strong margins and pro fitable outgrowth if this superior brand were brought under the PepsiCo umbrella. Investment analysts and portfolio managers were more than than skeptical, however. At the time of the Tropicana acquisition, there was a knowledge on Wall Street that Pepsi competency have paying too much. deuce years later, however, the Tropicana acquisition was viewed as an undischarged success.Tropicanas sales mint and positivity consistently exceeded market expectations every shadow from the date of acquisition in the fall of 1998 through kinsfolk 2000. Moreover, the integration of the new business into PepsiCos corporate structure was seamless neither Tropicanas brand heritage, nor its unique scattering system was harmed by the acquisition service. 1 Letter From the Chairman, 1996 PepsiCo annual Report. 3 801-458 PepsiCos call for for ally Oats (A) record 4 shows PepsiCos clove pink p strain history from October 31, 1997 through October 4, 2000.Throughout 1999, PepsiCos simp le eye p strain stagnated as investors shied external from the traditional packaged goods companies in opt of the Inter top and technology acquits. This lackluster slaying caused PepsiCos management to abstain from any major acquisitions. In the words of CFO Indra Nooyi, we wanted a few canton of solid performance behind us, and our property that is, our stock priceto reflect our rudimentary value. 2 When the Inter brighten bubble kick downstairs in demonstrate 2000, PepsiCos stock price began to rise between show 8 and October 4, it appreciated from $30. 0 to $45. one hundred twenty dollar bill- quintet, or virtually 50%. PepsiCos managers believed that it was time to see if a deal could be struck with quaker that would be profitable to both sides. The booster Oats confederation roughly a century old in 1999, booster Oats was a worldwide consumer goods company with annual sales of $4. 7 billion. In addition to its hot grains, supporter Oats and booster Instant O atmeal, the companys portfolio of brands include Gatorade sports beverages, Granola snack bars, Life and diademn Crunch ready-to-eat food grains, and sieve-a-Roni and Near East flavored granulate dishes. processs 5-7 contain champions most recent financial statements as of October 4, 2000. confront 8 provides data on allys financial performance worried down by beverage and food segments and by region. give away 9 shows tremblers total sales and growth judge by proceeds line for the years 1994-1999. In 1999, acquaintance was acclivitous from a period of restructuring and refocusing of its core businesses. During the decade front to 1999, acquaintance divested businesses with more than $2 billion in revenues, or about a third of its sign asset base.The divested operations include chemicals, con manufacturing, specialty retailing, restaurants and pet foods, as well as the infamous Snapple beverage business. (In 1994, ally paid $1. 7 billion for Snapple Corporation, wh ich sold branded juice-based beverages. admirer then do the mistake of replacing Snapples distributors, and alter the brands target consumers. aft(prenominal) incurring dramatic losses, champion sold the business to Triarc in 1997 for $ three hundred million. ) Robert Morrison conjugate the company as CEO in 1997, and proceeded to lead the company through an dramatic turn just about.By 1999, 93% of protagonists U. S. sales came from brands holding the number-one or number- cardinal reposes in their yield categories, and the company was perceived to be one of the best-managed companies in the packaged food and beverage industry. However, because it was a relatively small histrion in a highly pure and rivalrous global industry, supporter was withal seen as a potential acquisition target. Table A shows the dispersion of revenues among the major players in the global packaged food and beverage industries.Indeed, in August 2000, David Nelson, an analyst at CSFB estimate d quakers synergies with confused large food and beverage companies, and translated those figures into a potential takeover price for the company. His calculations are summarized in Table B. 2 Quoted in Lauren R. Rubin, meshingable Fit, Barrons, December 11, 2000. 4 PepsiCos address for ally Oats (A) 801-458 Table A Major Companies Competing in the Global incase Food and Beverage Industries yearly Revenues, $Bns 50 40 30 20 10 0 Heinz Kraft champion Oats Hershey oecumenical Mills Coca-Cola Campbell PepsiCo Unilever Keebler Danone Kellogg NestleTable B Potential Acquirers Estimated Synergies ($ in millions) Synergy Estimates Savings Kellogg Campbell Philip Morris Coca-Cola Pepsi-Cola Nestle Danone starting time bullyized Value essence 450 200 450 650+ 425 four hundred 275 Per OAT Share $20. 36 $9. 05 $20. 36 $30. 00+ $19. 23 $18. 10 $12. 45 Potential coup determine $95. 36 $84. 05 $95. 36 $ one hundred quintet+ $94. 23 $93. 10 $87. 45 Revenues one hundred fifty 25 cl euchre+ 250 150 c 300 175 300 150 175 250 175 CSFB comeliness Research Report on Quaker Oats, August 1, 2000. pastime in Quaker was centered on its Gatorade line of sports beverages, which accounted for 39% of Quakers sales in 1999.According to one analyst report in August 2000, As a small, publically traded, now well-managed company owning possibly the fastest-development billion dollar growth potential product in the food and beverage industry, there is little doubt that Quaker is an amiable target or at to the lowest degree(prenominal) a highly desirable merger partner. 3 3 David C. Nelson, David S. Bianco, Quaker Oats Is It in the subscriber line? , Credit Suisse First capital of Massachusetts righteousness Research, 08/01/2000, p. 4. 5 801-458 PepsiCos complot for Quaker Oats (A) Rumors linking PepsiCo and Gatorade first surfaced in 1994.Late in 1996, Quaker reportedly attempted to sell both its beverage businesses (Gatorade and Snapple) as a package for about $3 bill ion. A year later, analysts predicted that PepsiCos would use the proceeds from the spin-off of its restaurant unit to finance an acquisition of Gatorade. Finally, in a report published in March 2000, short letter Pecoriello, an analyst at Sanford C. Bernstein & Co. , advocated a PepsiCo-Quaker merger, adage that PepsiCo was strongly topographic pointed to leverage Gatorade through its dispersion system in the US and internationally, and to sell Quaker snacks through its Frito-Lay interlocking.Fueled in part by speculation that it might be acquired, Quaker stock appreciated most 80% from its low of $45. 9375 on March 14 to its recent high of $79. 125 on kinsfolk 29, 2000. endanger 10 shows Quakers stock price history from October 1997 through October 4, 2000. demonstrate 11 calculates selected ratios for PepsiCo and Quaker for the years 1996 to 2000. Exhibit 12 provides data on comparable companies. Exhibit 13 shows market interest rates as of October 4, 2000. Gatorade Gato rade was created on the campus of the University of Florida in 1965.Researchers at the school wanted to create a drink that would prevent dehydration among athletes. The drink was named for schools football police squad, the Gators its inception in the early 1970s launched the commercialised sports beverage industry. Quaker acquired rights to the formula and the name in 1983. By 1999 Gatorade was well establish as the worlds take sports drink with $1. 9 billion in global sales, and 82 percent of the U. S. sports beverage market. Its growth had been remarkable From 1997-1999, Gatorades sales grew at an annual rate of 12 percent, while pelf grew at around 15 percent (see Exhibits 8 and 9). everywhere the future(a) five years (2000-2004), Quakers management expected Gatorade sales to plus by $1 billion, implying a 9. 25% cumulative average growth rate. Should that growth materialize, economies of scale were expected to drive profits upward at a 13. 5% rate over the same time pe riod. As a rehydrating and energy beverage, Gatorade was a seasonal product, with the majority of its sales occurring in the warmer months of April to October. Highest levels of per capita use of goods and services were in the Confederate parts of United States. Gatorades international presence was limited, however less than 20% of its sales came from outside North America.Its European launch in the mid-1980s had been unsuccessful, partly because of low-down brand bewildering, but likewise because heat-driven beverage consumption was non green in Europes colder climates. Quakers managers believed that Gatorade had huge growth potential in the warm-weather climates of Latin America and Asia, but the wonky economies in these regions presented major challenges to sustained, profitable growth. At the time of the acquisition by Quaker, Gatorade had precisely two flavors on the market orangish and lemon-lime. By 1999, there were more than twenty different flavors, from Whitewate r Splash to Cool gloomy Raspberry.Quaker was also seeking to extend the Gatorades brand into new product arenas. In the summer of 2000, Quaker launched a vitamin-fortified flavored water called Propel under the Gatorade brand umbrella in southern U. S. markets. This new product was advertised as a seaworthiness water it retireed the vitamins, carbohydrates, and antioxidants present in Gatorade with single one-fifth of the calories. This move marked Gatorades entrance into the fast-growing bottled water market. At the same time, the company launched Torq, a rapidly energy, high-carbohydrate diet supplement for intense athletes.Although Torq was a niche product with limited market prospects, it signaled Gatorades continuing commitment to sports nutrition, thereby enhancing consumers perception of the brand. 6 PepsiCos Bid for Quaker Oats (A) 801-458 Finally, Quakers management had decided to extend the Gatorade brand into the $500 million energy bar market, which was growing at a n annual rate of 30%. This was a natural move, given Quakers core expertise in snack bar products (see below), and the fact that just about 70% of energy bar consumers also drank Gatorade. Quakers Food BusinessesQuakers food businesses were based on an sort of brands in the categories of hot and ready-to-eat cereals, grain products, snack bars, maple syrups, hotcake commixes and grits. Following Morrisons restructuring, all product lines were profitable, but for the most part their growth rates were low (see Exhibits 8 and 9). None of Quakers latest food brands had the potential to exceed $ 1 billion in sales in the foreseeable future? Hot cereals Oats were Quakers trustworthy product, but by 1999, hot cereals represented only 13% of the companys U.S. sales. Still oats were the companys most profitable product line with operate contribution margins of well-nigh 30%, and high returns on invested capital. Recently, sales had bring ined from a growing consumer focus on wellnes sy living and diet. Thus in 1999, Quakers hot cereal sales increased by 12. 5% compared with the compound annual sales growth of 1. 6% over the prior five years (see Exhibit 9). Quaker managers communicate considerable volume growth in this category as the baby boomers grew older and became even more health conscious.In the eyeball of consumers, the main d warmbacks of rolled oats were its taste and touch in preparation. New product phylogeny focused on these issues. Thus in 1999 Quaker introduced several new flash lamp oatmeal flavors, including baked apple, French vanilla, and cinnamon bark roll. It was testing convenient single-serve microwave-ready cups designed to egest the need for a bowl in preparation. different new hot oatmeal products included Dinosaur Eggs, which were targeted towards kids when hot water was added to the flare oatmeal, the eggs hatched little dinosaurs.Ready-to-eat cereal In 1999, Quaker held the number four position in the intensely competitive r eady-to-eat (RTE) cereal market category, trailing pla elucidateary Mills (33%), Kellogg (31%) and Kraft (16%). The business included three strong brands Life and Capn Crunch, with more than $150 million in annual sales each, and the crisp Oatmeal line, with sales of around $ c million. The balance of the segment was made up of bagged cereals Sweet Crunch, Cocoa B finales, and Marshmallow Safari. Real per-capita RTE cereal accept had decreased about 6% each year in the United States since 1994.Bucking this trend, Quakers RTE sales had increased by 1%-2% on average over the last five years (see Exhibit 9). But, although Quakers top RTE cereal brands were competing effectively for share in this declining category, it was increasingly challenging to maintain their profitability. In this difficult segment of their business, Quaker management had decided to focus on efficiency. In 2000, the company announced a two-year restructuring plan designed to achieve significant cost nest eg g by closing manufacturing facilities, consolidating manufacturing lines, and reconfiguring the RTE ereal distribution network. well-fixed caryopsis Quakers Golden Grain business produced flavored rice and pasta. gross sales had been flat for the last five years (see Exhibit 9), but Quaker still held the number one position in flavored rice with a 37% market share, and the number two position in flavored pasta with a 33% market share. Competition was increasing in these markets, however Mars was aggressively exchange flavored rice under its Uncle Bens brand, and universal Mills was promoting flavored pasta under the Betty Crocker label.In answer to these competitive moves, Quaker managers felt they might have to defend share by increasing expenditures on promotion and advertizement or dropping 7 801-458 PepsiCos Bid for Quaker Oats (A) prices. The division contributed about $50 million in run profits annually, and accounted for about 7% of Quakers 1999 operating(a) income. Grain-based snacks Quakers Snack Foods division sold chewy Granola veto, Fruit & Oatmeal Bars, Rice Cakes, and new Crispy Mini-Rice Cakes. Its products accounted for 17. 4% of the snack/granola bar market, second only to Kellogg Co.Quakers chewy Granola Bars led the $360 million granola bar category with a 39% market share. Over the past five years, toughs growth in revenues averaged 8% annually. Quaker Fruit & Oatmeal Bars were number two to Kelloggs NutriGrain in the cereal bar category. Quaker Rice Cakes had an impressive 66% market share in the $ one hundred sixty-five million rice cake category. The profits of the snack business had grown at 10% per year over the past three years, owing to the strength of demand for granola and cereal bars, and successful new product introductions (see Exhibit 9). opposite U. S. nd international foods Quaker also sold Aunt Jemima syrup and pancake mixes, and through them held a 17% share of the $560 million syrup category and 21% of the $300 million pancake mix category. Quaker Grits dominated the $ nose candy million corn grits market, with a 77% share. These were highly profitable brands, but they were in categories that promised little in the expression of future growth. The Quakers international food businesses lacked critical mass. Its Latin American food sales were toilsome in Brazil, where sales had declined 17% in 1999, due to severe currency devaluation and economic recession.In Europe, Quaker had a small, growing RTE cereal business, which was concentrated in the United Kingdom and Scandinavia. Its Asiatic food business was minuscule, accounting for less than $25 million in sales in 1999. Potential Synergies Gatorade If the acquisition succeeded, PepsiCos management expected that Gatorade would dramatically grow both the companys strategic position and its economic performance. PepsiCo would travel the exonerated category drawing card in noncarbonated beverages, a market, which was growing at 8%-9% annu ally, three times faster than the carbonated soft drink market.With Tropicana and Gatorade combine, PepsiCo would control a full quarter of this $23 billion market. One of the major benefits of combining the two companies operations would stem from distribution. Gatorade used a store brokers distribution system to deliver beverages to convenience stores and supermarkets, whereas PepsiCos used a Direct Store Delivery (DSD) system. individually system worked best for different types of products and retail outlets. The DSD system was much more expensive, unremarkably amounting to 15%-20% of sales, but it gave PepsiCo direct control over product selection, in-store visibility and the size of product displays.Moreover, the labor and equipment be of DSD were by and large fixed, hence the contribution margins of incremental unit sales were high. DSD worked well for high volume products (like colas), but it was non an economical way to supply lower volume products in large varieties ) to supermarkets and convenience stores. As indicated, Quaker used a warehouse brokers distribution system. In the case of Gatorade, however, robust consumer demand acted to offset many of the disadvantages of selling through brokers, including lower margins, potential stock-outs and poor product presentation.As a fastmoving convenience store item, Gatorade was regularly allocated highly visible ledge space, almost entirely without slotting fees, which were customary in the retail business. Moreover, Gatorades new products and packages historically had won increased shelf space for the brand, alternatively of taking up the same shelf space and cannibalizing older products. 8 PepsiCos Bid for Quaker Oats (A) 801-458 The acquisition of Quaker would enable PepsiCo to distribute Tropicanas nonrefrigerated juices, like Twister and Dole, through Gatorades warehouse brokers distribution system.The merger would thus considerably enhance companys position in the $7 billion nonrefrigerated juice segment According to CEO Enrico, PepsiCo would become the category captain of the nonrefrigerated juice aisle. PepsiCos managers estimated that using Gatorades warehouse distribution system for Tropicana juices could generate an incremental $ cd million in sales and $45 million in operating profit by the year 2004. The PepsiCo management team also projected procurement savings of approximately $60 million annually by 2004 from reductions in the costs of raw materials and supplies.Moreover, Gatorade used hot-fill production lines, which were similar to those used by PepsiCos Twister, Lipton teas, Frapuccino and SoBe beverages. If the two companies were feature, the team anticipated cost savings from better capacity utilization in manufacturing, warehouse, sales talk and logistics systems. Collectively, these cost savings were expected to reach $65 million annually by 2004. other(a) potential benefits of the business combination were more difficult to quantify.For example, Pe psiCos managers believed that Pepsis extensive cooler distribution network could be used to increase Gatorades penetration in vending machines, schools, and smaller convenience stores as well as other niche vending convey and food service accounts. PepsiCo CFO Indra Nooyi argued The combination of Gatorade and AquaFina in vending machines is a no-brainer. Over the longer term, PepsiCo could accelerate Gatorades international expansion by using the animated sales and distribution organizations of both Pepsi-Cola supranational and Frito-Lay world(prenominal).Finally, the sports technology expertise of the Gatorade Sports Science constitute might be combined with the health research capabilities of the Tropicana Nutrition Center to develop products that would meet the refreshment and nutrition inevitably of beverage consumers in new ways. Snacks If the acquisition succeeded, PepsiCos managers planned to integrate the Quakers snack food division into its Frito-Lay unit, which was already the worlds leader in salty snacks. They saw a significant opportunity in the $2 billion snack bars market, which was growing at 9% annually.Frito-Lay was in the process of reengineering its direct store delivery (DSD) distribution system to handle more product units. PepsiCos management believed that distributing Quakers Chewy Granola and other snacks through Frito-Lays system could increase Quakers revenues from snacks by an incremental $200 million and its operating profit by $34 million by 2004. A nonquantifiable benefit of the acquisition would be that Quaker snacks were non salty. For the most part, its brands con noned nutrition and health more than good taste or fun.Quaker brands put would give Frito-Lay access to numerous consumption occasions, for example, in the morning, that its existing salty snack brands did not serve. According to Roger Enrico, PepsiCo CEO We see bars as an ideal way to smuggle nutrition into more day-after-day diets. some other foods If the acquisition succeeded, Quakers nonsnack food businesses would represent 10% of the combined companys pro forma sales. Quaker Oatmeal, RTE cereals, Golden Grain, and Aunt Jemima businesses did not fit within PepsiCos convenience-food strategy, nor did they represent significant growth opportunities.Yet these businesses were highly profitable, and were expected to generate substantial free cash flows and pocket-sized growth over the foreseeable future. Lastly, their unit volumes supported the scale of Quakers (hence Gatorades) warehouse brokers distribution system. One complexity of the proposed acquisition stemmed from the fact that PepsiCos management would only consider a stock-for-stock transaction. Under that transaction structure, the company would be able to account for the merger as a pooling-of-interests. With a pooling-of-interests 801-458 PepsiCos Bid for Quaker Oats (A) accounting treatment, no grace would be created, and neither PepsiCos nor Quakers shareholders wou ld have to recognize a gain or loss as a result of the merger for income valuate purposes. On the other hand, under pooling-of-interests accounting, PepsiCo was precluded from selling any significant assets of Quaker for two years spare-time activity the merger. Thus, if the acquisition succeeded, PepsiCo would not be able to divest Quakers slower-growth food divisions for at least two years.By the same token, PepsiCo would not be able to repurchase shares in any significant quantity for two years. twain Pepsi and Quaker used share repurchases as their primary mode of returning cash to shareholders (see Exhibits 3 and 7). If the acquisition succeeded, Pepsi would have to change its cash distribution policy radically. close PepsiCo had to determine its initial offer forraderhand approaching the Quaker. The timing was critical, as several other companies were likely to be attracted by Quakers obvious strengths (see Tables A and B).At the same time, PepsiCo management had two maj or concerns. First, although Gatorades synergies and growth prospects provided a occur strategic rationale for the acquisition, Gatorade plus the snack business accounted for only about 40%-45% of Quakers sales and operating income. Food products like Quaker Oats, which PepsiCo was not directly interested in, constituted the absolute majority of Quakers business. Second, Quaker traded at 23 times the earnings, which was lower than PepsiCo, but still at a bounteousness compared to other food manufacturers (see Exhibit 12).Depending on the price and the value of realized synergies, a stock-for-stock transaction could potentially dilute PepsiCos earnings and diminish earnings per share, at least in the short run. 10 PepsiCos Bid for Quaker Oats (A) 801-458 extractions This case was prepared using the following published sources PepsiCo, Inc. 2000 annual Report, lendable at www. pepsico. com/2000/annual2000. hypertext mark-up language PepsiCo, Inc. 1999 Annual Report, forthcoming at www. pepsico. com/1999/annual1999. hypertext markup language PepsiCo, Inc. 1998 Annual Report, available at www. pepsico. com/1998/content. shtml PepsiCo, Inc. 997 Annual Report, available at www. pepsico. com/1997/content. shtml PepsiCo, Inc. 1996 Annual Report, available at www. pepsico. com/1996/content. shtml The Coca-Cola come with 1999 Annual Report, available at www. cocacola. com/annualreport The Quaker Oats society 1999 Annual Report, available at www. quakeroats. com The Quaker Oats Company 1998 Annual Report, available at www. quakeroats. com The Quaker Oats Company 1997 Annual Report, available at www. hoovers. com Form S-4, Registration teaching under the Securities Act of 1933, as filed by PepsiCo, Inc. ith arcsecond on 01/09/2001 Pepsi Seeks $5B Credit Line, Dow Jones parole Service, 10/12/1994 Analysts Dubious on Pepsis reside in Quaker, Dow Jones News Service, 10/12/1994 Quaker Rises on Pepsi Report, The Milwaukee daybook Sentinel, 11/30/1996 Michael J. B ranca, PEP The Good, The detrimental and The Ugly, Lehman Brothers impartiality Research, 11/03/2000 Cathleen Egan, S. Bernstein Analyst Muses over a Pepsi-Quaker Merger, Dow Jones News Service, 03/13/2000 Cathleen Egan, Quaker in Talks to Sell Gatorade, Snapple to Pepsi, Dow Jones News Service, 11/29/1996 David C.Nelson, David S. Bianco, Quaker Oats Is It in the investment firm? , Credit Suisse First Boston Equity Research, 08/01/2000 Lauren R. Rubin, Profitable Fit, Barrons, 12/11/2000 Patricia Sellers, Can Coke and Pepsi Make Quaker Sweat? Fortune, 07/10/1995 Janet Kidd Stewart, Pepsi Chief Pooh-poohs wield for Quaker Drinks, Chicago Sun-Times, 01/25/1997 11 801-458 PepsiCos Bid for Quaker Oats (A) Exhibit 1 PepsiCo Financial lines Consolidated Statement of Income ($ millions, draw out per share data) 9/2/00a 1999 1998 1997 1996 sort out sales New PepsiCo Bottling operations summation net sales appeals and expenses Cost of sales SG&A Amortization of intangible asset ass ets Impairment and restructuring charge keep down costs and expenses direct profit New PepsiCo Bottling operations and equity investments get along operating profit Bottling equity income, net Gain on bottling minutes Interest expense Interest income Income before taxes Provision for income taxes Income from continuing operations Income from quit operations, net gelt income net income income per share of unwashed stock, $ 14,028 0 14,028 8,244 2,123 20,367 14,686 7,662 22,348 13,655 7,262 20,917 20,337 5,433 6,209 96 0 11,738 8,198 9,103 183 65 17,549 9,330 9,924 222 288 19,764 8,525 9,241 199 290 18,255 8,452 9,063 206 576 18,297 2,290 0 2,290 one hundred thirty-five 0 (156) 43 2,312 740 1,572 0 1,572 1. 09 2,765 53 2,818 83 1,000 (363) 118 3,656 1,606 2,050 0 2,050 1. 40 2,460 124 2,584 0 0 (395) 74 2,263 270 1,993 0 1,993 1. 35 2,252 410 2,662 0 0 (478) 125 2,309 818 1,491 651 2,142 1. 40 2,040 (565) 91 1,566 624 942 207 1,149 0. 73 germ Company 10(K) and 10(Q) filings. aData for 36 weeks ended September 2, 2000. 2 PepsiCos Bid for Quaker Oats (A) 801-458 Exhibit 2 assets PepsiCo Financial Statements Consolidated balance wheel Sheet ($ millions) 9/2/00a 705 97 1,835 975 588 4,200 9,209 (3,928) 5,281 4,531 3,011 636 8,178 17,659 1999 964 92 1,704 899 514 4,173 8,816 (3,550) 5,266 4,735 2,846 531 8,112 17,551 1998 311 83 2,453 1,016 499 4,362 13,110 (5,792) 7,318 8,996 1,396 588 10,980 22,660 1997 1,928 955 2,150 732 486 6,251 11,294 (5,033) 6,261 5,855 1,201 533 7,589 20,hundred and one 1996 307 289 2,276 853 225 3,950 10,908 (4,822) 6,086 6,036 1,147 491 7,674 4,450 22,160 silver and cash equivalents short-run investments, at cost Accounts and notes receivable, net Inventories prepay expenses and other up-to-the-minute assets count original assets Property, gear up and equipment, net Accumulated disparagement elucidate PP&E intangible asset assets, net Investments in unconsolidated affiliates opposite assets sack up II&O exonerate ass ets of discontinued operations supply assets Liabilities and Shareholders Equity short-run borrowings Accounts due and other current liabilities Income taxes payable Total current liabilities Long-term debt another(prenominal) liabilities Deferred income taxes Common stock Capital in excess of par value maintained earnings Accumulated other ecumenical loss Less Repurchased common shares, at cost Total shareholders equity Total liabilities and shareholders equity Average shares outstanding, millions 16 3,337 168 3,621 2,737 3,033 1,380 29 963 15,040 (1,219) (7,925) 6,888 17,659 1,446 233 3,399 156 3,788 2,812 2,861 1,209 29 1,081 14,066 (989) (7,306) 6,881 17,551 1,466 3,921 3,870 123 7,914 4,028 2,314 2,003 29 1,166 12,800 (1,059) (6,535) 6,401 22,660 1,480 0 3,617 640 4,257 4,946 2,265 1,697 29 1,314 11,567 (988) (4,986) 6,936 20,101 1,528 0 3,378 413 3,791 8,174 1,997 1,575 29 1,201 9,184 (768) (3,023) 6,623 22,160 1,564 Source Company 10(K) and 10(Q) filings. aData for 36 w eeks ended September 2, 2000. 13 801-458 PepsiCos Bid for Quaker Oats (A) Exhibit 3 PepsiCo Financial Statements Consolidated Statement of cash Flows ($ millions) 9/2/00a 1999 1998 1997 1996 bullion Flows from operate Activities crystallise income from continuing operations Adjustments to manufacture net income to net cash provided by operating activities Gain on bottling transactions Bottling equity income, net Depreciation and amortization Noncash fraction of 1998 income tax benefit Noncash portion of restructuring charges Deferred income taxes Other noncash charges and credits, net enlighten change in operating working capital nett funds Provided by operational Activities coin Flows from Investing Activities Capital disbursement Investments in unconsolidated affiliates gross sales of businesses gross sales of property, plant and equipment short investments, by original maturity More than three months purchases More than three months maturities troika months or les s, net Other, net elucidate money use for Investing Activities Cash Flows from support Activities final payment from issuances of long-term debt Payments of long-term debt Short-term borrowings, by original maturity More than three months proceeds More than three months payments Three months or less, net Cash dividends paid Share repurchases subject from exercises of stock options Other, net Net Cash Used for Financing Activities Net cash from discontinued operations Effect of transfer roam deviates Net (Decr. )/Incr. in Cash and Cash Equivalents Cash and Cash Equivalents low gear of year Cash and Cash Equivalents dismiss of period Source Company 10(K) and 10(Q) filings. aData represents 36 weeks ended September 2, 2000. 1,572 2,050 1,993 1,491 942 0 (cxxxv) 642 0 0 138 191 (295) 2,113 (1,000) (83) 1,032 0 37 529 364 98 3,027 0 0 1,234 (259) 254 150 237 (398) 3,211 0 0 1,106 0 233 51 342 196 3,419 0 0 1,073 0 366 160 505 146 3,192 (574) (66) 0 0 (582) 577 0 (137) (782 ) (1,118) (430) 499 126 (2,025) 2,008 12 (144) (1,072) 1,405) (4,537) 17 134 (525) 584 839 (126) (5,019) (1,506) (119) 221 80 (92) 177 (735) (96) (2,070) (1,630) (75) 43 9 (115) 192 736 (214) (1,054) 108 (716) 103 (32) 375 (594) (1,238) 408 0 (1,586) 0 (4) (259) 964 705 3,480 (1,123) 3,691 (2,741) (2,856) (778) (1,285) 308 0 (1,304) 0 2 653 311 964 990 (2,277) 2,713 (417) 1,753 (757) (2,230) 415 0 190 0 1 (1,617) 1,928 311 0 (1,875) 146 (177) (1,269) (736) (2,459) 403 5 (5,962) 6,236 (2) 1,621 307 1,928 1,772 (1,432) 740 (1,873) 89 (675) (1,651) 323 (9) (2,716) 605 (5) 22 285 307 14 801-458 -15- Exhibit 4 PepsiCo stock certificate Price History PEP Historical Price Performance, October 31, 1997-October 4, 2000 Oct 4 Last close $45. 125 50 45 40 35 30Mar 8 52 week low of $30. 50 25 Jul-98 Jul-99 Jan-98 Apr-98 Jun-98 Oct-98 Jan-99 Apr-99 Jun-99 Oct-99 Jan-00 Feb-00 Apr-00 Jun-00 Jul-00 Nov-97 Dec-97 Feb-98 Mar-98 Feb-99 Mar-99 Mar-00 Aug-00 Aug-99 Sep-99 Nov-99 May-99 Dec-99 May-00 A ug-98 Nov-98 May-98 Source inclined(p) by casewriter based on CRSP data. Sep-98 Dec-98 Sep-00 Oct-00 20 801-458 PepsiCos Bid for Quaker Oats (A) Exhibit 5 Quaker Financial Statements Consolidated Statement of Income ($ millions, except per share data) 9/30/00* Net sales Cost of goods sold vulgar Profit SG&A Impairment and restructuring (gain) or charge Interest expense Interest income Foreign exchange loss, net Income before taxesProvision (benefit) for income taxes Net income Preferred dividends, net Net income available for common Net income per share of common stock, $ 4,045 1,805 2,240 1,551 172 40 1999 4,725 2,137 2,588 1,904 (2) 62 (12) 18 618 163 455 4 451 3. 36 1998 4,843 2,374 2,468 1,873 129 70 (11) 12 397 112 285 5 280 2. 04 1997 5,016 2,565 2,451 1,939 1,486 86 (7) 11 (1,064) (133) (931) 4 (934) (6. 80) 1996 5,199 2,808 2,392 1,981 (113) 107 (7) 9 416 168 248 4 244 1. 80 477 165 312 3 309 2. 34 Source Company 10(K) and 10(Q) filings. aData for ennead months ended Septe mber 30, 2000. 16 PepsiCos Bid for Quaker Oats (A) 801-458 Exhibit 6 Quaker Financial Statements Consolidated relaxation Sheet ($ millions)Assets Cash and cash equivalents Short-term investments, at cost Accounts and notes receivable, net Inventories Other current assets Total current assets Property, plant and equipment Accumulated depreciation Net PP Intangible assets, net Other assets Total assets Liabilities and Shareholders Equity Short-term borrowings Accounts payable Other current liabilities Total current liabilities Long-term debt Other liabilities Deferred income taxes Preferred stock Deferred compensation Tresury prefer stock Total preferred stock, net Common stock Capital in excess of par value kept up(p) earnings Accumulated other comprehensive loss Deferred compensation Less Repurchased common shares, at cost Total shareholders equity Total liabilities and shareholders equity Average shares outstanding, millions /30/00* 111 126 391 287 234 1,149 1,872 (797) 1,075 2 31 57 288 2,512 89 258 648 995 672 510 0 carbon (27) (47) 25 840 126 1,051 (108) (22) (1,578) 310 2,512 132 1999 283 0 254 266 193 997 1,852 (745) 1,107 237 56 293 2,396 one hundred fifty-five 214 570 938 715 523 0 nose candy (39) (39) 22 840 101 855 (95) (46) (1,457) 197 2,396 134 1998 327 28 283 261 216 1,115 1,819 (749) 1,070 246 79 325 2,510 137 168 704 1,009 795 533 0 100 (48) (30) 22 840 79 556 (80) (68) (1,176) 151 2,510 137 1997 84 0 306 256 487 1,133 1,913 (748) 1,165 351 49 400 2,697 169 191 586 946 888 579 36 100 (57) (22) 21 840 29 431 (82) (91) (899) 228 2,697 137 1996 111 0 295 275 209 890 1,943 (743) 1,200 2,237 69 2,306 4,394 568 210 576 1,355 994 559 238 100 (65) (16) 19 840 0 1,521 (68) (103) (960) 1,230 4,394 135 Source Company 10(K) and 10(Q) filings. Data for nine months ended September 30, 2000. 17 801-458 PepsiCos Bid for Quaker Oats (A) Exhibit 7 Quaker Financial Statements Consolidated Statement of Cash flows ($ millions) 9/30/00* 1999 455 124 14 (5) 4 0 1 3 (38) 32 31 631 (222) 14 (185) 219 14 0 (160) (156) 34 1 (96) 83 (373) (9) (516) 2 (44) 327 283 1998 285 133 (31) (27) 90 38 12 (41) 32 23 514 (205) 266 (166) 143 8 240 287 (160) (17) 2 (109) 112 (377) (8) (557) (1) 242 84 327 1997 (931) 161 (12) 1,151 66 40 42 (91) 20 43 490 (216) 300 0 0 0 0 84 (159) (453) 8 (54) 121 (50) (6) (593) (7) (26) 111 84 1996 248 201 14 (82) 23 0 29 (70) 22 27 410 (243) 174 0 0 0 0 (68) (157) (125) 2 (78) 31 0 (6) (331) 6 17 93 111Cash Flows from direct Activities Net income from continuing operations Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Deferred income taxes (Gains) losses on divestitures, net Restructuring charges** Asset impairment losses Loss on disposition of property and equipment Net change in operating working capital Change in deferred compensation Other items Net Cash Provided by run Activities Cash Flows from Investing Activities Additions to property, plant and equip ment Business divestitures, net of tax Purchase of vendible securities Proceeds from sale of marketable securities Proceeds from sale of PP Capial gains tax recovery Net Cash Used for Investing Activities Cash Flows from Financing Activities Cash dividends paid Change in short-term debt Proceeds from issuances of long-term debt Reduction of long-term debt Issuance of common treasury stock Repurchases of common stock Repurchases of preferred stock Net Cash Used for Financing Activities Effect of Exchange Rate Changes Net (Decr. )/Incr. in Cash and Cash Equivalents Cash and Cash Equivalents Beginning of year Cash and Cash Equivalents End of period 312 99 4 0 177 0 2 (132) 35 15 512 (199) 0 (354) 232 5 0 (316) (115) (25) 1 (84) 105 (236) (9) (364) (4) (172) 283 111 Source Company 10(K) and 10(Q) filings. a Data for nine months ended September 30, 2000. bThe 2000 number represents the sum of restructuring charges, asset impairments and losses (gains) on divestiture. 18 801-458 -19- E xhibit 8 Quaker Oats direct Segment tuition (dollars in millions, except per share data) bYear finish December 31 1999 Net sales a 1998 1997 operating(a) Income (Loss) 1999 1998 1997 $2,359. 5 308. 4 215. 4 2,883. 3 1,502. 3 229. 1 103. 8 1,835. 2 4,718. 5 6. 7 $4,725. 2 $2,274. 1 372. 9 202. 9 2,849. 9 $399. 8 26. 2 21. 1 447. 1 253. 9 16. 5 (7. 3) 263. 1 710. 2 -$710. 2 $2,287. 8 371. 4 205. 7 2,864. 9 1,183. 3 232. 2 103. 0 1,518. 5 4,383. 4 632. 3 $5,015. 7 $369. 8 28. 2 (1. 2) 396. 8 214. 9 25. 6 (7. 4) 233. 1 629. 9 (2. 4) $627. 5 $390. 3 34. 0 (9. 9) 414. 4 182. 7 19. 3 (15. 0) 187. 0 601. 4 (34. 6) $566. 8 1,338. 2 267. 7 103. 1 1,709. 0 4,558. 9 283. 6 $4,842. 5 Foods U. S. and Canadian Latin American Other c Total Foods Beverages U. S. nd Canadian Latin American Other c Total Beverages Total Ongoing Businesses Total Divested Businesses d Total gross revenue/Operating Income Less (Gains) losses on divestitures, restructuring charges, asset impairments and othernet e (2. 3) 25. 9 50. 2 18. 1 618. 3 163. 3 $455. 0 $3. 36 $3. 23 128. 5 31. 9 58. 9 11. 6 396. 6 112. 1 $284. 5 $2. 04 $1. 97 1,491. 1 50. 1 79. 1 10. 8 (1,064. 3) (133. 4) ($930. 9) ($6. 80) ($6. 80) habitual corporate expenses Interest expensenet Foreign exchange lossnet Income (Loss) before income taxes Provision (Benefit) for income taxes f Net Income (Loss) Per Common Share Net income (loss)e Net income (loss)dilute 801-458 -20- Exhibit 8 (continued) (dollars in millions) Year Ended December 31 1999 Identifiable Assets 1998 1997 1999Capital Expenditures Net of Depreciation 1998 1997 Foods U. S. and Canadian Latin American Other c Total Foods Beverages U. S. and Canadian Latin American Other c Total Beverages Total Ongoing Businesses Total Divested Businesses g Total Operating Segments Corporateh Total Consolidated $1,124. 6 174. 0 110. 1 1,408. 7 522. 7 105. 4 79. 6 707. 7 2,116. 4 0. 0 2,116. 4 279. 8 $2,396. 2 464. 2 94. 6 109. 5 668. 3 2,115. 1 37. 5 2,152. 6 357. 7 $2,510. 3 364. 5 81. 9 98. 2 544. 6 1,845. 4 335. 9 2,181. 3 515. 7 $2,697. 0 69. 8 20. 4 1. 7 91. 9 99. 5 0. 0 99. 5 (0. 9) $98. 6 $1,187. 0 167. 7 92. 1 1,446. 8 $1,056. 9 122. 4 121. 5 1,300. 8 $3. 7 3. 7 0. 2 7. 6 $37. 5 6. 5 (0. ) 43. 4 26. 1 6. 3 0. 8 33. 2 76. 6 (3. 5) 73. 1 (0. 9) $72. 2 $7. 2 9. 7 12. 3 29. 2 26. 4 (0. 9) 20. 0 45. 5 74. 7 (18. 7) 56. 0 (1. 7) $54. 3 Source Company financial statements and casewriter calculations. aIntersegment sales are not material. bOperating results exclude restructuring and asset impairment charges, gains and losses on divestitures and authentic other expenses not allocated to operating segments such as income taxes, cosmopolitan corporate expenses and financing costs. cOther includes European and Asia/ pacific businesses. d1999 includes net sales and operating results (through the divestiture date) for the Brazilian pasta business. 998 includes net sales and operating results (through the divestiture date) for the Ardmore Farms, Continental Coffe e, Nile Spice and Liqui-Dri businesses and the business divested in 1999. 1997 includes net sales and operating results (through the divestiture date) for the Snapple beverages and certain food service businesses and the businesses divested in 1999 and 1998. e1999 includes pretax restructuring charges of $12. 7 million, or $0. 06 per share, a pretax divestiture gain of $5. 1 million, or $0. 03 per share, and pretax adjustments of $9. 9 million, or $0. 04 per share, to subdue prior restructuring and divestiture reserves. 1998 includes pretax restructuring charges of $89. 7 million, or $0. 8 per share, pretax asset impairment losses of $38. 1 million, or $0. 18 per share, and a combined pretax divestiture loss of $0. 7 million, or a gain of $0. 20 per share, due to certain tax benefits. 1997 includes pretax restructuring charges of $65. 9 million, or $0. 27 per share, a pretax net charge of $4. 8 million, or $0. 02 per share, for an asset impairment loss partly offset by a cash litig ation settlement, and a combined pretax loss of $1. 42 billion, or $8. 41 per share, for business divestitures. f1999 includes reductions in the provision for income taxes of $59. 3 million, or $0. 44 per share, related to previously recorded tax accruals and tax assets. Includes the following Divested Businesses in 1999, the Brazilian pasta business in 1998 Ardmore Farms, Continental Coffee, Nile Spice, Liqui-Dri and the business divested in 1999 in 1997, Snapple, certain food service businesses and the businesses divested in 1999 and 1998. hIncludes corporate cash and cash equivalents, short-term investments and miscellaneous receivables and investments. PepsiCos Bid for Quaker Oats (A) 801-458 Exhibit 9 Quaker Oats Company Operations Summary 1994-1999 Annual Sales (dollars in millions) 1994 U. S. and Canadian Gatorade a International Gatorade Total Beverages U. S. Hot Cereals U. S. Ready-to-Eat Cereals Golden Grain Grain-based Snacks Other U. S. nd Canadian Foods Latin American F oods European and Asian Foods Total Foods Total Sales $908 269 1,177 416 679 334 275 483 301 233 2,721 $3,898 1995 $1,040 308 1,348 402 665 324 298 505 319 210 2,723 $4,071 1996 $1,095 283 1,378 440 626 316 285 518 345 207 2,737 $4,115 1997 $1,183 335 1,518 462 693 343 269 521 371 208 2,867 $4,385 1998 $1,338 371 1,709 431 712 341 291 500 373 203 2,851 $4,560 1999 $1,502 333 1,835 485 725 344 305 501 308 215 2,883 $4,718 CAGR 10. 6% 4. 4% 9. 3% 3. 1% 1. 3% 0. 6% 2. 1% 0. 7% 0. 5% -1. 6% 1. 2% 3. 9% diffusion of Annual Sales (%) 1994 U. S. and Canadian Gatorade a International Gatorade Total Beverages U. S. Hot Cereals U. S. Ready-to-Eat Cereals Golden Grain Grain-based Snacks Other U. S. nd Canadian Foods Latin American Foods European and Asian Foods Total Foods Total Sales 23% 7% 30% 11% 17% 9% 7% 12% 8% 6% 70% 100% 1995 26% 8% 33% 10% 16% 8% 7% 12% 8% 5% 67% 100% 1996 27% 7% 33% 11% 15% 8% 7% 13% 8% 5% 67% 100% 1997 27% 8% 35% 11% 16% 8% 6% 12% 8% 5% 65% 100% 1998 29% 8% 37% 9% 1 6% 7% 6% 11% 8% 4% 63% 100% 1999 32% 7% 39% 10% 15% 7% 6% 11% 7% 5% 61% 100% Source Company financial statements. aIncludes Europe, Asia-Pacific and Latin America. 21 801-458 -22- Exhibit 10 Quaker Oats pullulate Price History OAT Historical Price Performance, October 31, 1997-October 4, 2000 90 Oct 4 Last close $76. 0625 80 70 60 50 40 Mar 14 52 week low of $45. 9375 Jul-98 Jul-99 Jan-98 Apr-98 Jun-98 Oct-98 Jan-99 Apr-99 Jun-99 Oct-99 Jan-00Apr-00 Jun-00 Jul-00 Feb-98 Mar-98 Feb-99 Mar-99 Feb-00 Nov-97 Dec-97 Aug-98 Sep-98 Nov-98 Dec-98 Aug-99 Sep-99 Nov-99 Dec-99 Mar-00 Aug-00 May-99 May-00 Source Prepared by casewriter based on CRSP data. May-98 Sep-00 Oct-00 30 PepsiCos Bid for Quaker Oats (A) 801-458 Exhibit 11 PepsiCo PepsiCo and Quaker Oats Selected Ratios 1996-2000 36 Wks. 00 39% 44% 16% 16% 32% a 1999 40% 45% 14% 15% 44% -2% 26% 40% 64% 53% 12% 30% 1998 42% 44% 12% 17% 12% 0% 33% 49% 82% 35% 12% 31% 1997 41% 44% 13% 16% 35% -4% 30% 36% 62% 54% 13% 21% 1996 42% 45% 10% COG S/Sales SGA/Sales Operating Profit/Sales New Pepsi Operating Profit/New Pepsi Sales tax income Rate NWC (excl.Cash ST Inv and ST Debt)/Sales a Net PPE/Sales a Net II/Sales a Invested Capital/Sales Shareholders Equity/Invested Capital Return on Invested Capital d Return on Equity c 40% -2% 30% 38% 66% 50% 9% 14% -1% 26% 40% 66% 52% 17% 23% Quaker Oats, Inc. COGS/Sales SGA/Sales b Operating Profit/Sales Tax Rate NWC (excl. Cash ST Inv and ST Debt)/Sales a Net PPE/Sales a Net II/Sales a Invested Capital/Sales Shareholders Equity/Invested Capital Return on Invested Capital d Return on Equity c a 9 Mos. 00 45% 38% 13% 35% 0% 20% 5% 25% 23% 33% 100% 1999 45% 40% 15% 26% -2% 23% 6% 28% 15% 38% 229% 1998 49% 39% 10% 28% -2% 22% 7% 26% 12% 26% 185% 1997 51% 39% -19% 13% 5% 23% 8% 37% 12% -46% -410% 1996 54% 38% 10% 40% 0% 23% 44% 67% 35% 9% 20% Source Company financial statements. aAnnualized. Quaker Operating Profit = Gross Profit SG Impairment, consistent with PepsiCos definition. cRetur n on Invested Capital = Operating Profit * (1 Tax Rate)/Invested Capital. dReturn on Equity = Net Income from Continuing Operations/Shareholders Equity. 23 801-458 -24- Exhibit 12 Quaker Oats comparable Food and Beverage Companies Source Company Annual Reports, Hoovers Online Business Network. aSara Lee financial information includes rya/Monarch, the sale of which is scheduled to close in second quarter of fiscal 2001. bH. J. Heinz EBIT includes $464. 6 million gain on the sale of Weight Watchers. Hershey EBIT includes $243. 8 million gain on the sale of U. S. pasta business. Kellogg EBIT incorporates $244. million in restructuring charges and equipment write-offs. PepsiCo EBIT includes $1,000,000 gain on bottling transactions. cAverage reduce shares outstanding, in millions of per-share calculations, including stock options, ESOP and non-vested awards. dCommon Stock price data for 52 weeks prior to October 4, 2000, includes Danone ADRs traded at NYSE. eP/E reason as Closing Co mmon Stock price divided by EPS for the last full fiscal year. fMarket Capitalization figure as the Closing Common Stock price times the average diluted shares outstanding. Using last-available diluted shares outstanding would not change the calculation significantly. PepsiCos Bid for Quaker Oats (A) 801-458 Exhibit 13