This case talks about the latest trend of mergers and acquisitions and the ensuing fallout. The concern here is about the $14 billion mergers of PepsiCo and Quaker Oats. After a long delay with regards to granting permission for this merger, the Federal Trade Commission (FTC) finally gave the go-ahead after it realized that there was a split in the opinion of its members. 50 percent of the members voted in favour and the rest against the decision for the merger. This committee was set up to investigate the fairness of the deal with respect to the marketing principles commonly followed. Due to the split in decision, the entire investigation was called off, allowing the deal to proceed.
FTC staff had objected to this merger since they believed that this kind of merger would kill competition in the sports drink market segment. This would lead to an almost monopolistic scenario and give PepsiCo the overriding authority in cutting deals with convenience stores.
This deal, under the able leadership of Steve Reinemund, will create a formidable position of PepsiCo in the drinks and fast food segment. This would push the limit of the revenues to over $25 billions. This merger would mean that Gatorade, one of the leading sports drink, would come under the PepsiCo banner and thus give PepsiCo the leading edge especially over Coco-Cola, in the non carbonated drink segment. This is because Coco-Cola’s PowerAde, a non-carbonated drink aimed at the sports segment has only 15% of the market share while Gatorade has over 80% of the share.
The deal would also consolidate PepsiCo’s position in the ready-to-eat food segment. Quaker’s grain-based snacks and cereals like ‘Life’ and ‘Cap’n Crunch’ will now come under the Frito-Lay banner thus introducing more variety.
The case is definitely one of acquisitions and mergers. This case highlights the business strategies and tactics employed by big corporate houses to kill competition. This case also depicts the importance antitrust laws and focuses on their role in protecting consumer rights.
The main reason as to the emergence of these laws is the existence of monopolies and their harmful effects on the society as a whole. Before we proceed with the analysis of the case we need to know what monopoly is all about.
Monopoly: It can be defined as any condition which gives individual sellers, or groups of sellers acting as a unit; some measure of direct control over price.
The features of this kind of business transaction are:
- There is one and only one seller and several buyers;
- This also hints at no competition from immediate substitutes;
- Cross elasticity of demand between the monopolist’s product and any other product is low;
- The monopolist is in a position to set the price himself thus implying market power.
Two very important features that enhance the strength of a monopolist are:
- Large gap in the chain of substitutes;
- Possibility of securing control over all the close substitutes
Monopoly is not a permanent phenomenon. It is affected by the following:
• Shifts in consumer demand;
• By new inventions, which cause the immergence of new substitutes;
• Lack of stimulus to improve efficiency and in the long run lose out to new competitors;
• Government intervention in the form of laws and regulations.
The main disadvantage of a monopoly is the unrestricted market power or the power to decide on the price, which is granted to the monopolist. This is turn leads to the exploitation of customers due to lack of choice.
Coming back to the case, here PepsiCo is definitely going to benefit enormously from this merger. Quaker is definitely a big company in itself, but a merger with yet another soft-drink giant will only further consolidate its position in the market. This merger is highly beneficial to both parties since they more or less substitutes for one another. Thirsty people will either go in for a carbonated sweet drink or a non-carbonated fruit drink. By supplying both the alternatives under one banner the company is retaining both the customer bases.
Further Quaker is known for its Gatorade in the sports drink segment with almost 80% of the market share, which is nearing a monopoly in this segment. The tie up would boost the sales of PepsiCo’s other fast foods, since fast foods and drinks almost always supplement each other.
This would also give PepsiCo an upper hand in the pricing policy of the drinks market. Since it would be one of the major suppliers it could possibly regulate the prices to lead to an increase in its profits. Also when a customer tends to see the same company products everywhere and that too at a slightly elevate rate, then the element of ‘Buyers illusion’ comes into the picture. The customers tend to believe that the product is priced higher as it is superior in quality and better as compared to other similar products priced at a lower rate.
Any company prefers to diversify and systematically target and capture certain market segments in order to provide that segment superior quality service and kill all forms of competition from that segment. This seems to be the goal of PepsiCo too. It wants to diversify from being a supplier of just carbonated drinks and branch into fruit drinks. To do this the merger was the ideal option, because along with the Quaker company they are also buying its goodwill and market share.
This way they can systematically cater t every possible need of the sports segment right from the choice of drinks to providing snacks.
This brings us to the role of regulatory bodies, which are created to prevent the dealings between companies, which might prove detrimental to consumers in the long run. They prevent tie-ups between companies that would kill competition and also prevent price discrimination.
On a final note, acquisitions and mergers have their own positive as well as flip sides. On the positive side smaller firms with less resources could continue to thrive in the market if they merged with a larger parent company that provides it with ample resources. On the flip side excessive mergers could cause a market situation wherein only a few big players are left. This could give rise to either monopoly or oligopoly either of which could prove detrimental to the healthy growth of the society.
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