PepsiCo's SodaStream deal augurs more food & beverage M&A

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PepsiCo’s announced $3.2 billion acquisition of SodaStream is the latest in a wave of deal activity in the packaged food sector. This robust M&A environment should continue over the next 12 to 18 months as companies look to become more agile and tap into consumer trends like “better for you” foods and snacking, while also looking to improve capabilities such as digital marketing.

As the trend continues, middle market companies –those with $5 billion in market cap or less, likely will be key actors, both as buyers and sellers. As C-suite executives and boards consider which deals to make, they need to focus on how the integration will work, how they can keep top talent, and – perhaps less intuitively — how they can use an acquisition to reimagine their own operations and advance their strategic vision.

Conagra Brands’ recently announced deal to acquire Pinnacle Foods is just the latest in an active food M&A market, which is being driven by companies having a great deal of cash and low debt levels and venture capital and PE firms having record levels of cash to deploy. There is a lot of money chasing a lot of deals. At the same time, companies need to innovate or acquire innovation to boost slow organic growth.

Pinnacle’s market cap was a bit above the $5 billion middle market threshold – even before rumors of the deal hit the market – but its profile fits the characteristics that companies are looking for as they consider middle market food companies. Its products include “better for you” brands like EVOL and Udi’s. It is also in a growing category: frozen foods, which has profited from innovation that has improved perceptions of quality.

Those characteristics make a host of other middle market companies potential targets as they can help big food companies get into or grow in on-trend categories more quickly than if they tried to grow the segments organically. Big companies could also look to smaller companies to get into completely new segments – such as General Mills’ expanding into pet food with the acquisition of Blue Buffalo. Big food might also look to middle market to add capabilities, like a strong digital marketing presence or a strong brand that resonates with consumers.

But middle market companies are not just likely to be sellers, they also have opportunities to make acquisitions as larger companies make divestments. We have seen many instances in the past several years of big food companies paring their portfolios, benefiting middle market companies. B&G Foods, for example, has made several acquisitions of brands divested by larger companies, including the iconic Green Giant vegetable business. As larger companies merge, management will look to divest assets that no longer fit, and middle market companies are well positioned to acquire some of these attractive assets that might not have otherwise come to market.

Best acquisition practices
All this opportunity for acquisitions, both by and of middle market companies, makes it a good time to focus on how the buyer can maximize the value it gets out of an acquisition.

1. Don’t take your eye off sales and operations while integrating the acquisition. Acquisitions can be very disruptive and take the time of senior leadership – maybe too much time, especially in the first two quarters after closing. Middle market companies don’t necessarily have the experienced integration teams that their larger counterparts may have and may need to bring in outside resources to help. We have seen companies tap outside expertise to assist with parts of the integration, including change management in human resources and to combine or rationalize IT systems, among other areas. On the other hand, finance and other back office functions that don’t drive deal value can be wrapped into the acquiring organization.

2. Put together a sound integration strategy. Management needs to really look at how the two companies fit together. Determine what the value drivers for the acquired business – the things that made it attractive to the acquirer in the first place. Aside from the product they sell, is the value driver a specific capability, like an amazing digital marketing presence? Is it a unique supply chain that lets it source sustainable ingredients that its customers are aware of and value? Is it the people, or culture? If it is a value driver, it could make sense for the buyer to leave it as is, unless it can be made even stronger. Anything that isn’t a value driver should be wrapped into the acquiring organization. Finance and other back office functions are prime candidates. The idea of buying a business and “leaving it alone” may be a popular strategy, especially when buying fast-growing startups, but it isn’t necessarily the best strategy.

3. Speaking of people, talent selection is very important to integration. Make sure to take a “best of breed approach” when it relates to people. Decide who the key people are in the acquired asset — from a CEO with a large following to a marketing team that has developed a relationship — and do what it takes to keep them, whether that means retention bonuses, allowing flexible work hours they have become accustomed to or whatever else it is they value.

4. Take advantage of the acquisition to transform your operating model. Acquisitions are disruptive, but that disruption is an opportunity. When two companies come together, there is an opportunity to look at all of their business processes, customers and vendors and transform the operating model to become more agile. Does a company actually need to own the supply chain, or can it be outsourced so the company can become a little more asset light and agile? Finance and HR are other areas that companies can consider outsourcing to become more nimble. Look at sales and marketing, not only in terms of what customers are buying now, but what and how they will buy in the future and align sales and marketing toward the future consumer.

Middle market companies are going to keep participating in the ongoing wave of food industry consolidation, whether as buyers or sellers. This disruption is an opportunity for middle market companies to consider how they want to grow and whether they can do it alone, through an acquisition, or by becoming part of a larger entity. It also is an opportune time for all companies to look at the markets they want to be in, divest the assets they do not want by selling to a pool of willing buyers, and shape their operations and strategies to meet the demands of future consumers.