Last year was a busy year for mergers and acquisitions in the food and beverage industry. Some of the biggest deals in M&A in 2018, such as Keurig Green Mountain’s $26.6 billion acquisition of Dr. Pepper Snapple Group and Amazon’s $13.7 billion acquisition of Whole Foods, were in the food and beverage industry. Big CPG companies such as Conagra, General Mills, and Coca-Cola, as well as smaller and medium-sized players, also participated in deals in 2018. In 2019, M&A activity in the industry is projected to remain steady, as financial and strategic buyers look to keep pace with trends such as natural/organic, plant-based foods, better-for-you foods, and more recently with increasing legalization, the use of cannabis and hemp-derived ingredients.
Companies seeking to merge or acquire another company should keep in mind that the process may be time-consuming and expensive. Therefore, it is important to find the right partner and to be prepared to ensure a smooth transaction.
Is it the Right Fit?
A buyer looking for the right company to merge with or acquire can look at four things to assess whether it will be a good fit.
1. Brand and Product Fit. Considering the target’s products, does it make sense for your company to merge with or acquire the company you are targeting? For example, if you are a coffee company, you might expand into teas by acquiring a tea company. Does the brand fit in with other brands that are in your portfolio? Can you utilize your current distribution network to increase sales for the new brands you are acquiring?
2. Financial Health. An important consideration is the financial health of the target. Has the target had steady revenue growth? Are its books in good shape? A buyer should conduct a careful audit of the target’s books to understand the full financial picture, which will not only affect the purchase price and other terms of your offer, but will also help you understand both the financial risks and financial upside of the acquisition. How will the target affect your own financial picture going forward? Consider the cost of running the business after acquisition. What additional expenses are you acquiring (i.e. rent, salaries, insurance)? How long will it take for you to realize a return on the investment? How much additional investment will you need to put into the target’s business to meet projections?
3. Cultural Fit. Another important consideration is the culture of the target company. How has the company been run? Does the mission of the target company align with your company’s mission? This is especially important if founders and executives will be staying on and if you are retaining the employees. Will they be able to adopt your company culture and can they be integrated into your organization?
4. Alignment of Goals. What are each side’s goals with respect to the merger or acquisition? What is the target’s reasons for being acquired? Does it match up with your reasons for making the acquisition? Are you on the same page with respect to the direction in which you want to take the acquired or merged businesses? How will the acquisition help both target and buyer realize these goals?
Ensuring a Smooth Transaction
M&A transactions can be frenetic. It certainly will take a lot of time and energy from all involved. No transaction will be without bumps in the road, but there are four things to keep in mind to have as smooth a process as possible.
1. Be Realistic About Timing. Most transactions usually take longer to close than the parties anticipate. There are several steps in the process, and it can be frustrating if the parties are not realistic from the start about how long it could take to close the transaction. The main steps are:
- Negotiation of a term sheet
- The buyer conducting due diligence on the target company
- Drafting and negotiation of deal documents
From the start, the parties should have realistic expectations of what each step entails. How long it takes to finalize documents depends on the complexity of the transaction, as well as how aligned the parties are with respect to the terms of the deal. The timing also depends on how organized the parties are, how responsive the target is with regard to due diligence information requests, and how quickly each party can meet the conditions to close, such as the buyer obtaining financing, if necessary, obtaining third-party consents, or collecting required signatures from the directors, officers, and shareholders of the target.
2. Do Your Due Diligence. Due diligence is the buyer’s opportunity to take a deeper look at the target and to find any red flags early in the process. Are there any current or potential lawsuits? If it is a food manufacturer, are its labels in compliance with FDA regulations? Have they secured intellectual property rights? Are there any potential claims of infringement? Conducting a thorough due diligence investigation and completing it early is key to addressing any unforeseen issues and to assessing what kind of liabilities you might be acquiring. If the terms of the deal need to be adjusted as a result, it is better to do so earlier in the process.
3. Ensure All Parties are on Board. A transaction can be delayed or even derailed if a target’s board of directors, executives, and stockholders are not on the same page with regard to the transaction. The target will need to have consent from its board and stockholders to go forward with the transaction. Are all parties in favor of the acquisition and in agreement on the basic deal terms? Will there be any trouble obtaining required signatures? Will there be any dissenting stockholders?
4. Put Together a Team of Trusted Advisors. A good M&A lawyer will quarterback your transaction to a close, while balancing business considerations and protecting your legal interests. When hiring a legal team, make sure that you have access to the relevant expertise you may need. The transaction might involve a broad range of legal issues in several areas, including real estate, employment, environmental, intellectual property, tax and regulatory issues. You might want to consider a firm that has expertise in a number of areas relevant to the deal. Accountants and investment bankers are also integral parts of your deal team.
If you don’t already have a trusted team, get one. Get referrals from trusted sources and interview several firms to find the right fit. Do they have knowledge of the food industry or the specific segments of the industry that you are in? Another important consideration is whether they fit the size of the deal. You may not want hire an investment banker that handles deals in the $100 millions if the transaction is only in the $10-$20 million range. Will a firm that handles bigger transactions give your transaction priority? It is important to have a team of advisors that has the relevant expertise and that you trust to help you through a successful transaction.
Karen J. Balderama is a partner with law firm Wendel Rosen Black & Dean LLP in its Food & Beverage practice and is co-chair of the firm’s Business Practice Group.