A billion here, a hundred billion there. Pretty soon you’re talking real money. The lesson this month is on high finance and the apparent theory – actually a fallacy – that expansion leads to innovation and growth.
Some in the food and beverage industry apparently run their business using Woody Allen’s metaphor in the movie “Annie Hall”: “A relationship, I think, is like a shark. It has to constantly move forward or it dies.”
Sometimes moving too fast or too much is fatal. Let me direct you to our news stories, a trio of huge mergers and acquisitions. In the moving too fast category we have ConAgra Foods and Diamond Foods. ConAgra bought Ralcorp just three years ago for $6.8 billion. Now it's selling that business to TreeHouse Foods for $2.7 billion. That’s a fire sale price, a great deal for TreeHouse … which I hope doesn't move the acquiring company into the too fast or too much category. You can read about it here: ConAgra To Sell Private Label Operations to Treehouse
ConAgra’s former CEO Gary Rodkin – emphasis on former – wanted to deep-dive into private label so much he pursued Ralcorp for 18 months. When Ralcorp spun off its Post cereals businesses as a poison pill, greatly devaluing the company, Rodkin was undeterred, and he didn’t even lower his price. He wanted Ralcorp badly; he got Ralcorp badly.
Elsewhere on that page: Snyder’s-Lance is buying Diamond Foods for $1.9 billion. That sounds like a lot for a company that’s lost $160 million or so the past two years in a row. Buying Diamond will increase Snyder’s-Lance sales by 50 percent. I just hope Snyder’s-Lance isn’t making the same mistake Diamond did.
How did Diamond get into such a fix? Perhaps it over-leveraged itself in buying Kettle Brand potato chips or the Pop Secret popcorn brand. Neither of those was an overly expensive or audacious move, but big steps for what used to be a walnut growers cooperative.
Diamond's former Chairman/Pres/CEO Michael Mendes and his CFO were fired for financial shenanigans. And they were in the midst of a $2.35 billion purchase of Pringles chips. That was way over their heads. Imagine how deep the hole would have been if that had gone through.
On a different tangent is that blockbuster pending deal where Anheuser-Busch InBev apparently will buy SABMiller. (As of our press time, although a behind-the-scenes deal apparently had been struck, the formal offer had not been made.) I don’t think I’ve ever seen a $104 billion price tag before, not on anything. That’s billion with a B. It sounds like the kind of cash the government spends on some military contract.
That’s an unfathomable amount. There are only 61 countries with a gross domestic product higher than that, but 130 or so with GDPs below it. $104 billion is more than the GDPs of places like Ecuador, Slovak Republic, Syria, Luxembourg. More than double that of Lebanon.
Or 378 Alex Rodriguezes. BTW, Yankees, how’s that deal working out?
My point in all this: When the accountants, the banks and CFOs take over, as is necessary in deals of this magnitude, the R&D and manufacturing execs get shoved aside. When you're scrambling to make the monthly payment on a $104 billion mortgage, how much is left over for new product development. Or capital expenditures.
Kraft Heinz is sailing right along since its springtime marriage. All I've seen out of this merger so far is 2,500 layoffs. Oh, right, and a yellow mustard! Now, that's breakthrough innovation!
There's one more story in our News pages I want to point out. We report on General Mills creating a venture capital business to invest in and nurture startup companies with innovative products. Maybe they’ll become acquisitions, as in the case of Annie’s. Maybe they’ll otherwise provide new products for General Mills. Either way, General Mills – which has not been immune to the stagnation of big, center-of-the-store grocery companies – is shopping for innovation in a wise and measured way. It won’t double in size overnight, like the guys mentioned above, but it won’t shrink in half either, like ConAgra.
And then there's our cover story on breakthrough products. I wonder if AnheuserBuschInBevSABMiller will make our next list; ditto for TreeHouse and Snyder's-Lance (which did make it into this year's story).
You want breakthrough innovation? Don’t second-mortgage the company. Instead, write a check to your own R&D Dept. and cut them loose from line extensions and cost-control projects. Let the food scientists play. You’ll be pleasantly surprised by the ROI on homegrown innovation.