Introduction

By the end of 1999 following a multi-year restructuring effort, PepsiCo had once again become one of the most successful consumer products companies in the world. In less than 4 years, it had achieved an 80% increase in net income, on 30% lower sales, and with 75% fewer employees. Exhibits 1 through 3 contain the companys recent financial statements. PepsiCo's major subsidiaries were the Pepsi-Cola Company, which was the world's second largest refreshments beverage company, Frito-Lay, Inc., the world's largest manufacturer and distributor of snack chips, and Tropicana Products, the largest marketer of branded juices. PepsiCo's leading brands included carbonated soft drinks (Pepsi, Diet Pepsi and Mountain Dew), AquaFina bottled water, Tropicana juices and juices and juices based drinks, Lipton teabased beverage and Frappuchino ice coffee, as well as Fritos and Doritos corn chips, Lay's and Ruffles potato chips, and Rold Gold pretzels. Throughout 1999, PepsiCo was closely hacking several potential strategic acquisitions. ln the fall of 2000, it appeared that the right moment for an equity-financed acquisition had arrived. At this time, PepsiCo management decided to initiate confidential discussions with The Quaker Oats Company about a potential business combination. Gatorade, a key brand in Quaker's portfolio, had long been on PepsiCo's wish list. On October 5,2005 an investment-banking team from Merrill Lynch met with the top executives of PepsiCo to discuss a possible business combination between PepsiCo and Quaker. The goals of the meeting were: to assess the value of Quaker's businesses; to estimate potential synergies associated with a Pepsi-Quaker merger; and to come up with an effective negotiation strategy. PepsiCo executives were confident that Quakers beverages and snack food business could contribute to Pepsis profitable growth in convenience foods mid beverages. However, PepsiCo's manages, led by CEO Roger Enrico and CFO Indra Nooyi, were committed to upholding the value of PepsiCo's shares, and as a result, they were determined not to pay too much for Quaker.

PepsiCo's Origins and History ln the summer of 1898 Caleb D. liradham, a young phamacist from North Carolina, looked for a name that would better decided the "Brads Drink," his concoction of carbonated water, sugar. vanilla and kola nuts. He decided to buy the name "Pep Kola" from the local competitor, which he later changed to Pepsi-Cola, maintaining that the leverage aided in curing dyspepsia, or indigestion. In 1902, Bradham applied for federal trademark protection and founded the first Pepsi-Cola Company. As a result of Bradhams gambling on the post-World War l price of sugar, the company went bankrupt in 1923, and its assets were sold for $30,000. It was reorganized as the National Pepsi-Cola Company in 1928, only to go bankrupt again three yeas later. Emerging from bankruptcy with new owners, the companys fortunes changed suddenly 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 sales soared, and the Pepsi-Cola Company embarked on six decades of sustained and profitable growth. In 1965, the company merged with the Texas-based snack manufacturer, Frito-Lay, lnc. ln 1970, its total food and beverage sales passed the $1 billion mark. The major products in its portfolio at this time were Pepsi-Cola, Diet Pepsi and Mountain Dew beverages, plus Fritos, Lay's, Ruffles, Doritos, Cheetos, and Rold Gold snacks. The company, now called PepsiCo, continued to grow through the 1970s and 1980s. During this period, it used acquisitions to diversify out of its profitable, but relatively slowgrowth beverage and snack businesses, acquiring North American Van Lines, a trucking company, in 1968; Wilson Sporting Goods in 1970; Pizza Hut restaurants in 1977; and the Taco Bell fast food chain in 1978. ln 1984, PepsiCo was restructured to focus on soft drinks, snacks and restaurants, and the transportation and sporting goods businesses were sold. To strengthen its restaurant division, PepsiCo acquired Kentucky Fried Chicken in 1986; purchased an equity interest in California Pizza Kitchen in 1992; and acquired East Side Maho's Restaurants and DAngelo Sandwich Shops a year later.

By 1995, PepsiCo sales had reached $30 billion, and it had 470,000 employees worldwide. lt was the world's third largest employer. Restructuring in the Mid-1990s In the mid 1990s, PepsiCo began to encounter severe problems in its international bottling operations and in its restaurant division. In August of 1996, PepsiCo's long-time archrival, The Coca- Cola Company, bought Pepsi's largest Venezuelan bottler, and PepsiCo was left with no presence in that market practically overnight. In Brazil and Argentina, a bottler jointly owned by PepsiCo and local investors, came close to bankruptcy. The bottler's debts wew converted into equity, a move that essentially eradicated Pepsis claim: PepsiCo reported a one-time loss of 5576 million as a result of this restructuring. Simultaneously, the company suffered volume and profit decline in is restaurant business. Between 1988 to 1994, PepsiCo had invested close to $7 billion to acquire thousands of fast food and casual dining outlets. But the operational complexity of these businesses was a tax on PepsiCo's management. Moreover, because of their capital intensity, even profitable restaurant chains could not maintain high returns on invested capital 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.

in April 1996, Roger Enrico, formerly the head 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 seemed." ln the restaurant division, Enrico's team began by divesting PepsiCo's restaurant supply and distribution company and the smaller casual dining businesses. Simultaneously, me company announced plans to spin off its core restaurant businesses into a separate company. In 1997, PepsiCo combined its time restaurant business, Pizza Hut, KFC and Taco Bell, into a new corporate entity, Tricon Global Restaurants. PepsiCo received 4.5 billion in cash from Tricon as repayment of certain amounts due and a dividend; Tricon's shares

were then distributed to PepsiCo's shareholder, and simultaneously listed on the NYSE. These moves created a new public company, with $10 billion in sales and a market capitalization of $4.5 billion. Altogether, the divestitures of the restaurant business brought $5.5 billion of cash prxeeds to PemiCo. At the same time, PepsiCo's manages embarked on a major restructuring of the international beverage division. The goals of the program were to lower fixed costs, write down underperforming assets, and divest noncore businesws. Following the lead of Coca Cola, the companies consolidate its previously dispersed bottling operations into the hands of a few large, well capitalized "anchor" bottles, who were focusm solely on manufacturing, selling and distributing Pepsi's line of beverages. The new bottles were designed to be counterweights to large retailers, like Wal-Mart and Carrefour, in the rapidly consolidating retail marketplace. Thus in 1998 PepsiCo created the Pepsi Bottling Group (PBG) with $7 billion in sales, and bottling operations in countries ranging from the United States to Russia. This move separated the bottling and concentrates parts of the business, and allocated responsibility for building operational efficiency to the bottling companies. Retaining a 35% noncontrolling interest, PepsiCo sold 65% of PBGs equity in an initial public offering in 1999. The wle brought Sl billion in cash onto Pepsi's balance sheet, and led to a significant reduction in the company's asset base. Signaling management confidence in the new corporate strategy, PepsiCo used the cash generated by the restaurant and bottling divestitures to launch a share repurchase program. lt bought back 54 million share in 1996, 69 million share in 1997 and 59 million share in 1998. Management was now able to focus on building a strong portfolio of brands in beverage mid snack foods. In 1998, PepsiCo acquired the Tropicana juice business from Seagram's for $3.3 billion in cash. The acquisition gave the company a strong market presence in the fast-growing noncarbonated beverage segment. Compared to Pepsis existing businesses, Tropicana provided a lower return on asset and invested capital, but PepsiCo's manages, esmially Enrico and Indra Nooyi, the CFO, saw a great opportunity for shong margins and profitable growth if this superior brand were brought under the PepsiCo umbrella. Investment analysts and portfolio managers were more skeptical, however. At the time of the Tropicana acquisition, there was a perception on Wall Street that Pepsi might have paid too much. Two years later, however, the Tropicana acquisition was viewed as an outstanding success. Tropicana's sales volume and profitability consistently exceeded market expectations every quarter from the date of acquisition in the fall of 1998 through

September 2000. Moreover, the integration of the new business into PepsiCo's corporate structure was seamless neither Tropicana's brand heritage, nor its unique distribution system was harmed by the acquisition process.

Exhibit 4 shows PepsiCo's stock price history from October 31, 1997 through October 4, 2000. Throughout 1999, PepsiCos stock price stagnated as investors shied away from the traditional packaged goods companies in favor of the Internet and technology stock. This lackluster performance cause PepsiCos management to abstain from any major acquisitions. ln the words of CFO lndra Nooyi, "we wanted a few quarters of solid performance behind us, and our currency- that is, our stock price-to reflect our underlying value When the Internet bubble burst in March 2000, PepsiCo's stock price began to rise : between March 8 and October 4, it appreciated from $30.50 to $45.125, or almost 50%. lepsiCo's managers believed that it was time to see if a deal could be struck with Quaker that would be advantageous to both sides. The Quaker Oats Company Nearly a century old in 1999, Quaker Oats was a worldwide consumer goods company with annual sales of $4.7 billion. In addition to its hot cereals, Quaker Oats and Quaker Instant Oatmeal, the companys portfolio of brands included Gatorade sports beveragw. Granola snack bars, Life and Capn Crunch ready-to-eat wreals, and Rice-a-Roni and Near East flavored grain dishes. Exhibits &7 contain Quaker's most recent financial statements as of October 4. 2000. Exhibit 8 provides data on Quaker's financial performance broken down by beverage and food segments and by region. Exhibit 9 shows Quaker's total sales and growth rates by product line for the years 1994~1999. ln 1999, Quaker was emerging from a period of restructuring and refocusing of its core businesses. during the decade prior to 1999, Quaker divested businesses with more than $2 billion in revenues, or about a third of its initial asset base. The divested operations included chemicals, toy manufacturing, specialty retailing, restaurant and pet foods, as well as the infamous Snapple beverage business. (ln 1994, Quaker paid $1.7 billion for Snapple Corporation, which sold branded juice-based beverages. Quaker then

made the mistake of replacing Snapple's distributors, and alienating the brands target consumers. After incurring dramatic losses, Quaker sold the business to Triarc in 1997 for $300 million.) Robert Morrison joined the company as CEO in 1997, and proceeded to lead the company through an impressive turnaround. By 1999 93% of Quakers U.S. sales came from brands holding the number-one or numbertwo positions in their product 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 player in a highly concentrated and competitive global industry, Quaker was also seen as a potential acquisition target. Table A shows the distribution of revenue among the major player in the global packaged food and beverage industries. indeed, in August 2000, David Nelson, an analyst at CSFB estimated Quaker's synergies with various large food and beverage companies, and translated thaw figure into a potential takeover price for the company. His calculations are summarized in Table B.

interest in Quaker was centered on its Gatorade line of sports beverage, which amounted for 39% of Quaker's sales in 1999 According to one analyst report in August 2000, "As a small, publicly traded, now well-managed company owning possibly the fastest-growing billion dollar growth potential product in the food and beverage industry; there is little doubt that Quaker is an attractive target or at least a highly desirable merger partner.

Rumor linking PepsiCo and Gatorade first surfaced in 1994. Late in 1996, Quaker reportedly attempted to sell both its leverage business (Gatorade and Snapple) as a package for about $3 billion. A year later, analysts predicted that PepsiCo's 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, Bill Pocoriello, an analyst at Sanford C Bernstein &Co., advocated a PepsiCo-Quaker merger, saying that PepsiCo was "strongly positioned" to leverage Gatorade through its distribution system in the US and internationally, and to sell Quaker snacks through its Frito-Lay network. Fueled in mrt by speculation that it might be acquired, Quaker stock appreciated almost 80% from its low of $45.9375 on March 14 to its recent high of $79.125 on &ptember 29, 2000. Exhibit 10 shows Quakers stock price history from October 1997 through October 4, 2000. Exhibit 11 calculates selected ratio for PepsiCo and Quaker for the yeas 1996 to 2000. Exhibit 12 provides data on comparable companies. Exhibit 13 shows market interest rates as of October 4, 2000. Gatorade Gatorade 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 team, the Gatos: its introduction in the early 1970s launched the commercial sports beverage industry. Quaker acquired rights to the formula and the name in 1983. By 1999 Gatorade was well established as the world's leading sports drink with $1.9 billion in global sales, and 82 percent of the U.S. sports beverage market. lts growth had been remarkable From 1997-1999 Gatorade's sales grew at an annual rate of 12 percent, while profits grew at around 15 percent (see Exhibits 8 and 9). Over the next five years (20002004), Quakers management expected Gatorade sales to increase 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 period. 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 consumption were in the southern parts of United States. Gatorades international presence was limited, however less than 20% of it sales came from outside North America.

Its European launch in the mid-1980s had been unsuccessful, partly because of poor brand positioning, but also because heat-driven beverage consumption was not common in Europes colder climates. Quaker's manager believed that Gatorade had huge growth potential in the warm-weather climates of Latin America and Asia, but the shaky economies in these regions presented maior challenges to sustained, profitable growth. At the time of the acquisition by Quaker, Gatorade had only two flavors on the market: orange and lemon-lime. By 1999, there were more than twenty different flavors, from Whitewater Splash to Cool Blue Raspberry. Quaker was also seeking to extend the Gatorade's brand into new product arenas. ln 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 fitness water": it delivered the vitamins, carbohydratm, and antioxidants present in Gatorade with only 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 quick energy, high carbohydrate diet supplement for intense athlete. Although Torq was a niche product with limited market prospects, it signaled Gatorade's continuing commitment to sports nutrition, thereby enhancing consumes perception of the brand.

Finally, Quaker's management had decided to extend the Gatorade brand into the $500 million energy bar market, which was growing at an annual rate of 30%. This was a natural move, given Quaker's core expertise in snack bar products (see below), and the fact that nearly 70% of energy bar consumers also drank Gatorade. Quakers Food Businesses. Quaker's food businesses were based on an assortment of brands in the categories of hot and ready-to-eat cereals, grain products, snack bars, maple syrups, pancake mixes and grits. Following Morrisons restructuring, all product line were profitable, but for the most part their growth rate were low (see Exhibits 8 and 9). None of Quakers current food brands had the potential to exceed $1 billion in sales in the foreseeable future?

Hot cereals Oats were Quaker's original product. but by 1999, hot cereals represented only 13% of the company's U.S. sales. Still oats were the companys most profitable product line with operating contribution margins of almost 30%, and high returns on invested capital. Recently, Sales had benefited from a growing consumer focus on healthy living and diet. Thus in 1999, Quaker's hot cereal sales increased by 12.5% compared with the compound annual sales growth of 1.6% over the prior Five year (see Exhibit 9). Quaker manages projected considerable volume growth in this category as the baby boomers grew older and became even more health conscious. In the eyes of consumers, the main drawbacks of oatmeal were its taste and inconvenience in preparation. New product development focused on these issues. Thus in 1999 Quaker introduced several new instant oatmeal flavors, including baked apple, French vanilla, and cinnamon roll. lt was testing convenient single-some microwave-ready cups designed to eliminate the need for a bowl in preparation. Other new hot oatmeal products included Dinosaur Eggs, which were targeted towards kids: when hot water was added to the instant oatmeal, the eggs hatched little dinosaur. Ready-to-eat cereal: ln 1999. Quaker held the number four position in the intensely competitive ready-to-eat (RTE) cereal market category trailing General Mills (33%), Kellogg (31%) and Kraft (16%) The business included three strong brands: Life and Cap'n Crunch, with more than $150 million in annual sales each, and the Toasted Oatmeal line, with sales of amount $100 million. The balance of the segment was made up of bagged cereals: Sweet Crunch, Coca Blasts, and Marshmallow Safari. Real per-capita RTE cereal demand had decreased about 6% annually in the United State 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 difficult to maintain their profitability. ln this difficult segment of their business, Quaker management had decided to focus on efficiency. ln 2000, the company announced a 2 year restructuring plan designed to achieve significant cost savings by closing manufacturing facilities. Consolidating manufacturing lines, and reconfiguring the RTE cereal distribution network. Golden Grain Quakers Golden Grain businesses produced flavored rice and pasta. Sales had been flat for the last 5 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 marketing flavored rice under its Uncle Bens brand, and General Mills was promoting flavored pasta under the Betty Corker label. ln respond to these competitive moves, Quaker manager felt they might have to defend share by increasing expenditures on promotion and advertising or dropping price. We division contributed about 5% million in operating profits annually, and accounted for about 7% of Quaker's 1999 operating income. Grain-based snacks Quakers Snack foods division sold Chewy Granola Bars, Fruit & Oatmeal Bars, Rice Cakes, and new Crispy Mini-Rice Cakes. lts 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, Chewys growth in revenues averaged 8% annually. Quaker Fruit & Oatmeal Bars were number two to Kellogg's Nutri-Grain in the cereal bar category. Quaker Rice Cakm had an impresive 66% market share in the $165 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). Other U.S. and 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 $100 million corn grits market, with 77% share. These were highly profitable brands, but they were in categories that promised little in the way of future growth. The Quaker's international food businesses lacked critical mass. Its Latin American food sales were concentrated in Brazil, where sales had declined 17% in 1% 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 Asian food business was minuscule, accounting for less than S25 million in sales in 1999. Potential Synergies Gatorade lf the acquisition succeeded. PepsiCo's management expected that Gatorade would dramatically enhance both the companys strategic position and its economic performance. PepsiCo would become the clear category leader in noncarbonated beverages, a market, which was

growing at 8%-9% annually, three times faster than the carbonated soft drink market. With Tropicana and Gatorade combined, PepsiCo would control a full quarter of this S23 billion market. One of the major benefits of combining the two companies' operations would stem from distribution. Gatorade use a warehouse brokers' distribution system to deliver beverages to convenience stores and supermarkets. Whereas PepsiCo's use a Direct Store delivery (DSD) system. Each system worked best for different types of products and retail outlets. The DSD system was much more expensive, usually 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 costs of DSD were mostly fixed; hence the contribution margins of incremental unit sales were high. DSD worked well for high volume products (like colas), but it was not an economical way to supply lower volume product in large varieties) to supermarkets and convenience stores. As indicated, Quaker use a warehouse broken' distribution system. ln 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 shelf space, almost entirely without slotting fees, which were customary in the retail business. Moreover, (Gatorade's new products and packages historically had won increased shelf space for the brand, instead of taking up the same shelf space and cannibalizing older products.

The acquisition of Quaker would enable PepsiCo to distribute Tropicana's nonrefrigerated juices, like Twister and Dole, through Gatorade's warehouse broken' distribution system. The merger would thus considerably enhance company's position in the $7 billion nonrefrigerated juice segment: According to CEO Enrico, PepsiCo would become the "category captain" of the nonrefrigerated juice aisle. PepsiCo's managers estimated that using Gatorades warehouse distribution system for Tropicana juices could generate an incremental $400 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 cost of raw materials and supplies. Moreover, Gatorade used "hot-fill" production lines, which were similar to those used by PepsiCo's Twister, Lipton teas, Frapuccino and Sobe beverage. If the 2 companies were combined, the team anticipated cost savings from better capacity utilization in manufacturing, warehouse, delivery and logistics systems. Collectively, these cost savings were expected to reach $65 million annually by 2004. Other potential benefits of the business combination were more difficult to quantify. For example, PepsiCos managers believed that Pepsi's 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 channels and food service accounts. PepsiCo CFO lndra Nooyi argued "The combination of Gatorade and Aqua Fina in vending machines is a no-brainer."Over the longer term, PepsiCo could accelerate Gatorades international expansion by using the existing sales and distribution organizations of both Pepsi-Cola international and Frito-Lay International. Finally, the sports technology expertise of the Gatorade Sports Science Institute might be combined with the health research capabilities of the Tropicana Nutrition Center to develop products that would meet the refreshment and nutrition needs of beverage consumes in new ways. Snacks lf the acquisition succeeded, PepsiCo's manager planned to integrate the Quaker's snack food division into its Frito-Lay unit, which was already the world's leader in salty snacks. They were 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. PepsiCo's management believed that distributing Quakers Chewy Granola and other snacks through Frito-Lays system could increase Quakers revenue 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 not salty. For the most part, its brands connoted nutrition and health more than good taste or fun. Quaker brands' positioning 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 Roqer Enrico, PepsiCo CEO: "We see bars as an ideal way to "smuggle" nutrition into more daily diets." Other foods If the acquisition succeeded, Quakers nonsnack food businesses would repayment 10% of the combined companys pro forma sales. Quaker Oatmeal, RTE cereals, Golden Grain, and Aunt Jemima

business did not fit within PepsiCos convenience-fom strategy, nor did they represent significant growth opportunities. Yet these businessw were highly profitable, and were expected to generate substantial free cash flows and modest growth over the foreseeable future. Lastly, their unit volumes supported the scale of Quaker's (hence Gatorade's) warehouse broken' 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-interest. With a pooling-of-interests accounting treatment, no goodwill would be created, and neither PepsiCo's nor Quaker's shareholder would have to recognize a gain or loss as a result of the merger for income tax purpose. On the other hand, under pooling-of-interests accounting, PepsiCo was precluded from selling any significant assets of Quaker for two years following the merger. Thus, if the acquisition succeeded, PepsiCo would not be able to divest Quakers slower-growth food divisions for at least 2 years. By the same taken, PepsiCo would not be able to repurchase shares in any significant quantity for two years. Both Pepsi and Quaker used share repurchase as their primary mode of returning cash to shareholders (see Exhibits 3 and 7). If the acquisition succeeded, Pepsi would have to change is cash distribution policy radically. Decision PepsiCo had to determine its initial offer before approaching the Quaker. The timing was critical, as several other companies were likely to be attracted by Quaker's obvious strengths (see Tables A and B). At the same time, PepsiCo management had 2 major concerns. First, although Gatorade's synergies and growth prospects provided a clear strategic rationale for the acquisition, Gatorade plus the snack business accounted for only about 40%-50% of Quakers sales and operating income. Food products like Quaker Oats, which PepsiCo was not directly interested in, constituted the bulk of Quakers business. Second, Quaker traded at 23 times the earnings, which was lower than PepsiCo, but still at a premium 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.