Dear all,
This is not a competing essay. I just want to share with you guys some info about Foster and its failures in acquiring Southcorp Company in 2005. I would be very appreciating as receiving your comments.
There are some more Figures and tables but I can not attach them in. Tie hands (bo tay).
Love,
Caodaica.
Foster’s Southcorp Acquisition and Its Failures in the American Market
CASE SUMMARY
Foster is a global multi-beverage company which has been substantially operating in three regions including Australia, Asia and Pacific (AAP), America and Europe, Middle East and Africa (EMEA). The company productions are diversely ranged from beer, wine, spirits, cider, to non-alcoholic real juices.
In 2005, Foster announced the acquisition of Southcorp which, at that time, was the largest Australian wine manufacturer. Foster’s initial objective was becoming the leading beverage manufacturer in the American market as well as in the global market.
However, the operational results of the synergic company had not remained as high as the expectation of Foster’s management board. The American sales of the company had incessantly decreased in years after the acquisition. Foster had been facing with myriad dilemmas of the shareholders’ hopeless attitudes, the decrease of its credibility and the losses of human resources.
All the unexpected performance results of Foster in the American market had been mainly caused by the Foster’s depraved corporate governance, the American market volatilities and the strong competition from other beverage manufacturers.
Foster’s management board had rendered all its efforts for a recovery of Foster wine sales in the American market. However, the outlook was not much brighter.
CASE DEVELOPMENT
FOSTER GROUP LIMITED (FGL)
Foster’s Group is a Melbourne based premium global multi-beverage company delivering selections of beer, wine, spirits, cider, and non-alcoholic beverages. It is substantially operating in three business areas including Australia, Asia and Pacific (AAP), America and Europe, the Middle East and Africa (EMEA). Foster’s products have been sold in more than 155 countries around the world (Foster’s Group, 2008).
Foster’s history started in late 1876 when Jacob Beringer established Beringer Vineyards in Napa Valley. In 1900s, confronting with the economic recession in Australia, Foster Brewing Company and Carlton Brewery merged with four other breweries to form Carlton and United Breweries (CUB). Then, in the twentieth century, Foster group has continuously expanded through acquisition and brand development in their markets. The CUB has increasingly become one of the biggest beverage manufacturers in the global market with premium brands including Victoria Bitter, Carlton Draught, Crown Lager, and particularly Foster’s Lager which once became the world’s top selling beer. Apart from beer, the CUB’s wine portfolio was also expanded by acquiring other wine manufacturers such as Jameison’s Run, Saltram Wine (Foster’s Group, 2008).
In 2005, Beringer Blass Wine, a Foster subsidiary represented Foster’s Group to run farther expansion on its wine division by acquiring Southcorp. A sad story of Foster started (Foster’s Group, 2008).
SOUTHCORP ACQUISITION
Southcorp
Southcorp was one of the leading wine producers in Australian market. This company also performed as an aggressive component in the international wine market. Before 2005, Southcorp’s sales had reached averagely 20 million cases of wine per annum, constituting about AUD $1.1 billion in its total revenue. Southcorp’s viniculture was bright due to the cultivation of grapes and grape vines in over 8,000 hectares in some of Australia's finest wine producing regions. It also owned around 25 key brands and its four core premium brands including Penfolds, Rosemount Estate, Lindemans, and Wynns Coonawarra Estate. Those core brands had accounted for around 80% of Southcorp’s total sales revenue (Foster’s Group, 2005).
Acquisition story
Southcorp acquisition began on January 13th, 2005 when Foster’s Group purchased 18.8% interest of Southcorp from this company’s largest shareholder, the Reline Investments Pty Ltd. Then, Foster continued to buy the rest of Southcorp shares by offering a price increase of 12 cents per share to $4.26 per share (from $4.14 per share). Southcorp boards had agreed and recommended its shareholders to accept the offer in absence of a superior offer, which hugely assisted Foster in reaching 90% compulsory acquisition threshold. The share buying process transaction continued until May 26th, 2005 when Foster owned 91% of the shares. Lastly, on Friday, 3 June 2005, Foster commenced compulsory acquisition of the remaining Southcorp shares and then it legally possessed 100% of Southcorp (Foster’s Group, 2005).
Objectives of the synergic company
The acquisition was expected to be strategically fit; to enhance Foster’s long-term global growth prospects as well as delivering significant benefits to both shareholders and the company. Also, the acquisition was suitable to Foster’s ambitions of creating an unrivalled collection of premium wine brands which could “dominate” the global wine market (Foster’s Group, 2005). The first expected assignment of the synergic company was achieving the first position in the American wine market.
Prior to the Southcorp acquisition, Foster’s management board believed that, based on the verified track record of management teams in Australian wine and beer businesses, the synergic company would integrate and capture the benefits while retaining the best elements of each company and the momentum of the existing businesses (Foster’s Group, 2005).
According to Foster’s Group (2005), the expected values of the acquisition would be as follows:
• Diversifying and balancing earnings stream between Foster’s Australian CUB and its global wine Beringer Blass Wines (BBW).
• Reducing cost structure while maximizing revenue benefits. BBW had a proven track record in optimizing production arrangements, capturing cost reductions hence in turn enhancing the capital efficiency of its business.
• Generating double digit returns in three years’ time.
THE SYNERGIC COMPANY AND ITS FAILURES IN THE AMERICAN WINE MARKET
The American wine market
The American wine market is one of the largest markets in the world with the sustainable development of the wine industry. The overall wine consumption raised by 3.2 percent in 2007 to 292.1 million 9-liter cases. Total trading on wine retail was peaked at $27.9 billion in 2007 (Anonymous, 2008). Considering the continuation of high growth level, the American wine market is predicted to be the largest wine market and the biggest wine importer by 2010 (Anonymous, 2008). This consideration is taken due to the large wine demand in this country. According to 2008 Wine Handbook, 70 million people aged 23-30 are willing to buy wine at lower price. They also prefer buying wine based on visual appearance and brand recognition to wine market. On the other hand, 77 million Americans aged 43-61 have more disposable income and become higher-priced wine purchasers.
Following the huge demand, international beverage companies have been attempting to move in the American market, creating fierce competitions since some last decades. Most of competitors come from France, Italy, and Australia (Geisler, 2008), including some premium brands such as the Jacob’s Creek, AB Mauri and Hennessy XO Cognac.
Foster’s sales decline in the American market
Foster’s wine division has suffered continuous declines in its sales since the Southcorp acquisition assignment. Foster’s Group (2008) annual report asserts that the wine results have not met its expectations especially in America, which is known as the most important wine market of Foster.
In 2007, Foster’s international operational result (Figure 1) showed the company’s revenues increased 4.9%, up to AUD 2, 346.5 million. Foster’s global brands including Victoria Bitter, Carlton Draught, Crown Lager and Foster’s Lager had performed well when their constant currency increased 7.8%. Foster’s earnings before interests (EBITS) in 2007 increased 7.2%, accounting for AUD 469.9 million.
However, the wine sales in the American market had immediately embarked on dilemmas dramatically even Foster had put a lot of efforts in American market. Speed (2008) asserts that the sales of Foster’s wine in the American market have decreased in all five biggest products. The profit of the Foster’s biggest brand in US market, Beringer, was down by 3 percent following by Lindemans (1 percent), Rosemount (17 percent) and Wold Blass (8 percent). Meanwhile, competing Australian exporters such as Yellow Tail and Jacob’s Creek reported strong growths during August, 2008.
As seen in Figure 2, in 2007-2008, the EMEA market had been operating well as it constituted 6.1 percent increase in the total volume. On the contrary, the Foster’s American market total wine sales suffered a decrease of 9.6 percent.
Accompanying the decrease in sales, Foster’s securities price had also dramatically declined. It was predicted in 2005 that the acquisition of Southcorp would increase per share earnings in two years’ time. But the sad reality was after a two- year increase (in 2008), it went down again at the same price level per share as in 2005.
As seen in Figure 3, in the mid 2008, Foster’s share prices plunged dramatically to about AUD 4.5 for each share. It was a decrease of AUD 2.5 compared with the ending price of 2007.
The share earnings were dragged down by the wine performance. Accordingly, Foster had involved in high risks including operation and stakeholders management risks. Moreover, Southcorp’s brands came in a relatively fragile status.
Foster had been trying to review its global wine division after cutting $603 million from its wine assets and downsizing the American company including sacking the American chief executive, Trevor O’Hoy (Speedy, 2008).
However, the outlook would not much bright. Foster’s American market chairman, Mr. Crawford said that the reality of Southcorp integration was not as well as expected and operating conditions were now even more challenging (Smith, 2008).
Questions:
Why did Foster choose to acquire Southcorp rather than to merge with it?
What were the Southcorp acquisition’s implementation issues that Foster faced?
What were the operating issues Foster faced in the international wine market after acquiring Southcorp?
Was the failure of the Southcorp acquisition strategy caused by the lack of corporate governance?
1. Why did Foster choose to acquire Southcorp rather than to merge with it?
The first enquiry posed is why Foster acquired Southcorp instead of merging with it. To answer this question, the definitions of merger and acquisition should be clearly explored. Merger is a strategy through two firms which willingly agree to integrate their operations on a relatively co-equal basis. The two companies merge with each other because they believe they have the resources and capabilities that may create a stronger competitive advantage. After the merger, both previous entities disappear into the new organization. Shares are commuted into new shares and usually revalued to account for new market value. Meanwhile, acquisition is a strategy which one firm buys a controlling, or 100% interest from another firm. Companies use the acquisition form because of the intension of using a core competence more effectively by making the acquired firm a subsidiary business within its portfolio (Hanson, Dowling, Hitt, Ireland & Hoskisson, 2008).
In this case, Foster acquired 100% of Southcorp. Why Foster choose acquisition method but not the merging one? Responding this question, the primary steps should be taken to identify Foster’s strategic objectives in acquiring Southcorp (Daunt, 2002).
In general understandings, the Southcorp acquisition represents operational tactics of Foster because of the benefits of the acquisition.
Southcorp’s reasons to be acquired Foster’s reasons to make an acquisition
- An outstanding offer for shareholders
- Creating a world’s leading premium wine business
- Benefiting stakeholders of Foster
- Using the core competency
- Eliminating competition
Building the world’s leading premium wine business
Firstly, the acquisition was the step which satisfied the Foster’s ambition of establishing a global leading premium wine business with an unrivalled collection of premium wine brands. As said above, Southcorp was the largest wine manufacturer in the Australian market. Alternately, Southcorp had been performing well in the international economic arena. Therefore, following the acquisition, Foster would undoubtedly become one of the largest wine rivals in the American market in particular and the global market in common.
Benefiting stakeholders
On the other hand, the acquisition was also beneficial to Foster’s shareholders by creating more comparative advantages and providing higher quality products. Foster’s strategic objectives were retaining Australian ownership of wine brands and strengthening Australian wine’s popularity in the world (Robinson, A. A., 2008; Foster’s Group Limited, 2005). Alternately, the acquisition would satisfy all Southcorp shareholders by a higher price of shares. Figure 4 showed the offer price of $4.17 AUD per share in cash which represented a 51% premium to the average of Southcorp broker valuations of $2.76 AUD per share (Refer to Appendix 1) (Rice & Galvin, 2005; Foster’s Group Limited, 2005).
Exploiting the competency
Owing to acquiring Southcorp, Foster would exploit the core competency of this company in the wine market, particularly while Foster aimed to be more successful in the international wine market by 2005. Southcorp’s core competencies were the credibility, premium wine brands and the strong value chain in the American market. Acquiring Southcorp would enable Foster to achieve another higher position in the American market.
Competition elimination
The acquisition of Foster and Southcorp will be an opportunity to eliminate future competition and gain a larger market share in premium wine sectors. Foster could avoid the market rivals including Southcorp after the acquisition. Moreover, the other market competitors would be “left behind” in terms of capital, market shares and technology.
2. What were the Southcorp acquisition’s implementation issues that Foster faced?
After the Foster-Southcorp deal, Foster faced one implementation issue which is the management overprices the takeover offer. Such implementation issue hinders Foster from achieving the expected synergy.
“Southcorp’s share price was inflated. In the absence of takeover speculation, Southcorp’s share price would be significantly lower than the offer price.” (Gettler, 2005) As the case presented, Foster finally swallowed Southcorp after taking a 50.9% voting majority, and Southcorp’s majority shareholder accepted Foster’s $3.1 billion takeover bid, valuing Southcorp’s share at $4.26 each (Decision New Media SAS, 2005). Obviously, the high offer price was financially attractive to Southcorp’s shareholders, and there would be no rival in this takeover, even though Southcorp broadly believed its share was worth up to $4.8 each (ABC, 2005; CNET Networks, 2005). However, The Sydney Morning Herald (2007) suggests Foster might have made a mistake by acquiring Southcorp at $4.26 per share value. In hindsight, the Foster-Southcorp deals were overpriced, as the wine industry was moving into global oversupply.
Technically, Foster’s management incorrectly assessed Southcorp’s share value (SMH, 2008; Haverkorn, M., 2008). Moreover, a 51% premium to average of Southcorp broker valuations of $2.76 AUD per share is the evidence of Foster’s over investment in Southcorp (Refer to Figure 4).
3. What were the operating issues Foster faced in the American wine market?
The currency problems
After the big write-downs of $600 million to $700 million before tax in the carrying value of its global wine assets in some last years, Foster’s board management advises one of the biggest problems of the company is the currency volatilities. In the American market, Foster exposures have been resulted by the strong Australian dollar. In 2005, O'Hoy, the former senior executive of Foster, said Foster's pre-tax profit would be reduced by about $4.5 million for every one-cent increase in the Australian/US dollar exchange rate.
Referring to Figure 6, Foster’s problem has been increasingly severe from 2006 to 2008. The Australian dollars had been incessantly increased in the period of 2006 to 2008, up from AUD/USD (0.7049) to AUD/USD (0.9549). The Australian dollar's strength has neutered whatever efficiencies it has managed to wring out of the Australian wine business and in its US operations. Foster has used a thing called 'constant dollars' to try producing a set of 'normalized' accounts that remove the impact of the currency changes. However, the problems have not been solved yet.
The aggressive competition from the other companies
It is widely acknowledged that the wine industry world-wide is undergoing fundamental structural changes as a result of globalization and mounting international competition. This is reflected on the demand side by contracting household and increasing restaurant and hotel sector consumption of wine. Particularly, American market is increasingly one of the emerging wine markets with the huge demand, becoming an ideal destination for the wine manufacturers all over the world (Bernetti, Casini & Marinelli (2006).
Foster wine sales in the American wine market have been facing aggressive competitions from big international groups such as Diageo, InBev and SABMiller, as well as private equity groups (Foster’s Group, 2008). All of Foster’s competitors are strong and experienced in the American market. Some of them can offer “strip down” prices which lead to the Foster high price wine ignorance in the American market. The average price offered by Foster is USD 3 dollar versus to the competitors’ average price of USD 2 dollar. That contributes a huge loss for Foster since the acquisition.
Moreover, the wine industry was moving into an oversupply in US market, and the excessive wine cannot be consumed (Smith, P., 2008). The situation poses Foster a troublesome matter in selling in the American market. Foster’s losses also related with the US economy slowdown, and less consumption of wine and other alcohol (Haverkorn, M., 2008).
The more scarce resources in Australian
One more issue that Foster had to face in the American market is the scarce resources. The droughts in Australia in 2006 and 2007 had been tightening the grape supply situation in Australia. Therefore, Foster's had to outsource overseas resources to fill any shortfall, but it would also mean higher prices for the company's brands next year, and the ending of low margin wine cask business (Fosters Group, 2008)
4. Was the failure of the Southcorp acquisition strategy caused by the lack of corporate governance?
Yes. The failure of the American market sales can be seen as the failure of the corporate governance of Foster.
Firstly, the corporate governance will be defined to support the following analyses. Corporate governance represents the relationship among stakeholders that is used to determine and control the strategic direction and performance of organization (Mitchell, Agle & Wood, 1997). The substantial objective of corporate governance is ensuring the effectiveness of strategic decisions.
In the Foster’s acquisition case, the lack of corporate governance can be seen as some categories below:
o Lack of prediction of the corporate managers: In O'Hoy's defence, no one really predicted the demise of Australian wine in the United States, which was at the heart of Foster's problem (Foster Group, 2006). Australian wine had already enjoyed twenty years of notoriety and popularity across the globe. As Foster's was buying Southcorp, the Australian company was forecasted to become the leader in the American wine market. However, the sum-off expectation was not reached. The Southcorp acquisition synergies were unattainable, and Foster's push to be one of the biggest beverage merchants on the planet was a case of seeing the world through rose-coloured glasses (Fosters Group, 2008).
o Lack of connections between the parent company and the American affiliate: After the failure in 2006, the American market had rung an alarm to a disastrous result of Foster. However, the Foster’s American management board did not righteously reported to the parent company and stakeholders, which led Foster to a more severe failure in the American market.
o The wrong decision in designation: In Australia, one main tenet of corporate governance is the active and independent board that oversees a corporation’s management. However, the resignation of the ex-chief executive O’Hoy had proved the wrong decision of the Board of management of Foster in designating.
o Foster’s management board was too optimistic: With the ambition of becoming the leading premium wine manufacturer, Foster seemed to be so hurried in acquiring Southcorp without careful plans and tactics. The optimistic behaviours of Foster were the substantial reason for the carelessness of Foster’s managers and stakeholders. Then, no one could be understood the main reasons for the failures of Foster in the American market.
Conclusion
Within the world of business, the company operational strategy must be consistent and righteous. Foster’s Southcorp acquisition is a typical example showing the wrong acquisition decision will lead to the operational failures.
This paper has been attempting to discuss the magnitude and the reasons for the failures of Foster in the American market after the Southcorp acquisition. Specifically, this paper has rewritten the case study. Then, it has discussed the four issues related to the case, which are the reasons why Foster chose to acquire Southcorp instead of merging with it; the Southcorp acquisition’s implementation issues that Foster faced in the American market; the operating issues of Foster in the international wine market after acquiring Southcorp and the lack of corporate governance of Foster.
Foster’s Southcorp acquisition is a good example for the risks of synergizing two different companies. These risks include the cultural differences, management risks, operational risks and stakeholder management risks. Therefore, when arriving at the decision of acquisition, a thorough tactic must be conducted through a carefully holistic approach.
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