Coke Versus Pepsi, 2001

Abstract

Set in December 2000, immediately following the merger announcement between PepsiCo Inc. and the Quaker Oats Company, this case asks students to examine the implications of the merger for the rivalry between Coca-Cola Co. and PepsiCo, and for value creation by each firm. Because the merger would allow PepsiCo to control Gatorade, which held an 83% share in the sports drink market, PepsiCo would further strengthen its already-wide lead over Coca-Cola Co. in the noncarbonated drinks segment. Would Coca-Cola's historically stellar performance in terms of value creation be threatened by the merger? The case asks students to estimate EVA TM (Economic Value Added) from 2001 to 2003, and provides income statement and balance sheet forecasts to aid in this task. Students also need to determine each company's weighted average cost of capital (WACC) in order to estimate EVA. The primary objective of this case is to introduce students to the concepts and calculation of WACC and EVA.

Excerpt

UVA-F-1340

Rev. Feb. 14, 2014

Coke vERSUS Pepsi, 2001

On December 4, 2000, PepsiCo, Inc., and the Quaker Oats Company issued a joint press release announcing their merger. The terms of the merger stated that PepsiCo would acquire Quaker Oats in a stock-for-stock deal valuing Quaker at around $ 14 billion.

Merger Announcement

Given PEP's [PepsiCo's] #1 rank in the faster-growth segment and its improving competitive position in CSDs [carbonated soft drinks], we believe PEP could, over the long term, threaten Coca-Cola's lead in the domestic beverage category in all channels except fountain.”

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Keywords: cost of capital