CFO Perspective: How to Be Acquired in a Market of 'Snack Mergers Acquiring Snack Mergers'

Editor's Note:"CFO in the Know" is an editorial series exploring the role of CFOs across various industries. You can find the entire serieshere.

In the food industry, the existence of a small local company is often seen primarily as a target for acquisition by a larger corporation.

This may sound counterintuitive: why break your own balanced structure, risk losing your entire executive team, and sell your products to an industry giant? Not to mention, M&A in the food industry is especially volatile amid market fluctuations, as consumers can abandon a long-time favorite product overnight.

But for small food companies that may have only one or two popular drugstore snack products, a quiet and seamless acquisition could be the ultimate goal. Large food conglomerates spend billions of dollars annually acquiring smaller, niche-positioned food companies to expand their business footprint and enter the currently trending snack or beverage markets.

Case Study: Amplify Snack Brands

In 2017, The Hershey Company acquired$1.6 billionto purchase SkinnyPop parent company Amplify Snack Brands and its entire product portfolio.

At the time, Hershey CEO Michele Buck called the acquisition of Amplify crucial to the company's journey to becoming an "innovative snacking powerhouse." She considered Amplify an ideal subsidiary that could bring "scale and category management capabilities to key segments of the warehouse snack shelf" for Hershey, a company known more for sweets than salty snacks.

But Hershey was not the only winner in this deal to strengthen its own portfolio.

Amplify (whose pre-acquisition CEO Tom Ennis still leads it) went public in 2015 after SkinnyPop swept the nation. But in the following two years, its stock price fell more than 50%, and the company struggled to compete with larger, better-funded rivals.

According to CNBC, news of the Hershey deal sent Amplify's stock soaring 70%. At the close of the deal, Amplify and Hershey management expected to achieve approximately $20 million in annual synergies in the first two years through cost savings and portfolio optimization.

Before acquiring Amplify, Hershey had been making small acquisitions for years; it acquired beef jerky seller Krave Pure Foods in 2015 and, a year later, the maker of "healthy" chocolate bars barkTHINS.a year lateracquired the manufacturer of "healthy" chocolate bars barkTHINS.

The trend of large companies acquiring niche brands is everywhere. Just before Amplify came under Hershey's wing, Kellogg announced it would acquire RXBar for $600 million, while Mars invested in KIND Snacks with a total valuation of $3 billion to $4 billion.

The Value of Selling

Global finance executive Mark Cole worked at Kraft during the merger of Philip Morris and General Foods. He told CFO Dive: "This was supposed to be a merger. It started as a merger, but you need a culture, otherwise the company won't succeed because you'll have two different views on how things should be done."

Cole said that only when they actually renamed it Kraft did the joint venture get out of trouble, and thereafter "was able to achieve greater success."

As companies change hands, and with the food industry market being unpredictable and often volatile, how can CFOs of smaller independent companies best prepare for being acquired by a company with ten times the resources? Is there a better way to position the company to secure more favorable deal terms for the acquiree?

You need a culture, otherwise the company won't succeed because you'll have two different views on how things should be done.

— Mark Cole, finance executive

When asked whether he sees a trend of small food companies existing and developing with the goal of being acquired by giants like Hershey or Kellogg, Cole said yes and no. He told CFO Dive: "Some small local companies want to remain family-run. But I think most companies are seeking to be acquired by one of these large national brands."

Another CFO and food industry veteran agrees. Before becoming CFO of logistics and supply chain company BNSF in 2018, Bill Dering stood at the forefront of food industry deals. He spent six years at Kellogg as Senior Director of Corporate Development and Strategy and Finance, during which he led the $2.5 billion acquisition of Pringles in 2012. In 2016, he became Senior Vice President of Strategy at WhiteWave Foods, which was acquired by Danone in 2017.

Dering said acquisitions are largely a good thing for small food companies. Giants like Hershey and Mondelez "have larger, stronger distribution networks," Dering noted, "and they also have the ability to negotiate better commercial and retail pricing, and expand geographically, in some cases even into international markets."

Focus on Differentiation

Dering said that to fully leverage this advantage, CFOs of these smaller companies must prioritize building a strong business with competitive differentiation. "You can very technically (build) stronger controls and so on," he said, "but if your goal is to be acquired by a larger company, the best thing you can do is build differentiated products and brands. That's where the value lies for big companies."

Dering divides the differentiation strategy into two parts. First: build differentiated products. "Typically," he said, "this innovation is something healthier, with better nutritional credentials, and unique. Then you build a brand around it, with a loyal consumer base."

If your goal is to be acquired by a larger company, the best thing you can do is build differentiated products and brands.

— Bill Dering, CFO of BNSF

Dering said that if small companies succeed in doing this, big companies will take notice. "They want to buy a brand and product line that already has some scale and is difficult to build internally. Then they can take it over and, through their own distribution network, do even more."

In short, Dering's two priorities for CFOs are: invest in a pipeline of differentiated innovation, and build the brand. That's it. "There are many other things, but these two are the most important things you can do," he said, "Everything else ranks third, fourth, and fifth."

Cole's top priority starts from a different angle. "It's staffing," he told CFO Dive, "It's making sure the people under you are willing to stay."

The 'Catch-22' of Employee Retention

Cole said that from a CFO's perspective, his biggest concern is: "Do I have people who understand the business to help me transition it to the new owner?"

Cole noted that in some cases, people are willing to stay; in other cases, if the new owner has shared service centers, or if they are not satisfied with the quality of the finance and accounting staff, they may not necessarily want these people to stay.

"The challenging part is that a lot of this is very sensitive, so you may not be able to communicate any information to most employees until the deal is basically finalized," he said, "Managing this transition is one of the key challenges."

Another challenge, Cole said, is systems. "How do you continue to provide financial reporting and financial analysis based on data output from the system?" he asked, "Often, the acquired company runs some kind of small in-house system. How quickly can it be integrated?"

Systems and Forecasting

Cole has firsthand experience with the importance of integrating systems. Between 2005 and 2010, he held various finance and supply chain management roles at Mondelez International. From 2014 until the Danone acquisition, Cole served as CFO of Earthbound Farm Organic, a subsidiary of WhiteWave Foods.

"If you have to do a full system implementation, like I had to do at WhiteWave, it will break you," he said, "And it did. WhiteWave was a public company, and Earthbound Farm was not. We had to establish controls quickly, which required a massive system upgrade because many control weaknesses were related to the (old) system."

Dering confirms this. "Once the acquirer buys you, they will have their own forecasting process and a set of controls they will install," he said, "So your books can't be inaccurate."

Dering also pointed out another fatal mistake: dumping inventory into the market heavily in the run-up to being acquired. "We've seen companies, in the 18 months before we (acquired them), lower product prices by offering bigger retail trade discounts," he said.

This kind of operation can sometimes make the company's income statement look like it has greater growth momentum. But Dering said, "Smart buyers will notice that you've trained consumers, and the brand is not a premium brand. That's the risk; over time, you cause damage."

The Bottom Line: Strategy, Strategy, and Strategy

Although Dering and Cole propose different strategic paths for CFOs, they agree on one major focus: forward-looking strategy.

"I think the CFO should ask: 'What is the strategy for getting the acquired company onto a new system, if that makes sense?' If it doesn't make sense, how do you ensure the company can operate independently while also providing the necessary financial information to consolidate results at a high level?"

Ultimately, it's the business strategy that drives the most value.

— Bill Dering, CFO of BNSF

Cole's bottom line: "Make sure you have the right approach and the right strategy from a systems and support perspective."

Dering agrees. "Ultimately, it's the business strategy and the competitive differentiation you build that drive the most value," he said, "As a CFO, I would think about how to use the P&L, capital, and my resources to invest to achieve that."