Merger Mania Heats Up Price of Food Stocks
The food stocks are hot. General Mills’ stock price hit an all-time high of more than $90 a share this week and is selling at 22 times earnings. Meanwhile, Kellogg, Heinz and Hershey are all selling at or above 20 times earnings in a market that gives General Electric a price-earnings ratio of 14 and IBM a multiple of 12. The stock market is paying a higher premium for breakfast cereal and ketchup than for high tech.
Why? Alas, the reason--as with so much else in the stock market these days--has more to do with speculation about takeovers than with greater growth in the industry or the economy.
“It’s anticipation of future consolidation,” says Philip Smith, the president of General Foods. “The fact that a General Foods-Philip Morris thing happened, and RJR-Nabisco, creates additional anticipation of mergers in this industry.”
Not Growing Fast Enough
The General Foods-Philip Morris “thing” that Smith is referring to is the tobacco company’s $5.6-billion purchase last November of the big food company (Maxwell House and Sanka coffees, Oscar Mayer meats, Jell-O desserts). Philip Morris, clearly wishing to further offset its dependence on cigarettes (it also owns Miller beer), plucked General Foods--which had $9 billion in sales in fiscal 1985--by paying $120 a share for stock that had been selling at about $70 before the merger offer.
It plucked a ripening plum. An improvement program begun in 1981 by Chairman James Ferguson and President Smith had doubled the food company’s sales and was about to produce a quickening in earnings growth. The stock market, recognizing that General Foods would grow faster than the food industry’s average of 1% a year, had moved the stock to $70 from $25 over the five-year period. But that was still not fast enough for some institutional money managers who urged immediate acceptance of Philip Morris’ initial offer of $110 a share.
Which brings up some fundamental questions: Why should General Foods think of growing faster than the food industry, which almost by definition follows the growth rate of the population? Why did General Foods, founded in 1922 as Postum Cereal Co., lose its independence in 1985? And why are there open rumors today about acquirers stalking General Mills, the home of Wheaties and Betty Crocker?
Add Value for Shareholders
Finally, is it healthy that institutional money managers should exert such influence over a major corporation whose policies and success are equally important to suppliers, customers and employees?
Smith, 52, a Georgia-born ex-Marine with a master’s degree in business administration from the University of Michigan, finds it easiest to answer the first question. “The corporation exists to add value for its shareholders,” he says. “Someone puts a dollar down, they want a return, and that’s true whether it’s a pension fund or an individual or a company like Philip Morris. “
Fair enough--few of us would risk our money in a company that failed even to promise the chance of a growing dividend or rising stock price. And, presumably, working hard to keep coffee drinkers and Jell-O eaters happy is the way General Foods achieves those needed returns.
But General Foods was making a profit and promising more. Why the loss of independence? Because, says Smith, of a changed climate in antitrust regulation that now says, in effect, that bigger is better. Only 20 years ago, he reflects, General Foods acquired S.O.S. scouring pads and was forced to divest it by the Federal Trade Commission, which ruled that General Foods was simply too big to be allowed such an acquisition. A Philip Morris, with $15 billion in revenue, would never have been allowed to take over a General Foods, with $9 billion.
But it is now, on the rationale that U.S. companies need size and scale to compete in the global market--need, that is, to have enough money and product lines to be a market power in any country.
The rationale overlooks the supreme dominance of the world’s breakfast tables by ingenious and dedicated--but relatively small ($3 billion in revenue)--Kellogg Co.
And so the ultimate force behind the food stock boomlet is an alliance of institutional money managers and leveraged takeover investors, playing on present day managements’ fears over shareholder value.
Smith, like most executives--indeed, like most people--is ambivalent about the stock market’s hold on corporate decision-making. “There are good and evil things in it,” he says, the good of shareholder value offset by the investment managers’ short-term performance criteria.
Smith has no fresh answers to the problem beyond saying that management has an obligation to employees and the public as well as to shareholders. Maybe it’s about time we paid as much attention to the first two constituencies as we now do to the third.
