What Snapped At Quaker

470 Words2 Pages
Planning to adopt a value-based performance metric? Think it will help you make smarter acquisition decisions? Okay, chew on this: If EVA is so smart, how come it didn't prevent EVA poster child The Quaker Oats Co. from making its disastrous $1.7 billion purchase of Snapple Beverages Co. in late 1994--which it was forced to sell two years later for a mere $300 million? Answer: Quaker didn't use EVA to calculate its $14-per-share offering price for Snapple. According to company spokesman Mark Dollins, Quaker uses a discounted cash flow model to evaluate acquisitions and divestitures, and merely uses EVA as an incentive compensation tool. "EVA does not take into account, in mergers and acquisitions, things such as market conditions," Dollins says. Not surprisingly, Stern Stewart & Co. says EVA is a wonderful tool for valuing acquisitions. "Whether it had been an EVA analysis or a discounted cash flow or price-to-earnings analysis, it's really the old adage--garbage in, garbage out," says Stern Stewart senior partner and co-founder G. Bennett Stewart III. "It all depends on the assumptions." To see just how good some of the new metrics are at valuing acquisitions, we asked both Stern Stewart and HOLT Value Associates LP to calculate a fair value for Snapple at the time of its acquisition by Quaker, using only data that was publicly available at that time. Stern Stewart declined, citing its former consulting relationship with Quaker, but HOLT agreed to take on the assignment using its CFROI (cash flow return on investment) methodology. First, some background. In valuing a company whose CFROI is higher than average, HOLT assumes those returns will gradually fade toward the market norm because of competitive pressures. The rate of fade is determined in part by the volatility of the company's historic CFROI levels. That's important because HOLT's valuation
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