What is the influence of ConAgra Share price and prospect after acquiring Ralcorps? Analysis of market power and efficiency hypothesis in USA food industry

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INTRODUCTION

Background

ConAgra Foods Inc is an American company whose headquarters are located in Chicago. ConAgra Foods Inc is a food processing company that deals in packaged foods throughout the country. The company partners with supermarkets, food services, and restaurants to sell its brands (Conagrabrands.com.2020). Notably, the company was formed in 1971 from its predecessor, Nebraska Consolidated Mills. The company recorded annual revenue of US$ 7.827 billion in 2017, with a net income of US$639 million (Sec.gov.2013). The company has adopted the acquisition strategy to deal with market forces beginning from its establishment. In 1980, the company acquired Banquet Foods and purchased several small organizations within the USA worth US$500million (Conagrabrands.com. 2020).  Notably, in 1998 the company purchased brands from Nabisco worth US$480 million (Conagrabrands.com. 2020). However, the company has been faced with different controversies since its conceptualization. The company has been accused of environmental negligence and insufficient sustainability development. Also, the company has ethical issues based on the labor relation by Basic Vegetable Product LP, which it acquired in 2001 (Allison, 2020). The company faced cultural insensitivity when it demolished a historic site to establish its offices in 1988. Lastly, in 1997, ConAgra Foods Inc pleaded guilty for bribery and fraud charges.

Ralcorp Holdings manufactures an array of food products. The products include crackers, peanut butter, pasta, snack foods, chocolate, mayonnaise, breakfast cereals, and cookies. The company has offices in St. Louis. Notably, the company has a private label through which it sells its products (Allison, 2020). Ralcorp Holdings evolved from Ralston Purina, which was mainly associated, it the label ‘human food’. However, ConAgra Foods Inc purchased the company in 2011 (Allison, 2020). Through the acquisition agreement, the shareholders of Ralcorp Holdings received $90 for every share owned (Sec.gov.2013). Notably, the full purchase was completed in 2013 January.

According to the articles of agreement between the Ralcorp Holdings and the ConAgra Foods, it is documented that the two were to the merger, but as a result, Ralcorp was to be wholly owned by ConAgra Foods (Sec.gov.2013). The Ralcorp was to continue operating as a subsidiary of ConAgra Foods Inc (Sec.gov. 2013). The merger prohibited the Ralcorp’s share from being listed at any stock exchange (Sec.gov. 2013). Besides, under the equity and stock option, the existed and the accrued interest arising from the shares were to be paid while each shareholder was to be compensated US$90 for every share owned in the Ralcorp Holdings (Sec.gov.2013). Notably, all the transactions arising from the merger was to be subjected to tax laws of the federal government as well as of individual state (Sec.gov.2013)

According to Sec.gov. (2013)At the acquisition time, the market price of the common stock owned by Ralcorp Holdings was evaluated. In 2011, the company’s stock traded between $65.61 and $58.05 for the first quarter (Sec.gov.2013). For the second quarter, Ralcorp’s shares traded between $68.52 and $59.23 (Sec.gov.2013). Consequently, the stock traded between $91.35 and $67.28 as well as $89.43 and $68.84 for the third and fourth quarters, respectively. In 2012, based on the quarters, the Ralcorp’s share traded between $86.97 and $74.18, $89.86, and $68.96, $74.54, and $61.85, $73.50 and $59.28 for the annual quarters (Sec.gov.2013).

The acquisition influences employees negatively if not adequately managed. The employees both from the acquired company and the taking over company have job uncertainty (Richards, 2020). Commonly, most organizations streamline the operations of the acquired company to conform to the existing values and cultures (Richards, 2020). It can be challenging for the employees who had served relatively more extended time in the previous company. Besides, cultural integration can be a challenge among the employees. In the end, the employees are likely to develop psychological and social difficulties that affect the operation of the company (Richards, 2020). Generally, the employees build stress, competitiveness, fear of job loss, and cultural panic.  Notably, when another company acquires a company, all the liabilities and benefits are transferred to the company purchasing it. The responsibilities include the lawsuits, ethical issues and image, public goodwill, and the stakeholders’ characteristics. Besides, the customer base, the reputation, the organization culture, the brands, and the patent, as well as the market share, are transferred to the company performing the acquisition. Therefore, it is imperative to determine the effect on the ConAgra share price and prospect due to the acquisition of Ralcorp Holdings in 2012.

Problem Statement

When a company is acquired by another, several challenges occur, which affects the financial status of the mergered company. Employees develop psychological effects such as stress and fear of the unknown, thus, influencing the working morale within a company. The acquisition process is based on several assumptions and optimism that it will positively impact the market price of the parent company. However, a company, after the acquisition, faces managerial challenges and financial constraints. ConAgra Foods, after acquiring Ralcorp Holdings in 2012, experienced several challenges, which lead to its reestablishment in 2017 under a new name Conagra Brands.

Justification of the study

ConAgra Foods Inc. was a company that had, in many occasion, adopted acquisition strategy to increase its market share, diversify its products and services as well as maintain a competitive edge. The company provides a practical case study for financial analysis research into the effects of the acquisition on the market power, maintaining close discussion to the market share price.

Research Question

What is the influence of ConAgra Share price and prospect after acquiring Ralcorp Holdings?

Significance of the study

The study offers an in-depth analysis of the effects of the acquisition, particularly within the USA food industry. The study also presents a platform for exercise financial analysis and modeling expertise while training for real-world challenges. Notably, the study can be used by young scholars to borrow in the analytical approaches employed and the modeling techniques. Indeed, the study is based on empirical research, which involves ConAgra Food Company and Ralcorp Holdings; therefore provides companies with secondary information and red flags when performing acquisition. The answering of the research question and achieving the study aims will help the shareholders make a sound and reliable decision on investments.

THE LITERATURE REVIEW, HYPOTHESIS DEVELOPMENT, AND THEORIES

The section contains the theories behind the acquisition and merger in the corporate world, the definition of topic statements and terms in the study. Besides, the part will examine different literatures that support the thesis statement while focusing on hypothesis development.

Definitions

            Acquisition and Merger

The merger is the corporate practice through which two companies agree to bring together different operations under one management (Majaski, 2020). The merger abolishes the existence of two independent organizations and creates a new company that incorporates the two once-independent companies. Acquisition, on the other hand, is the business transaction in which an organization takes over the ownership and operations of another company (Majaski, 2020). Notably, the acquiring organization is termed the “acquirer,” while the organization whose operations are acquired is known as the “the target company “(Putz, 2020). Notably, in the acquisition, the target company, upon completion of the transaction, becomes the property of the acquirer (Putz, 2020). Indeed, in the corporate studies, the purchase and merger are interchangeably used in due to similarity in the results.  For this research, the terms will be used interchangeably since the focus is on the result that is determined by the extensive literature review and precise data analysis as well as modeling.

Controlling interest amount

Theoretically, the acquisition and merger are governed by the controlling interest amount.  The studies have set the amount to be 50% of the total voting share of a given organization plus one when considering the newly formed entity (Smith, 2019). However, the controlling interest can be less than 50%, depending on the organization in question (Smith, 2019).

Share Price

              For this study, share price and the stock price will be used interchangeably. The share price is the purchasing cost of the saleable shares within a company (Tarver, 2019). Besides,  for this study, it will be examined as the price of the stock a person is willing to pay, considering the shares of ConAgra Foods after the acquisition of Ralcorp Holdings. Notably, the share price for a new company is influenced by the law of supply and demand (Tarver, 2019)

Market Power

According to Kenton (2019), the market power defines the ability of an organization to manipulate both the levels of supply and demand and thus influencing the market prices of a given good or service. Such companies have control of their profit margins as well as control the market entrance by manipulating the market obstacles (Kenton, 2019). According to Kenton (2019), a company with market power forms the market price makers. For this study, both “price makers” and “market power” will be used interchangeably during both literature review and discussions.

Theories and Motives for Acquisition

Acquisition and merger are common practices in the cooperate world—different companies merge due to managerial advantages. Two or more companies can create a merger due to value creation through increasing wealth by pooling the shareholders (Harroch, 2020). Besides, some companies practice it for diversification, acquisition of assets, tax purposes, and to increase the financial capacity to achieve the collective objectives of the parties coming together (Harroch, 2020). The acquisition involves one company taking control of the two companies that come together. The target company is bought and loses its rights to offer its products, patent, labels, and name identity. The acquisition is performed for similar reasons, except that two main influencing factors exist. A company can acquire another to gain a competitive advantage in the market. The acquisition gives a company market share advantage through minimizing competition while increasing market share (Harroch, 2020). The target company usually has a loyal customer base upon which it used to thrive. The acquirer inherits the name and the customers as well. Notably, the acquisition allows for diversification of both products and services within the market, when the target company and deals in different but related products (Harroch, 2020). On the contrary, the target company can opt for the deal when it is on the verge of collapsing and cannot sustain its managerial requirements, such as operation cost and lack of distributed leadership within the organization (Harroch, 2020).  The theories and explanation for the acquisition motives can be examined through the neoclassical theory and the behavioral hypothesis. The behavioral hypothesis encompasses both hubris and agency theories.

Neoclassical theory

The modern trends in the corporate world charge the managers with the duty of safeguarding and maximizing the shareholders for a company to remain competitive (Tavassoli et al., 2018). The management of any company engages in the acquisition if the transaction increases the value to the shareholders (Tavassoli et al., 2018). However, any deal that does not meet the purpose is objected by the management of any company for this reason. Notably, the main aim of the acquisition is to create synergy for the acquirer. The synergy is evaluated when the company’s value before the acquisition is less than the value after the acquisition. The synergy is perceived either through the financial analysis or the operational analysis (Tavassoli et al., 2018). From a financial perspective, acquirer gains synergy by lowering the cost of capital and increasing cash flow. The financial synergy improves the acquirer’s economic image by reducing the default risk. The company is likely to receive creditors’ willingness to support its venture since it does not suffer the probability of bankruptcy. Besides, the company faces low-interest rates on the loans since it has reduced the risk of collapsing before servicing the loans. Indeed, the acquisition creates “debt coinsurance.” Notably, the acquisition diversifies the equity risk of the company as well as reduces the cost of borrowing, which would impact the shareholders negatively (Tavassoli et al., 2018). According to the distribution theory, which is attributed to Lewellen (1971), the acquisition that involves closely related companies in the operation and service offering, when the cash flow bears some correlation, the acquirer company is likely to reduce financial distress (Prakash, 2017). Also, the acquisition from the economic synergy increases the tax shield, which enhances the value for the shareholders.

From the operational synergy, the acquisition enhances the acquirer revenue while reduces the cost. The benefits arise from the marketing and sales perspective. Before the acquisition, the company had a relatively small market share and faced proportionately high competition from the target company. Therefore, the company will spend less on marketing strategies while enjoying the increased market share based on the combined share (Tavassoli et al., 2018). The acquirer also enjoys the functional advantages of the target company. The acquirer combines functional strengths such as the two companies, such as marketing skills and product line. Notably, the cost reduction is easily achievable as compared to revenue enhancement when an acquisition occurs. The cost reduction can be modeled by fixing the cost while adjusting units of production. Furthermore, it can be evaluated through the use of specialized labor and the sharing of equipment within the combined company in similar processes (Prakash, 2017). However, revenue enhancement is not easy to visualize due to the modeling challenges that lie in the quantification of the parameters involved. In the study, motives of ConAgra Foods and the effects it faced will be analyzed from the shareholders’ perspective while examining the market forces.

Agency Theory

  The agency theory focuses on the interest of the managers and the technocrats within the company. The company’s top management will adopt the acquisition of another company due to its importance rather than the shareholders’ benefits (Tavassoli et al., 2018). The theory is perceived as behavioral in its approach. The theory argues that acquisition is driven by the empire-building attitude possessed by most managers. The free cash flow theory emphasizes that the managers may venture in the purchase despite incurring negative net present value while dividends to shareholders as long as personal interest are protected. The cash flow theory is an element of the agency theory in its postulates (Tavassoli et al., 2018). The free cash flow theory is adopted by management to maintain the cash under their control while paying shareholders dividends. Notably, the manager’s job is directly correlated to the success and the existence of the company. When a company collapses, the managers are losing their jobs. Therefore, in the acquisition process, the top managements consider the risk of losing their job opportunities and venturing into the unknown over the shareholder’s wealth. Indeed, studies have shown that managers will welcome the acquisition transaction when it reduces their risks (Tavassoli et al., 2018). Notably, the management’s bonuses, status, and salaries are directly related to the size of the corporation. Therefore, the theory will assist in examining the decisions taken by the management of ConAgra Foods during the acquisition process if they were to the interest of the shareholders or personal interests

Hubris Theory

The theory is also behavioral in its approach, just like agency theory. However, the hubris theory argues that managers irrational (Hayward et al., 2020). The over self-confidence in the managers amounts to mistakes when evaluating acquisition transactions. Notably, the theory evaluates the errors by the managements from the acquirer side and its related effects. The target company is perceived to be a good being bought and needs to impact analysis for either short term or long term (Hayward et al., 2020). The managers of the acquirer may pay a higher premium when acquiring a company due to over-estimation. Usually, the acquirer pays a high premium to lure the shareholders into transferring their shares (Hayward et al., 2020). The target company and its shareholders will gain from the high premium paid. On the contrary, the acquirer, due to over-estimation, will not get value for the capital invested in the acquisition transaction. As a result, the shareholders of the acquirer experience capital loss (Hayward et al., 2020). According to the theory, the high premium will increase the price per share for the target company will lowering the value of the acquirer.  Overall, the combined result on the acquirer is zero. The cause of the negative consequence or net-zero value on the acquirer is based on the behavioral theories of the managers (Prakash, 2017). The managers’ attitude of empire-building can be resulting in acquiring a company despite red flags of non-profitability. Besides, the behavioral theory attributes the detrimental effect of the human error on the managers when performing financial analysis and evaluating the worth of the company. Notably, over-estimation is shared when purchasing private companies due to the inaccessibility of the information (Hayward et al., 2020). The theory will be adopted in the study during the literature review and financial evaluation in determining the actions of the managers of the ConAgra Foods before the acquisition of Ralcorp Holdings.

Literature Review

References

Richards, L. (2020). The Effects of Merger and Acquisition on Employee Morale. Small Business – Chron.com. Retrieved 9 June 2020, from https://smallbusiness.chron.com/effects-merger-acquisition-employee-morale-3196.html.

Harroch, R. (2020). What You Need To Know About Mergers & Acquisitions: 12 Key Considerations When Selling Your Company. Forbes. Retrieved 9 June 2020, from https://www.forbes.com/sites/allbusiness/2018/08/27/mergers-and-acquisitions-key-considerations-when-selling-your-company/#5ab487124102.

Sec.gov. (2013). Final Proxy Statement. Sec.gov. Retrieved 9 June 2020, from https://www.sec.gov/Archives/edgar/data/1029506/000119312512518230/d449072ddefm14a.htm#toc449072_33.

Conagrabrands.com. (2020). Home | Conagra Brands. Conagrabrands.com. Retrieved 10 June 2020, from https://www.conagrabrands.com/.

Allison, K. (2020). With an Activist Investor, ConAgra Is Primed to Be Carved Up. Nytimes.com. Retrieved 10 June 2020, from https://www.nytimes.com/2015/06/20/business/dealbook/with-an-activist-investor-conagra-is-primed-to-be-carved-up.html.

Almalki, S. (2016). Integrating Quantitative and Qualitative Data in Mixed Methods Research—Challenges and Benefits. Journal Of Education And Learning, 5(3), 288. https://doi.org/10.5539/jel.v5n3p288

Smith, T. (2019). Controlling Interest Definition. Investopedia. Retrieved 10 June 2020, from https://www.investopedia.com/terms/c/controllinginterest.asp.

Tarver, E. (2019). What Determines a Company’s Share Price?. Investopedia. Retrieved 10 June 2020, from https://www.investopedia.com/ask/answers/061615/how-companys-share-price-determined.asp.

Kenton, W. (2019). What You Need to Know About Market Power. Investopedia. Retrieved 11 June 2020, from https://www.investopedia.com/terms/m/market-power.asp.

Prakash, S. (2017). The Impact of Mergers and Acquisitions on Shareholders’ Value: An Empirical Analysis of Select Indian Companies. Indian Journal Of Finance, 11(9), 22. https://doi.org/10.17010/ijf/2017/v11i9/118087

Tavassoli, A., Saeedi, P., & Biglari, B. (2018). ). According to Agency Theory and Neoclassical Theory: New Ownership and Diversity of Public Sector Companies in corporate Life Cycle [Ebook]. IA University of Arak Press. Retrieved 11 June 2020, from http://amfa.iau-arak.ac.ir/article_539131_71d2c0024b0a269c95484d4f316957ac.pdf.

Hayward, M., Shepherd, D., & Griffin, D. (2020). A Hubris Theory of Entrepreneurship. Management Science, 52(2), 160-172. https://doi.org/10.1287/mnsc.1050.0483

Majaski, C. (2020). What Is the Difference Between Mergers and Acquisitions?. Investopedia. Retrieved 11 June 2020, from https://www.investopedia.com/ask/answers/021815/what-difference-between-merger-and-acquisition.asp#:~:text=A%20merger%20occurs%20when%20two,attempt%20to%20create%20shareholder%20value.

Putz, A. (2020). M&A 101: The difference between mergers and acquisitions | PitchBook. Pitchbook.com. Retrieved 11 June 2020, from https://pitchbook.com/news/articles/ma-101-the-difference-between-mergers-and-acquisitions.