Merger and Acquisition: Starbucks and Peets Coffee

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All kinds of business organizations face an array of business risks and challenges in their respective industries that requires the adoption of appropriate mitigation measures to continue competing with their major business rivals and continue making profits and remain solvent. Mitigation methods range from partnerships, opening doors for new shareholders to mergers and acquisitions (M &As). Even though the terms mergers and acquisition are used interchangeably they differ in meaning considerably DePamphili s (2009). Acquisition refers to the purchase whereby one company takes over another and establishes itself as a new owner. Legally, the purchased company comes to a close and the buyer’s stock continues to be traded DePamphili s (2009). On the other hand, a merger takes place when two companies agree to move forward as a single entity rather than continue to be distinctly owned and managed. This is commonly referred to as ‘a merger of equals’ in practice. In this case, the stocks of the two companies are given up and the new company’s stock is issued in its place DePamphilis (2009). In practice mergers are rare. However, when a company is bought by another as part of the deal’s terms, the purchased company is permitted to proclaim that it is a merger even if in reality it is an acquisition. The deal has usually dubbed a merger because acquisition carries a negative connotation and thus the deal makers and top managers attempt to make it pleasant by referring to the acquisition as a merger. This explains why the two terms are commonly used together in practice.

A Background of the company and the management team

Peet’s Coffee &Tea Inc. was founded by Alfred Peet as a single store in 1966 in Berkeley California. After working for a considerable period of time in the coffee industry in the US, Peet got troubled by the poor quality of coffee brought into U S. To change the trend, he decided to open up his own shop at Walnut and Vine Streets in Berkeley California, in 1966 Bussing-Burks (). Peets grew up in the coffee business when he was living in the Netherlands as a child and when he moved to San Francisco in California at the age of 35 he started doing what he knew best, that is, roasting coffee Bussing-Burks (). As of December 30^th, 2007, Peet’s Coffee &Tea operated one hundred and sixty-six stores in six states Bussing-Burks (2009). Bussing-Burks (2009) was an inspiration for Starbucks. Peet lived a life dedicated to specialty coffees and is credited for the distinctive dark-roasting style he helped to make popular Bussing-Burks (2009). Peet’s is run through two reportable sections, that is, retail and specialty sales. Bussing-Burks (2009) observes that Peet’s sell its coffee under firm originality standards. The company uses various channels to distribute its products including foodservice accounts, stores found in six states, coffee, restaurant, home delivery and grocery stores Bussing-Burks (2009).

A Brief coffee Industry overview

Peet’s operates in an industry in which main players must rely on global markets for supply of their main raw materials and whose end consumers are largely concentrated in the West. Therefore, their competitiveness depends to a large extent on how the global coffee markets are structured at any given point in time. Most of the coffee traded in the global markets comes from Latin America, Asia and Africa. It is important to note that the quality of coffee from farmers in world’s coffee growing countries determines the quality of coffee that Peet’s and other market players like Starbucks produces in the long run for their end consumers. This fact have necessitated the need to work closely with coffee farmers especially in developing countries so as to help them grow coffee that has accepted standards of quality at the international markets. For example, Peet’s has been working with farmers in Rwanda and Kenya in conjunction with Technoserve a non-profit organization in the bid to help them increase quality production and market their products profitably at the international markets. Global coffee markets witnessed major changes in the 1990s in terms of structures and power Bruinsma (2003).Main changes included an increasing number of trading and roasting companies, increasing methods of differentiating products and allocation of the value addition along the promotion and processing chain Bruinsma (2003). The coffee industry is thus an inherently competitive industry that is subject to changes for which market players like Peet’s must position them selves strategically in order to safeguard their competitiveness.

The Acquisition Purchase price and Company Operation after the Merger and financing the deal

As mentioned earlier, Mergers &Acquisition are a common method used by business organizations to mitigate risk of extinction from a market that is increasingly competitive to an extent that its survival is jeopardized. It is also a strategic approach to increased competitiveness and wider customer base that is adopted by companies in virtually all industries not necessarily only when pushed to the wall by competition.

According to Dalal, Wahba and Baertlein (2011) Peet’s Coffee &Tea Inc. has had talks with Starbucks Corp, about a possible sale to the large coffee shop chain. According to Dalal, Wahba and Baertlein (2011) Peet’s market value stood at $589 million as of March year 2011.As of the same date Starbucks w2as valued at over $ 26 billion.

Reasons for Mergers and acquisitions in business vary from one company to another as well as one industry to another. According to Hunt (2009) companies opt for mergers and acquisitions because of various monetary and operating reasons. For instance, companies may wish to grow, broaden their horizons, expand a given product line, reach new markets or obtain new technology. They may also wish to influence combined synergies or simply acquire a rival competitor Hunt (2009).Even though executives of Peet’s Coffee $Tea Inc. and Starbucks have been largely unwilling to comment on the rumors about the deal that has been going round the market, experts suppose that the real reason behind the merger and possible acquisition is the desire to influence combined synergies of the two companies especially in the line of grocery business West as cited in Reuters (2011). But generally West is confident that in two to three years Starbucks can probably double or triple Peet’s business. However, other reasons for pursuit of a merger as enumerated above are bound to influence the sealing of the deal between these two companies.

According to Morran (2011) an acquisition by Starbucks would help Peet’s get into the fast-growing single-cup coffee markets. The deal has been termed strategic by commentators especially when observed in the light of the recently announced deal between Starbucks and Green Mountain. Starbucks and Green Mountain has entered into an agreement in which it will be making single-cup coffee offering’s for Green Kuerig machines Morran (2011).

Basing a possible valuation on Peet’s market value that stood at $589, Starbucks can pay a maximum of $2 billion for the proposed deal. However, it is important to note that business valuation professionals use a combination of methods like relative valuation, discounted cash flow (DCF) valuation, historical earnings valuation, asset valuation and future maintainable earnings valuation among other methods Ray (2010). The deal would be financed through stocks. The method through which M& As are financed has important consequences for shareholders of both the acquiring and the acquired companies Ray (2010).According to Ray (20100), currently majority of the M&As are paid through stocks rather than cash. Ray suggests that the managements of the two companies contemplating a merger should consider various issues on how to pay for and whether to accept a deal or not before the final decision is made. The acquirer according to Ray should decide on the mode financing the deal between cash and stock if the acquirer chooses to pay for the deal through the stocks it must settle on whether to offer a fixed value of shares or a fixed number of shares. The involved executives should note that cash places all the possible risks on the acquirer and relays a strong message to the stock markets that the management of the acquiring company is self-assured about the deal as well as its own capital value Ray (2010). Also it should be remembered that by offering shares an acquirer in real meaning offers to share the newly merged company with the stockholders of the acquired company even though that is usually interpreted as a lack of confidence in the value of the acquirer’s stock. Therefore, offering a fixed value of the shares is preferred because it sends a more confident signal to the markets as the acquirer assumes all the risk Ray (2010).

Reference List

Bruinsma, J. (2003). World agriculture: towards 2015/2030: an FAO perspective. Milton Park, Abingdon, Oxford: Earthscan.

Bussing-Burks, M. (2009). Starbucks. New York, NY: ABC-CLIO.

Dalal, M., Wahba, P., and Baertlein, L. (2011). Starbucks and Peet are in recent deal talks: report. Web.

DePamphilis, Donald M. (2009). Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions. London, Orlando: Academic Press.

Hunt, Peter A. (2009). Structuring mergers & acquisitions: a guide to creating shareholder value. New York, NY: Aspen Publishers Online.

Morran, C. (2011).Starbucks to Buy Peet’s Coffee?

Ray, K. G. (2010). Mergers and Acquisitions. Connaught Circus, New Delhi: PHI Learning Pvt. Ltd.

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Merger and Acquisition: Starbucks and Peets Coffee

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