Acquisition Strategies & Failures: Royal Numico Company

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Table of Contents

Abstract
The Environmental Analysis of the Royal Numico
Analyzing the Suitability of an Acquisition
Determine Valuation, Negotiate and Set Deal Terms
Perform Confirmatory Due Diligence and Close the Transaction
Integrate the Companies
References

Abstract

The Royal Numico case study can be used as a process of learning because the company makes mistakes that it failed to predict. A more in depth analysis of the environment might have led them to better information and prevented them from buying the other companies in the first place. In both the acquisitions their top goal was to become the market leader by acquiring someone else’s goods. In my opinion, they become too one sighted and failed to understand that acquiring companies with huge sums of money will not lead to a higher market share. There has to be a strategy for every SBU and every department and every product line. It takes more than a give and take relationship to be successful in the business world. You just can’t buy your market share you have to go out and grab it.

The Environmental Analysis of the Royal Numico

The environmental analysis of company can be conducted through many methods. To use this analysis is a tool to make decisions it is more that both internal and external components are looked at. Porter’s five forces can be analyzed to understand the internal and external environment of Royal Numico. They relied heavily on research and development and marketing ad had to think about internationalizing and growing as a company to recover these costs. They decided to buy Rexall Sundown Inc. Porter’s Model looks at rivalry with the competition but the acquisition by Numico had to do more with expanding and recovering costs. Another reason was to acquire a higher market share and obtain more products. “The acquisition reinforces Numico’s leading position in the growing nutritional supplements market… The acquisition of Rexall Sundown, major supplier to the mass market, will provide Numico with leading nutritional supplements brands and the largest distribution network in the U.S.The acquisition will allow Rexall Sundown to enhance its string market position in the U.S. mass market and provides access to the European market.” (Eppink 729)

Royal Numico had clearly analyzed each of the aspects of the acquisition and what the environment was like at the moment. They knew that their distribution network was commendable and would a lot of value to the Numico Company as a whole and help with making more sales. They also analyzed their current market share to understand the environment and sought to expand it with the acquisition. They also analyzed the buyer and supplier power. “WE bought the US companies and their distribution channels to be in a position to sell our clinical and diet foods on a large scale. We did not buy them just for selling vitamins…More than half of the turnover in the USA was diet and sport nutrition.” (Eppinks 729) They knew that they had to get their hand on all the suppliers so they can distribute their product effectively and they knew that the product was being sold because of the high turnover.

An entry and exit barrier analysis is a must according to Porter’s model. In their annual report they did not overlook the risks attached with the acquisition. “First of all, Numico focused on the production of specialized nutritional products. This policy involves certain risks regarding the vulnerability of these products and the target groups which there are aimed at, including babies, patients and people with specific nutritional needs. (Eppinks 730) They evaluated their target markets and realized that there was some vulnerability to sell to the target markets. “The second risk was the increasing foreign exchange risk from the growth of the activities in the USA. Numico drew up its balance sheet in euros; a change in the rate of the dollar relative to the euro has a positive or negative impact on the sales reported. The same change would have the opposite effect on the value of debt if it was incurred in US dollar.” (Eppinks, 730) They knew that the environment consisted of incessant fluctuations in the currency rates and that sales would get affected.

An environment analysis helped them understand that if the economy went up they result would be great but any threats to the economy would have a fatal consequence. “Finally, the board recognized that sales of nutritional supplements were more sensitive to economic fluctuations rather then their traditional products. However this effect was somewhat reduced because consumers were becoming increasingly conscious of their health and the importance of balanced nutrition.” (Eppink 730) They understood that although there were economic barriers their target market had become more health conscious and as long as there was a need for the product they would be successful. Royal Numico carried out a good environmental analysis although it might be questioned if it was good enough. Both the acquisitions were sold eventually either because they were failures or just not in line with Numico’s new strategies.

Analyzing the Suitability of an Acquisition

There are eight steps to checking the suitability of an acquisition (Steps to a successful acquisition 2005):

Choose Target Spaces

After analyzing the company environment the company can understand where its strengths lie and where the weaknesses lie. A SWOT analysis can tell the company where they stand currently and where they should go form there. A gap analysis should be conducted to see the difference between where they are where they want to be. In Royal Numico’s case they were successful in their country but they wanted to expand to the United States. Henceforth, they settled in the idea of an acquisition that would give them a strong distribution channel and a larger product line.

Develop Target Profiling Criteria

Once they company realized that they wanted to acquire another company they had to choose which one would be the best. The acquisition must be in line with the original goals, the mission and the vision of the company as a whole. The location of the company, it’s position in the market, and its supply and demand functions have to be analyzed to paint a clear picture of where the company is right now and where will it go after the acquisition.

Collect Information and Rank Targets

Research and development is a big part of making decisions because it ends up being one of the most important tools. This aspect was already inscribed in Royal Numico, henceforth they could easily analyze their targets and calculate the risks. One aspect of collecting information should be consulting critics and taking outside advice. Rooji made three criticisms to the acquisition of the Rexall Sundown which were most likely ignored because later these factors come back and haunt Numico and result in the sale of Rexall Sundown.

Approach Targets

Approaching targets is a difficult task because people react to things differently in different countries. Since Royal Numico’s acquisition was in the United States it would have to thoroughly analyze the American publics buying methods. As stated earlier the company knew that there were risks involved and reaching out to the target market would be quite vulnerable. Since they knew that reaching out to targets was quite venerable they should have created a strategy to eradicate that vulnerability or come up with a plan to handle it. The suitability of an acquisition also depends on its feasibility. Although a lot of the things sounds attractive and Numico had enough money to buy the both the companies they should have researched how this would affect the target markets.

Investigate Targets

In order to minimize these risks they company had to analyze the target markets and they found that the American consumer had a health conscious mindset and they would nutritional supplements and related products. Once again paying attention to Rooji’s analysis would have been beneficial here because they failed to realize that dietary supplements were based on fads that would come and go and depended heavily on the economy. It is not wise to simply launch and idea or a strategy only because a few aspects seem positive. Each negative or incomplete area of information has to be completed and analyzed thoroughly.

Determine Valuation, Negotiate and Set Deal Terms

They acquired the company for 2 billion pounds in the form of shares, bonds, and other payment methods. (Eppink 729) The GNC merger was one of the largest one in the history of nutritional foods and banks like JP Morgan backed up Numico’s payment in cash. The sale of a company is just important as the acquisition because if the acquisition does not work out well a sale is inevitable. In my opinion the future value of the acquired company should be calculated if the strategy doe not go as planned. This would give a rough estimate of how much the company might loose. The company could use this information to evaluate and set aside funds from the profits to cover future losses so that if the unfortunate event of selling an acquisition does happen the company does not end up being in a huge loss like Royal Numico eventually did.

Perform Confirmatory Due Diligence and Close the Transaction

To successfully close a deal there must be a written set of responsibilities established so that there are no conflicts after the acquisition. Each person in the company should know their role and be aware of what they have to do in order to meet the long term goals of the company. All the documentation should be taken care of and should be double checked for accuracy.

Integrate the Companies

Acquisition will allow the companies to work together as one in a mutual relationship of benefiting each other. Integration has to begin right away to the acquired company can achieve all the goals of the parent company.

Evaluate the acquisition of the nutritional business “The acquisition of General Nutrition Companies (GNCI) by Royal Numico, N.V. this month could be the start of a far-reaching consolidation in the troubled nutritional and natural products industry… Midsized firms with revenues of $100 million to $750 million, such as Rexall Sundown, Twinlab, Nutraceutical International, NBTY/Nature’s Bounty and Weider Nutrition, are possible acquisition candidates, given the generally low valuations accorded to nutrition and natural products companies…a product glut at retail has led to disappointing sales and earnings for a number of industry leaders, with nutrition stocks badly lagging the overall market.” (Product glut 1999) These are some of the headlines that were circulating in 1999 preceding Royal Numico’s acquisition of Rexall Sundown. Clearly the lagging market was in indicator of expanding internationally and to earn a higher market share.

“Major baby-food supplier Royal Numico said it will pay $1.75 billion in cash for Pittsburgh’s General Nutrition Companies (GNC). Executives of the Dutch group said the merger would result in the world’s largest company devoted exclusively to nutrition. GNC, which operates 4,000 stores in the US and other countries, announced last month it was buying an 8 percent stake in drugstore.com, an online prescription retailer.” (Business & Finance 1999) The large summed acquisition clearly highlighted that Royal Numico saw many benefits especially when “General Nutrition’s board of directors has unanimously approved the merger agreement in which Royal Numico will pay $25 per share for all outstanding shares of the company in a transaction valued at about $2.5 billion.” (Matta 1999) For Numico this acquisition meant two things: a higher market share that would a leading position in the market and expanding the product line with GNC using research and development. (Eppinks 728)

Numico followed the eight successful steps of acquisition when it went after GNC. It set certain goals, evaluated target markets, analyzed results and in the end ended up accomplishing what it was after: “As a result of intensive active component research development, Numico has developed a range of specialized nutritional supplement products. The acquisition of GNC provides Numico with the world’s leading brand and the largest distribution network in the US to sell these products without significant additional marketing expenses.” (Eppink 729)

“ROYAL NUMICO NV, a Dutch specialty foods company, will acquire Rexall Sundown Inc., a major US manufacturer and marketer of nutritional supplements and consumer health products. The transaction is valued at roughly $1.8 billion, or $24 per share, including the assumption of about $114 million of Rexall Sundown’s net debt and the value of its outstanding stock options.” (Mirasol 2000) According the Numico the acquisition would help the company penetrate the US market through dietary supplements and “strengthen its position as the global leader in specialized nutrition products.” (Mirasol 2000) This acquisition was the third one on Numico’s list and gave it the title of “the world’s largest nutritional supplements company.” (Mirasol 2000) The acquisition was finally made for “2.7 times sales, or $1.77 billion.” (Cohen 2002)

One thing to watch out for in the Rexall Sundown aqusition was that it was related to dietary products. According to Theo van Rooji this would pose a lot of non traditional challenges. “First of all, this new market was one with much more influence from fashionable developments. More over, he considered these products to be much more income elastic and therefore more dependant on economic cycles. Finally the competititors were often smaller companies with sometimes unpredictable and ‘wild’ behavior.” (Eppink 729) This acquisition was not as risk proof as the earlier one and posed many challenges. Anything in the dietary product category is close to a fad. Although people are becoming more and more health conscious they still look for quick ways to reduce weight and when one product gets old they jump to the next one. This is apparent in the American market because it is easy to see that Jane Fonda got pushed aside by the Tae-Bo guy, then he got pushed aside by home appliances, which then got pushed aside by diets that wouldn’t require exercise. Within these diet plans we first had the South Beach and tomorrow we might have the South Shore. Rooji’s observation is completely succinct in that these products are like fads and highly dependant on some sort of phantom following that might die down immediately and without notice.

Evaluate the disposal of the businesses – was the disposal a mistake?

“Dutch conglomerate and specialty foods company Royal Numico announced that it will sell Rexall Sundown, the largest supplier of vitamins and supplements to Wal-Mart stores. Numico blamed Rexall Sundown, which it acquired in 2000 for $1.8 billion, and GNC, the supplement retail operation it acquired in 1999, for the conglomerate’s $1.45 billion third-quarter loss.” (Slumping Supplement 2002) Although the analysis of the strategy presented that although there were risks the acquisition would be suceeful. This shows that even a environment analysis cannot show what the future might hold but it can be a good predictor. According to Rooji’s observations the dietary supplement posed all the challenges he predicted.

The acquisition did not accomplish any of the company’s goals and instead they ended up in a loss.According to the case study “During the presentation of the financial results for 2002 in March 2003, Numico announced that the sale of Rexall Sundown was well under way. Rexall Sundown was characterized as a low-growth/low-margin business. Given the new strategy which focused on high-growth-high-margin business, Rexall Sundown no longer fitter both the criteria. GNC was put on probation; it was a high-margin, but a low-growth business.” (Eppink 731) Along with Rexall Sundown, GNC also became stagnant. Either that or none of their current acquisitions were in line with their new strategy of high growth and high margin.

This was understandable in the case of Rexall Sundown because it posed many risky challenges to begin with. The dietary supplements were highly dependant on fads and stability was very hard. Surprisingly, “In July 2000 FTC charged Rexall Sundown with making false and unsubstantiated claims for its Cellasene product as a purported cellulite treatment. In March 2002 a Camden County jury returned a verdict in favor of New Jersey consumers in a class-action that alleged Rexall Sundown had marketed and labeled its Calcium ‘900’ and Calcium 1200 products in violation of the New Jersey Consumer Fraud Act.” (Slumping Supplement 2002) This unfortunately might have been one of the reasons Rexall Sundown was not doing well and Numico found out. Even if Numico was not aware of the infringement of the law it was best that they got rid of Rexall Sundown before they got into further debt: “The Dutch baby food maker Royal Numico sold Rexall Sundown, a vitamin supplements company in Boca Raton, Fla., for $250 million in cash yesterday. The buyer NBTY Inc., a manufacturer and marketer of nutritional supplements based in Bohemia, N.Y. Royal Numico, which owns the GNC vitamin stores, is heavily in debt after a series of poor investments and needs to raise 650 million euros ($746 million) by the end of 2004 to meet some of its obligations.” (Crouch 2003)

“On 17 October 2003 the sale of GNC was made public. It was stated that there was no strategic fit Numico. It was a retail brand, with little product overlap and synergies limited to research.” (Eppink 731) Reasearch and development was one of the main goals of the acquisition and that both the companies would benefit each other. The entry strategies into GNC were fool proof and there were barely any risk factors but for the most expensive merger in the nutritional foods sector to fail something must have been over looked. “Moreover, Numico’s management could now focus their time and financial resources on its high-growth/high-margin business of baby food and clinical nutrition. GNC was sold to Apollo Manaagement for US$750m in a deal completed in 5 December 2003.

The estimated impairment was 450 million Pounds. A press statement issued by GNC said that “Apollo…sees tremendous value in the power of the GNC brand.” (Eppink 731) The sale of GNC was somewhat surprising because earlier there were no risks associated with the strategy and the board of directors had said yes to the sale immediately and unanimously. Everything was pointing in the right direction and unlike Rexall Sundown no negative information was found pertaining to the risks of the strategy either. It is best to conclude that GNC brand was not a failure but just not in line with the new strategy of Numico where as Rexall Sundown could have easily been a complete failure.

The Royal Numico case study can be used as a process of learning because they company makes mistakes that it failed to predict. A more in depth analysis of the environment might have led them to better information and prevented them from buying the other companies in the first place. In both the acquisitions their top goal was to become the market leader by acquiring someone else’s goods. In my opinion, they become too one sighted and failed to understand that acquiring companies with huge sums of money will not lead to a higher market share. There has to be a strategy for every SBU and every department and every product line. It takes more than a give and take relationship to be successful in the business world. You just can’t buy your market share you have to go out and grab it.

References

“Business & Finance.” Christian Science Monitor 91.154 (1999): 24. Academic Search Complete. EBSCO.

Cohen, Judy Radler. “Pharmaceutical Deal Multiples: On the Rise. (cover story).” Mergers & Acquisitions Report 15.3 (2002): 1. Business Source Complete. EBSCO.

Crouch, Gregory. ” COMPANY NEWS; ROYAL NUMICO SELLS REXALL SUNDOWN FOR $250 MILLION.” Business. 2003. New York Times. Web.

Matta, L. Matthew. “Duo To Feed Market With Royal Numico Deal.” Bank Loan Report 14.30 (1999): 2. Business Source Complete. EBSCO.

Mirasol, Feliza. “Numico Acquires Rexall Sundown To Form Leading Nutrition Supplier.” Chemical Market Reporter 257.19 (2000): 23. Business Source Complete. EBSCO.

“Product glut may spell trouble for supplement hucksters. (Cover story).” NCRHI Newsletter 22.5 (1999): 1. Academic Search Complete. EBSCO.

“Porter’s Five Forces.” Strategic Management. Quick MBA. Web.

“SLUMPING SUPPLEMENT SUPPLIER FOR SALE.” NCAHF Newsletter 25.6 (2002): 2. Academic Search Complete. EBSCO.

” Steps to a Successful Acquisition.” The Elite Advisor. 2005. CEG Worldwide. Web.

“The Strategic Planning Process.” Strategic Management. Quick MBA. 2008. Web.

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