Tuesday, May 01, 2012

Should Coke Acquire Monster?

The Wall Street Journal reports that Coca-Cola explored a possible acquisition of Monster, the energy drink company.   Coca-Cola apparently backed away due to the hefty price tag.  Some investors reportedly balked at the premium that would be paid for Monster, and they made their concerns known to management.

I found one particular note in the story quite interesting.  It reads: "Coca-Cola already has an agreement with Monster to distribute some of its drinks, and that could diminish the potential synergies from any deal—and thus Coke's willingness to pay a large premium."   When I teach strategy, I always reinforce the idea that companies need to consider whether a merger is actually required to achieve the benefits of cooperation.  I draw on Williamson's transaction cost theory, and I argue that we have this "markets vs. firms" choice to make.  Do we organize the activity inside the firm (merger), or do we transact with another party through the market (with a contract or alliance)?   In this case, Coke has been working quite effectively with Monster through the market for some time.  The question is:  What additional synergistic benefits will come if they move from this relationship to a merger?   What can they NOT accomplish through their current relationship?  That's the key question in this case.

Beyond that, though, we also have to consider the following:  What are the costs of inaction?  Will Pepsi acquire Monster, and therefore, Coke would lose its current relationship altogether with this leading energy drink firm?  We have seen that story before, in fact.  Coke once considered acquiring Gatorade, and investors (specifically Warren Buffett) balked at the price tag.  Pepsi swooped in and acquired Gatorade instead.  Coke has been a laggard in the sports drink business ever since that time.  So, Coke must consider the question about whether additional synergies exist above and beyond their current relationship, but they also must consider whether that relationship could get disrupted by a rival's purchase of Monster.

1 comment:

Andrew Breton said...

Coke and Pepsi are always buying. Gatorade, Odwalla, Naked Drinks, Fuze, SoBe just to name a few. So, for Coca-Cola there is certainly the threat of Pepsi buying Monster given the last 10 years of history. Although, Monster isn't a healthy product. If Coca-Cola pulled the trigger on the merger, they would increase their market presence in a valuable target market (young people. The only danger in leveraging the current relationship is Pepsi making a play for Monster, now they know that Coca-Cola is mostly out of it.