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Team Apples Final Paper 1

Team Apples Final Paper

Rivier University

Executive Summary

After careful review, it is recommended that our company, Perdue Farms, move forward with bidding on the purchase of Smithfield Foods. We have conducted immense research into the following aspects both organizations:

· Market Conditions

· Branding

· Financials

· Culture

· Supply Chain

· Government Regulations

· Risks

Our assessment indicates this to be a favorable acquisition for Perdue Farms. There is ample market opportunity, with increasing demand in the pork industry up to as much as 60% by 2050. We have compiled how this acquisition will be marketed to bring brand awareness to our organization. From a financial perspective, we are recommending debt financing as interest rates are still at historic lows. Our plans to maintain and improve culture within organizations will be executed through our employee engagement strategy. We will leverage both Perdue Farms and Smithfield Foods supply chains to create a best-practices efficient way to deliver products to our customers, as well as receiving products and services from our vendors. We expect there to be government regulations that our legal team will need to resolve. However, our overall risks remain low compared to the upside for our organization moving forward.

Smithfield Foods was one of America’s leading food companies derived from centuries of United States tradition. One of the most popular products Smithfield foods sold in the United States was their iconic holiday ham. The ham flavoring was derived from a curing process Native Americans taught settlers five centuries ago. In 2013, when a Chinese firm bought Smithfield Foods, it irritated many patriots and protectionists. Naturally, this reaction was to be expected; but behind the American pride was a different reality many people had not realized. At the request of the Chinese government, Chinese companies have been urged to launch a global buying spree. As part of a new phase in their unprecedented economic experiment, Chinese companies are targeting a resource that is widely forecasted to become dangerously scarce in the coming decades - food (Halverson, 2015).

Foods, such as soy, wheat, and corn, are dwindling as the world’s population continues to grow. Major concerns stem from the fact that most other food products, such as pasta, bread and livestock meat are derived from these foods that are dwindling. At the same time, according to a United Nations study, global warming is destroying up to 2 percent of the world’s crop production every decade. By 2050, with the global population is expected to reach 9.8 billion and food supplies will be under greater stress. Demand will be 60% higher than it is today, but climate change, urbanization, and soil degradation will have decreased the availability of arable land. The Chinese government is already is dealing with food shortages, as many people are starting to eat more as they move from poverty into the middle class. The government is pushing Chinese businesses to acquire agricultural resources from around the world, including the United States (Tan, 2019).

Smithfield Foods, as a United States based company, processed 32 million pigs a year. On average, one pig moved through a Smithfield Foods processing plant every second to be prepared for consumption. Smithfield supplied multiple restaurant chains and many grocery stores in the United States. It represented the height of America’s industrialized farming, owning everything from hog farms in Iowa, to the slaughterhouses outside Chicago, warehouses, and distribution trucks across the United States. With the Smithfield purchase, a Chinese company now owns 1 in 4 pigs raised in the United States (Halverson, 2015).

The acquisition of Smithfield Foods helps China carry out their government’s plan to improve the quality and scarcity of their food supply. The United States government should be taking immediate action to follow suit and prevent food insecurity in the United States. The United States food industry is too vital of an industry for the United States government to allow it to be disrupted by Chinese government interests. If Perdue Farms is approved to buy back Smithfield Foods from China, the United States will be in a better position to retain more United States farmland, livestock, and other agricultural resources needed to maintain food security in the Unites States.

Market Conditions – Competition

Market conditions for the meat industry are showing positive trends and opportunities in the upcoming year. Global strategist, Justin Sherrard of Rabobank, anticipates more competition for the United States in the export markets due to increase production in most parts of the world (Einstein, 2018). In Mexico there is growing competition for pork and poultry markets. Throughout China and Asia there appears to be growing competition in poultry.

The Trans-Pacific Partnership was an agreement that covered tariffs on goods and services, intellectual property, and other aspects of global trade. The goal of this deal spanning several continents and covering 40% of world trade (McBride, 2019). President Barack Obama had entered the US into this partnership to ensure the U.S was the one writing this century’s rules of the world’s economy, and not countries like China (2019). In 2017, President Trump withdrew the U.S from the partnership claiming it would push manufacturing jobs overseas (2019). There have been talks of re-entering into this partnership which according to global strategist Sherrard, would be very positive for the meat industry’s opportunity in global trade (Einstein, 2018).

SWOT Analysis Perdue Farms & Smithfield Foods

Strengths for Perdue Farms include strong marketing and ability to charge premium prices for its established quality. Another strength is it’s selective breeding that and has developed more quality chickens (Perdue Farms, 2019). Weaknesses contain change in management style from centralized to decentralized along with a decline in the chicken market. Opportunities for Perdue are the rise in popularity of turkey and chicken with current diet trends and industry consolidation is becoming more popular opening a door to acquire other industry competitors (2019). A threat to Perdue is it’s smaller global footprint than its competition that are mostly operate across the globe.

The strengths for Smithfield foods are being the top pork producer and processor and having operations 26 U.S states, Mexico, and 10 European countries (Fusaro, 2018). It’s positive hog production fundamentals in Europe are fueling profitability internationally. Weaknesses include an increase in prices for feed ingredients and fluctuations in foreign currency exchange rates (Zigu, 2018). Some opportunities for Smithfield Foods include meeting consumer demands of better for you foods that are lean protein and include natural ingredients, along with innovating it’s packaging to differentiate for quality and convenience (2018). Threats include cost increases due to rising interest and exchange rates and pressure associated with food safety (2018).

Competitor Profile: Tyson foods.

Tyson foods is based in Springdale, Arkansas and is the world’s second largest processor and marketer of chicken, beef and pork. Tyson operates through four segments, chicken, beef, pork, and prepared foods and it annually exports the largest percentage of beef in the United States. Tyson’s annual revenue is $40 billion (Tyson Foods, 2019).

Competitor Profile: Pilgrims.

Pilgrim’s is a leading global poultry and prepared foods company and has 36 production facilities and 16 prepared foods facilities across the U.S, Puerto Rico, Mexico, the U.K and Continental Europe. The company is Brazilian owned Pilgrim’s is headquartered in Greenly, Colorado and has an annual revenue of $10.7 billion and 54,000 employees (About Us, 2019).

Competitor Profile: Hormel Foods.

Hormel foods produces a range of meat and food products and sells these products throughout the United States and Internationally. The company operates through four segments, grocery products, refrigerated foods, Jennie-O Turkey Store, and International. Hormel foods is headquartered in Austin, MN and have 20,000 employees worldwide. Their annual revenue is $9.5 billion (About, 2019).

Competitor: JBS Foods

JBS Foods is the leading processor of beef and pork in the U.S with more than $50 billion in annual sales. JBS is headquartered in Greenley, Colorado and is a majority shareholder of Pilgrim’s Pride Corporation. The company sells its products to more than 105 countries on six continents and employs more than 100,000 team members (JBS, 2019).

Branding

Purchasing Smithfield Foods, will include a complex marketing campaign that innovatively markets the acquisition to maintain brand strength while also ensure new product success. Since Pork was the main product of Smithfield Foods, the four points of branding success will be “Perdue saves America”, Perdue Pork, Summers of Perdue, and brand separation. The goal of the branding campaign will be to gain respect surrounding the acquisition and bring awareness to the new products. Additionally, the marketing campaign will have consumer involvement using fun slogans that can trend on social media and attract ads.

“Perdue saves America” will be the focal marketing point surrounding the acquisition. Buy American and isolationism is a position that the current regime is taking in politics. Though Perdue will by no means take a political stand, commercials will be used showing a chicken saving a pig from China. The message will be fun and light that Perdue is establishing American dominance, protecting American jobs, and promoting American business. Perdue saves America is innovative because not many businesses can say they are trending in the domestic direction; many businesses are outsourcing and globalizing so Perdue can take gain consumer support through their unique acquisition.

To coincide with these commercials, Perdue will take advantage of social media by employing a Summer of Perdue social media campaign. The company will reach out to influencers on social media and provide funding to through parties and cookouts as long as Perdue chicken and pork is at least visible in the picture. Perdue will sponsor as many summer events out there and provide free samples to the people. Additionally, Perdue will host a Perdue Pork contest. The individual who makes the most like recipe with the new product will win one million dollars. This part of the branding campaign will get the word out to consumers and allow them to provide word of mouth marketing.

Perdue Pork will be an experimental marketing strategy that will work oppositely with the Brand separation strategy. Perdue will employ some of the Smithfield Products into the Perdue brand to make Perdue Pork while maintaining some of the products with their original Smithfield name. A study will occur to see if the new Perdue name or the original name will perform better. This will allow the company to accurately know whether they should keep the old name or lean on the Perdue brand name for success.

The combination of these branding strategies will allow for the company to reach consumers of all varieties. The campaign will have daily metrics to monitor success like sales, views, hashtags, and tweets. After a couple months the company can evaluate whether Smithfield Products should remain separate from the traditional chicken brand or create a powerhouse Perdue family of products.

Financing Options for Smithfield Foods Merger and Acquisition

The reacquisition of Smithfield Foods back to U.S Corporation from the recent Chinese buyer and current owner relates to various financial options such as value of assets, liabilities, firm value, and source of financing. The financing options available for the acquisition are important to consider because the company is being reacquired and the business is seeking to achieve profitability. The first financial consideration is the total value of assets. The value of assets is important for consideration as it influences the acquisition price. The acquirer sets the prices based on the value of total assets (Bena & Li, 2014). This covers the value of property, plant, and equipment, cash balance, and value of inventories, accounts receivables, and short-term investments. Under the IFRS guidelines, the acquisition price should be based on the prevailing market value of assets (Gaughan, 2010). It is also important to establish the book value of assets for the calculation of total value of firm (Bena & Li, 2014). Understanding the value is important in the reacquisition of Smithfield Foods from the current Chinese buyer.

Secondly, the value of liabilities is important in the acquisition and mergers processes. The IFRS requires that the acquisition price of an entity should be based on the net value of assets. This represents the difference between total assets and total liabilities. The liabilities represent the financial obligations that the target company has on the external and internal financial lenders (Custodio, 2014). It is important to consider the value of liabilities in respect to assets for the Smithfield acquisition. Finally, the sources of funds is an important consideration for the acquisition of Smithfield Foods back to the U.S Corp. The funding sources available include debt and equity financing. It is recommended that the company should embrace debt financing over equity to maintain strong control of the organization.

Culture

Work culture plays an important role in an organization. Its main goal is to extract and maintain the very best out of the employees. It is imperative that employees enjoy their workplace and over time develop a sense of loyalty towards it. In order to achieve this, the organization must offer a positive work ambience in order to allow the employees to concentrate on their work.

When there is talk about the success (or failure) of a merger/acquisition (M/A), things are looked at from a big-picture perspective using financials as the main unit of measure while the human element is often lost or ignored. But what happens when an M/A is announced? What becomes of the work culture of those employees who are now affected? Can an M/A really be considered successful if employees are quitting their positions and morale is at an all-time low?

An organization’s leadership team needs to understand the impact an M/A may have on their employees and commit to prioritizing the employee experience during such a change. Employees are imperfect and fueled by emotions which can create an unhealthy environment and disengagement, and they will experience a number of feelings that need to be addressed. Creating an employee engagement strategy that accounts for the unique emotions the employees may experience in their work culture is a necessity. Some areas that apprehensive employees may experience, and how to try to mitigate them, are:

Anxiety – Once the announcement is made, a massive and abrupt disruption from the norm can create a flood of questions as well as employees may be engulfed by a cloud of uncertainty, fear, lose productivity, become stressed out, or even quit. These can negatively impact the work culture. Leadership should have an internal communication plan that is multi-tiered and intentional to add clarity and ease worry. As time goes on, leadership needs to continue to listen to their employees and address any new questions or concerns that may develop along the way.

Selfishness – Employees may feel threatened or uncertain about their future, and in the interest of self-preservation now only think about themselves and have little regard for others, crippling essential team dynamics. Management can fight selfishness with relationship building by creating opportunities for teams to collaborate and remind everyone they all need support.

Grief – This can come in any form such as a co-worker has to leave, the work culture they are accustomed to dissolves or changes drastically, or their own job role may change. These can seriously impact an employee’s psychological health and feelings of denial, anger, sadness, etc. can emerge as they try to deal with the loss of meaningful parts of their work. Leaders have to be human in their approach to these situations knowing it may take some time for employees to accept the change. Driving excitement about the M/A is fine, but management needs to be sensitive to the fact that some employees are genuinely feeling a sense of loss.

Pride – It is not uncommon for one company to be more dominant than the other and superiority can rear its ugly head. Outside of market share and profit, an M/A is designed to build one unified work culture from two. Pride, on either side, can create division and keep the new work culture from forming. Being condescending to new team members or hoarding knowledge is defeating. Management should find those who are proud and excited about the new M/A and have them become mentors or teachers to the newly formed teams.

Excitement - Not all employees will be apprehensive, negative, or despondent with an M/A. There will be those who are excited about it and the positivity it can bring to their work culture. Leaders should form task forces with these individuals as they would become good ambassadors for the change and can help bridge the gap.

Mergers and acquisitions will continue to be a key strategy for organizations looking to attain greater market share and increase profits. Change in work culture will be a huge part of any M/A and management needs to have their own employee engagement strategy in place. It is the management’s empathy for what their employees are feeling that will grow the positivity needed to work through hard changes. Remembering that everyone is human during the merger/acquisition could be the ultimate difference between success and failure.

Culture, cont’d

Every company’s success depends upon the efficient work of its employees and the efficiency rate of employees depends upon the board of the company that how much facilities does employees are getting and how happy they are with their jobs. Same thing goes for the Perdue chicken and Smithfield foods. We can determine the success rate to some extent of these both companies on the basis of its former and current employee’s reviews. According to the Anne M. Mulcahy, former CEO of Xerox, “Employees who believe that management is concerned about them as a whole person – not just an employee – are more productive, more satisfied, more fulfilled. Satisfied employees mean satisfied customers, which leads to profitability.”

According to the brightermonday.co, indeed.com and glassdoor.com, these are the following five generic factors which plays an important role in the happiness rate of employees in any company:

1. Praise and Recognition: This one is probably the most important factor for the happiness of the employees in any company. Every employee wants to be praised for his good work and employees tend to seek the recognition from the company when they are working hard for the objectives and vision of the company. So praise and recognition plays an important role in the happiness of the employees.

2. Meaningful and Interesting Work: The employees who are tasked with the jobs they love to do or find more interesting always yields the highest performance and efficiency. Salary is not everything as employees who love to do their jobs tends to stick around more. (Shu Zhou, 2013)

3. Work-Life Balance: Companies needs to provide an atmosphere to its employees where they can have a balance between their work and personal life. This balance requires that employees gets emergency leaves, friendly environment with in the company and ability to do work from home when necessary.

4. Organizational Trust, Culture and Environment: This factor is also very important as it plays an important part in the relationship of employees and managers. The employees who like to work independently will be happier at the company which promotes the culture of individual performance.

5.  Professional Growth and Development: The salary is not everything for any employee. The employees wants to see their professional skills honed and they want to grow professionally with the passage of time. So it is up to the company to keep the employees busy with critical responsibilities or monthly training programs to help them grow professionally.

We can deduce a number of results from the reviews of former and current employees of Perdue chicken and Smithfield foods on indeed.com and glassdoor.com. The employees at both the companies think that working hours are very hectic and the employees are generally unhappy with the supervisors and the mangers so board of both companies needs to attend this matter. The positive change could be that there should be policies to maintain the work-life balance of employees and managers and supervisors needs to appreciate the employees for their good work and build a more professional and friendly relationship.

Following are the average ratings given by employees of Perdue chickens:

Following are the average ratings of Smithfield foods given by the current and former employees of the company:

Supply Chain

Managing supply chain is the most integral and fundamental part of any organization. Supply chain simply means all the processes and factors that involves in the creation of a product and then its distribution and sale in the market. A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished productss, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm. (Ganeshan & Harrison, 1995) Supply chain management consists of three important levels; strategic, operational and tactical.

The strategic level usually deals with the creation of the product, handling the vendors and suppliers. So how can both companies, Smith Foods and Perdue Chickens, get benefits from each other’s supply chain strategy?

First of all we will have to sum up the common products the both companies are making because the common products requires same raw materials which are available from the same type of suppliers. So the Smith foods gets all of its raw materials for dairy products from different suppliers all over the country but it can get those raw materials from the Perdue Farms e.g. eggs.

On the other hand the Perdue Farms requires the chicken feed and they don’t make the feed on their own. So Perdue chicken has to rely on the outside suppliers for the chicken feed. The Smith Foods has a product line of chicken feed as well so Perdue chicken can always use the product of Smith foods as their raw material.

Apart from supplying the raw materials to each other both companies can share the logistics department for the supply of the products into the market.

Government Regulations in Mergers and Acquisitions

The reacquisition of Smithfield Foods from the Chinese buyer back to U.S captures several government regulation issues that will affect the success and valuation of the company for acquisition. The major government legislation issue relates to the cross-border regulations on mergers and acquisition (Heinemann, 2012). The fact that Smithfield Foods is being reacquired from a Chinese buyer introduces the procedures to the US and Chinese regulations. The government restrictions on the cross-border restrictions will affect the process and acquisition value (Alimov, 2015). The controls also increase the cost of acquisition. The company’s management will undergo a series of legal issues that may prolong the process and make it costly (Green, 2016). The regulations cover the labor market. For instance, the absorption of employees in the Chinese plant back to US introduces legal issues such as compensation and regulatory taxes. The political risks affect the reacquisition of Smithfield Foods. The trade wars between China and US also affects the acquisition process based on costs and regulatory requirements.

The termination of $240,000 for Smithfield by the USDA also impacts the acquisition process. Both China and U.S apply different laws on contractual agreements that affect the acquisition process. In the reacquisition of Smithfield Foods, the incorporation of the terminated contract into the valuation affects the pricing and procedures. The renegotiation of the contract when the company is under the U.S management is also a significant issue in the process based on the applicable laws and procedures (Luo, Xue & Han, 2010). Finally, from a government perspective, the taxation laws play a critical role in the reacquisition of Smithfield Foods. The differences in the taxation are significant in the negotiation and incorporation in the deal. It influences the acquisition costs and firm valuation.

Risks

A corporate merger can have huge effect on a company’s growth and long term goals. Merger can be profitable and beneficial for the company as it helps its business to expand. Companies also engage in merger & acquisition to dominate their sector. The acquisition of Smithfield Foods could lead to potential risks and challenges for Perdue farms as the company’s strength revolves around chicken production in the US. Perdue farms is one of the largest poultry producers in the U.S. and one of the world’s leading producers of organic chicken, while on the other hand, Smithfield Foods is a meat processing company and the world’s largest hog raiser and pork producer.

Risk Name	Description	Severity
1. Overpayment	· Perdue may have to overpay and come up with huge budget to acquire Smithfield Foods since it is the current biggest asset of Shuanghui International.	High
2. Culture Assimilation Challenges	· Corporate cultures of the potential merging companies differ from each other so it may pose a risk to the company’s growth.	Moderate
3. Target Achievement	· It might be difficult task for the integrated companies to achieve a desired target for sales and marketing due to differences and cost saving and economies of scale.	Moderate
4. Losing Chinese Market	· The deal might largely affect the exports of pork from US to China as Shaunghui International could potentially replace Smithfield / Perdue as pork supplier to China since China is one of the largest pork consuming country.	High
5. Employee anxiety, and engagement issues	· The process may lead to high expectations from employees that could lead to anxiety and might have differences in moral values. Job security would be reason for concern as there is a chance of layoffs.	Low

The acquisition poses great scope for growth through expansion and diversification. The companies should foresee the challenges that might arise due to the acquisition. It is vital for the company to obtain a professional advice before the acquisition to manage the merge effectively and efficiently and to prevent the above mentioned potential risks and losses that may face in the process.

References:

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