Commerce 372 - Case #3 Questions

EF5042- Individual Case Questions:Eskimo Pie CorporationDue by Friday, 17 October 2014

You are responsible for handing in written answers to the following questions drawn from the Eskimo Pie Corporation case. You can work with others on this assignment, but each individual must hand in their own set of answers.

1. Why do the managers of Eskimo Pie want to find an alternative to the Nestle acquisition?

The President of Eskimo Pie and its management staff were afraid of losing its independence or even disappearance after the Nestle acquisition. The acquisition would mean the disappearance of 70 years stand alone operation history of the company. It was forecasted that Nestle would consolidate its ice-cream business by restructuring Eskimo Pie. The restructure would influence the position of Eskimo Pies headquarters, management staff and employees who built up long-term relationship with this company. Nestle might also change the companys business direction after the acquisition. Nestle would terminate all licensing arrangement which were the main business line of Eskimo Pie. In the past record, Nestle terminated the sublicensing arrangement in 1986 after acquisition of Carnation.

Moreover, there were obstacles during the negations of the acquisition. They were argued for the transaction details which fit Nestles expectation in tax condition and the clearance cost of contamination disposed by Eskimo Pies plant. As Reynolds Metals aimed at reinvestment of its core aluminum business by selling Eskimo Pie, the negation obstacles would slow down the acquisition progress. Hence, the managers of Eskimo Pie would like to find an alternative to the Nestle acquisition.

2. Why would Nestle want to acquire Eskimo Pie? Are there potential synergies such as economies of scale? Is Eskimo Pie worth more to Nestle than it is worth as a stand-alone company?

Before the acquisition, Nestle and Eskimo Pie were marketing competitors in frozen novelty industry. Eskimo Pie was the top 3 brand in the industry in 1991. From the passage, the industry growth was slowed down in 1980s. Acquisition of Eskimo Pie would enlarge the market share of Nestle and consolidate its leading role in the industry.

There were potential synergies in the Nestle acquisition from the point of view of Nestle. Eskimo Pie had all-rounded licensing arrangement in the product line of the industry with national network. Eskimo Pie also manufactured ingredients and packaging with plants. Eskimo Pie was succeed in product innovation. Nestle had acquired Drumstick and Carnation before. If Nestle also acquire Eskimo Pie, Nestle could reduce cost and employees in duplicate position by combination of product lines.

3. What would be the capital structure (i.e., debt ratio) of Eskimo Pie after its IPO if Reynolds Metals accepts the two-step transaction proposed by Wheat First?

The debt ratio = (total asset total equity) / total assetThe two step transactions would lower total assets since it withdrew cash and debt. The issuance of common share would enlarge total equity. After the two effects, the debt ratio will be lowered.