When you think about it, corporations are no different than consumers. They see the economic writing on the wall, and they react to it accordingly. So it was no surprise when PepsiCo's (NYSE: PEP) CEO Indra Nooyi said she was down on beverage acquisitions in North America. Instead, she'd like to drive profits in an organic fashion. In my opinion, she's basically saying that she doesn't feel that the economy has hit a bottom yet and that she's got time to look around for prospects to add to her company's portfolio.
I think she's probably correct (if she actually is thinking along those lines), but I would add that, if a particularly compelling prospect came along, I wouldn't necessarily reject it in knee-jerk fashion just because the economy is one scary beast. Remember that PepsiCo, or any company for that matter, can buy other businesses for cheap valuations at the moment. Of course, those other businesses know that, and probably are holding off from putting themselves up on the block. So I do realize that being a value buyer in this climate is more complex than it appears to be at first glance.
She's also on the right track in terms of concentrating on growing internally. I don't think companies focus as much as they should on internal growth. As Nooyi pointed out, organic innovation can indeed be the more attractive economic alternative to pricey buyouts.
She sort of contradicts herself, though, when she admits that Frito-Lay might be suitable for buying something. I would offer that the same concept should apply to PepsiCo's snack entity. It's probably best to rely on Frito-Lay brand extensions to drive growth rather than buy outside snack assets.
Frito-Lay does a superb job of introducing different flavors. In fact, some of the experiments it's been doing with the Doritos trademark have succeeded ... with me at least. For example, have you eaten those Doritos Collisions yet? Quite tasty! If the beverage side of the company needs to focus on internal innovation, I would argue that the snack side should do the same. Why look to outside acquisitions on either side?
Statements like the one made by PepsiCo's chief aren't surprising. The deal market isn't great, credit is still an issue, and buyers and sellers alike are cautious about entering any kind of transaction. It's no different than picking individual stocks in this irrational market. Things look cheap, then they get cheaper. PepsiCo, as well as Coca-Cola (NYSE: KO), have to be careful that they don't do any sort of overpaying, because if they don't have an acceptable margin of safety on something they buy, then the slowing economy could wreck the value they derive from the transaction.
For now, most companies are hunkering down and focusing on extracting efficiencies. I recently wrote about Coca-Cola Enterprises' (NYSE: CCE) goal to distribute its beverages in a cost-conscious manner. Companies are not in the mood to buy. It's understandable. If limiting access to acquisitions truly forces corporate cultures to focus on organic innovation, then I like it.
Disclosure: I own Coke; positions can change at any time.
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