Starbucks it Is Recommended That Starbucks Acquires

Starbucks

It is recommended that Starbucks acquires Caribou Coffee (CBOU). Caribou is a direct competitor to Starbucks, which is the appeal. Caribou's existing locations can be either closed out or converted to Starbucks locations. Caribou is a strong regional brand with 541 coffeehouses (MSN Moneycentral, 2012). The company has a very similar business model to Starbucks, but with less size and arguably less business sophistication. Caribou is, nonetheless, a successful company that is now turning a profit ($35.22 million in FY2011) after many years of losses.

Caribou stock is currently trading at $16.93 per share, giving the company a market capitalization of $352.96 million. The offer for Caribou will need to be higher. An acquisition premium of 10% is reasonable (McClure, 2012), however, because there is only limited opportunity for synergies to add value to Caribou, and because Caribou stock is already trading near its all-time high. A 10% premium would give a purchase price $388 million.

Starbucks has $2.273 billion in cash, so it could use cash to pay for the purchase. Another option is to use shares for the purchase, although the company does not have any treasury stock on its books. In either case, Starbucks can easily make this purchase with equity. In addition, there are considerations for not using debt. One such consideration is that Starbucks only has a minor amount of long-term debt ($549.5 million). The company has not taken on any additional long-term debt recently, and this purchase would nearly double the amount of long-term debt that Starbucks had on its books. Moreover, it is better that capital projects have their funding aligned with their useful life. This purchase, therefore, should be done with equity or at worst a debenture. More likely, however, equity would be the better choice given the small size of the deal and the desire of the company to avoid major changes in its capital structure.

3. A second choice for a merger would be Panera Bread. A much larger company than Caribou, Panera is valued at $5.13 billion, so it would almost certainly be a stock-based purchase, or a mix of stocks and cash. Panera is a good purchase because it is a complementary business. Starbucks coffee would add value to existing Panera outlets, and Panera's food could help Starbucks. However, these companies could come together without an acquisition, and Panera is at an all-time high valuation that, given its price tag, is probably more than Starbucks would want to pay right now for this business. As a result, Panera Bread would be a secondary merger target.

Financing a Panera deal would definitely be trickier, and there is much greater risk with such a deal as a result. If Starbucks took on some debt to fit Panera into its company, Starbucks would need to extract substantial synergies to justify the purchase. Panera is large enough that there is some direct competition between the two companies and it is unknown how the market would respond to the merger. And as noted, while with Caribou there is no complementary business opportunity so a takeover would be warranted, Starbucks can do business with Panera without actually buying it. To justify buying Panera, Starbucks might prefer if Panera was poorly run and undervalued. That is simply not the case today.

A third choice for a takeover might be a smaller, independent coffee company like the kind that find their way to the Whole Foods shelves. There are a lot of these small companies, and they are easy to acquire. The rationale would be to acquire a premium brand. For Starbucks, this option is less interesting than the others because the company sees its own brand as premium and typically thinks bigger than merely snapping up small coffee companies.

4. What I learned the most from this exercise is the value of thinking strategically about mergers and acquisitions. There are two different approaches - the strategic and the financial and you must consider both of them in order to find the best options. For example, the second choice deal was too larger and the third choice deal too small. The first choice deal was of the right size to be important to Starbucks, but also to allow the company to finance it easily. Strategically, the deals also took on different dimensions.