The aim of this case study - “Coke Versus Pepsi, 2001” is to analyze the trend of both companies – Coke and Pepsi, after announcement of Pepsi’s acquirement to Quaker Oats, based on the past and forecasted information and materials. This essay would use “Economic Value Added” (EVA) measure, in order to identify the expected values of both companies.
Carolyn Keene, the consumer analyst at mutual fund firm SPL, believed that the value comparison of Coca-Cola and PepsiCo should be measured by EVA. So what is EVA? Economic Value Added is a popular method of value creation developed by Stern Stewart and Co of New York. It is a measure of economic profit. The EVA is the difference between the ...view middle of the document...
Thirdly, EVA is influenced by all of the decisions that managers have to make within a firm - investment decisions and dividend decisions also affect the return on capital and the financing decision also affects the cost of capital. In addition, Using EVA helps the company in monitoring the problem areas and hence taking corrective action to resolve those problems.
However, disadvantages of using EVA as a measure of company performance exist. By using EVA, managers would provide more incentives in getting better performance in short term. EVA depends on the current level of earnings but it does not involve forecasts of future cash flows and does not measure present value. In addition, the measure of EVA is not suitable to compare different projects with different sizes because of its dollar amount.
As the data shown on Exhibit 1- historical EVA and Return Comparisons for Coca-Cola and PepsiCo, Coca-Cola Company has a peak time ($1,814,000) of EVA in 1994 and started to decrease gradually from 1997 to 2000. However, PepsiCo, Inc. has a continually increasing EVA for seven years from 1994 to 2000. Behind the trends, the main factors include the NOPAT, invested capital and WACC.
First of all, NOPAT for both companies have strong correlation with sales revenue and sales volume. To Coca-Cola (KO), the mistake taken by M. Douglas Ivester who is the CEO from 1998 to 2000, lead KO’s bottlers raise the prices. The result of the mistake is a dramatic decrease in volume, and leading to a 41% fall on net income. Therefore, the NOPAT decreased consistently from 1997 to 2000. To PepsiCo, the positive effects of Roger Enrico as a CEO from 1996 to 2000 make the company’s return on equity almost doubled, from 17% in 1996 to 30% in 2000 (Exhibit 2). The main activities that Enrico instituted included selling off the fast food chains such as KFC and Pizza Hut, spinning off the bottling operations and brokered the acquisitions for Tropicana and Quaker Oats in order to make PepsiCo a “total beverage company”. Because of the aggressive steps made, PepsiCo has a variable NOPAT over the seven years.
Second main factor is invested capital. As Exhibit 1 shown, the overall trend of invested capital of KO is upward and seems to maintain the level at around $15,800 MM from 1998 to 2000. However, PepsiCo has an opposite overall trend, whose invested capital is downward.
The third factor, weighted average cost of capital, also known as WACC, is regarded as the cost of capital. The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital. Although both KO and PepsiCo have downward trends on WACC from 1996 to 2000, PepsiCo has always a lower WACC than KO. Nevertheless, KO has almost caught up PepsiCo on WACC in 1999 (around 9.9%) and 2000 (around 8.4%).
As the EVA’s formula is:
EVA= NOPAT – (invested Capital x WACC)
= Invested Capital (NOPAT / Invested Capital – WACC)