Ch. 10 Mergers and Acquisitions

In chapter 10, we explore the concept of mergers and acquisitions as vehicles of business growth, diversification, and expansion.

The following is a list of acquisitions by Starbucks Corporation, by year, since its founding in 1971:
1999 Tazo Tea; Hear Music, a San Fransico-based music company
2003 Seattle Coffee Company, which includes Seattle's Best Coffee and Torrefazione Italia coffee
2005 Ethos Water
2008 Coffee Equipment Company and its Clover® brewing system
2011 Evolution Fresh
2012 LaBoulange® bakery brand; Teavana

Source: Starbucks Company Timeline

In previous entries, I've talked about the recent Evolution Fresh and LaBoulange acquisitions. These two recent acquisitions have helped Starbucks to expand its product offerings. In today's entry, I'd like to talk about the recent $620 million Teavana acquisition , announced in December of last year.

Starbucks CEO Howard Schultz discusses the acquisition in an interview with CNBC. He describes the logic behind the 53% premium price despite Teavanna's falling sales. "I think the issue is not the premium. The issue is the long-term opportunity. Starbucks is buying into a $40 billion category of tea that is right for innovation. We believe we can do for tea what we have done for coffee." says Shultz.

"Teavana has 300 stores that are mall-based, that has stunning unit economics, with sales to an investment ratio of 3 to 1. That is best in class. Inside Teavana today, despite how good those unit economics are, they do not have a beverage business to speak of. We think just like in the mid 80s when we brought an espresso bar and the romance of coffee into our Starbucks stores, we can create a very unique beverage opportunity that will build frequency and loyal customers."

He then describes how he believes that Starbucks "can leverage the existing best of class real estate acquisition and design capability that Starbucks has to build urban neighborhood sites for Teavana around the country and around the world."

He also explains that one of Starbucks' strengths is its "underlying capabilities in social and digital media with the Starbucks card and loyalty program," and their leadership and success in having the "strongest mobile commerce payment business in the retail business." He describes, "We will thread those benefits to Teavana consumers in which Teavana customers will have the same seamless benefits that Starbucks customers have driving awareness and trial." Finally, he explains that Starbucks can leverage its existing international partnerships to support this expansion, describing the success Teavana already is experiencing in the middle east and gulf region.

To link this back to our chapter 10 text, recall the section on pricing and premiums. The buyer must consider factors such as the targets's market value, intrinsic value, an the value to be gained from potential synergies between the target and the buyer (pg. 341). Despite Teavana's falling sales, Starbucks justifies the 53% premium it paid with a clear vision for how it can achieve synergies and can integrate the brand into its strategy for corporation-wide long-term growth.

The full CNBC interview with Howard Schultz, including transcript
More about the Teavana acquisition from the Starbucks Newsroom