The Quaker Oats Company merged with PepsiCo in 2001.

Overview of Companies

PepsiCo is among the most successful consumer products companies in the world. PepsiCo consists of
Frito-Lay, Inc., the world's largest manufacturer and distributor of snack chips, Pepsi-Cola Company, the
world's second largest refreshment beverage company, and Tropicana Products, Inc., the largest seller
and marketer of branded juices in the world. PepsiCo's brands are among the best known in the world
and are available in about 190 countries. PepsiCo's brands include Lays and Ruffles potato chips, Doritos
tortilla chips, Tostitos tortilla chips, Cheetos cheese flavored snacks, Pepsi-Cola, Mountain Dew, Diet
Pepsi, Aquafina water, Lipton Brisk and Tropicana Pure Premium.

Quaker is an international marketer of foods and beverages. Quaker is a major participant in the food
industry in the United States and Canada and is a leading manufacturer of hot cereals, pancake syrups,
grain-based snacks, cornmeal, hominy grits and value-added rice products. In addition, in the United
States, Quaker is the second-largest manufacturer of pancake mixes and value-added pasta products
and is among the four largest manufacturers of ready-to-eat cereals. Quaker manufactures and markets
its products in many countries throughout Europe, Asia and Latin America. Quaker also manufactures
and markets Gatorade active thirst quencher, which is the leading sports drink in the United States and
Canada. Quaker also manufactures and markets Gatorade in Europe, Asia and Latin America.

Reasons on Merger

The merger will create significant value for shareholders of the combined companies. Quaker's
beverage and snack foods businesses align with PepsiCo's strategy to remain highly focused on growth
through the sale of convenient foods and beverages. The strong complementary brands and warehouse
distribution system that Quaker's businesses add to PepsiCo broaden the platforms available for long-
term growth. PepsiCo believes that the proposed merger will solidify and enhance its top and bottom
line growth and improve its return on invested capital over time. Several of Quaker's brands, particularly
Gatorade, are leading brands in growth categories. PepsiCo believes that it can introduce new domestic
and international channels of distribution for Gatorade beverages, and that the Gatorade distribution
system will add to the growth of Tropicana's shelf-stable beverages. PepsiCo also believes that the
distribution of Quaker's bars and rice snacks can be significantly increased through the use of Frito-Lay's
North American and international distribution systems, and that the Quaker brands will give Frito-Lay
access to eating occasions, such as breakfast, when consumers typically do not consume salty snacks.
The merger between PepsiCo and Quaker Oats created important cost savings. Due to the similarities of
each company's products, the distributional needs were close to each other. Merging with the major
suppliers' channels of PepsiCo gave Quaker Oats additional benefits and savings. Warehouse forces
were also combined that enabled to save time, space and manpower. Beverage manufacturing for
Pepsi- Cola, Tropicana and Gatorade has been also consolidated, that gave operational benefits and
valuable cost savings.

PepsiCo and Quaker now share warehouses and distributing system. It is the most important reason why
this merger meets all cost savings needs. It shows that PepsiCo reduced its costs from $400 million
annually to $230 million . PepsiCo and Quaker Oats combined its forces not only in terms of production
but also in terms of human capital. Thus, PepsiCo did not have a necessity to invest huge sums of money
in improving the system and was just getting benefits from the additional asset the merger has provided.
In combining their resources, PepsiCo and Quaker Oats saved money and increased efficiency. All major
criteria for raising productivity are met. Physical capital and human capital are combined, and costs from
operations are significantly reduced, while increasing returns to scale are applied. All these issues
outline a winning merger, one that created $ 25 billion corporation that is the fifth largest in the
country.

The merger created a $25 billion food and beverage company

Under terms of the merger, Quaker shareholders will receive 2.3 shares of PepsiCo common stock in
exchange for each share of Quaker common stock they own. Based on the number of Quaker shares
outstanding, PepsiCo expects to issue approximately 306 million additional shares of its common stock
to Quaker shareholders. PepsiCo shareholders will continue to own their existing shares of PepsiCo
common stock. Shares of the combined company, which is known as PepsiCo, will be traded on the New
York Stock Exchange and the Chicago Stock Exchange under the symbol PEP.

Any company prefers to diversify and systematically target and capture certain market segments in
order to provide that segment superior quality service and kill all forms of competition from that
segment. This seems to be the goal of PepsiCo too. It wants to diversify from being a supplier of just
carbonated drinks and branch into fruit drinks. To do this the merger was the ideal option, because
along with the Quaker company they are also buying its goodwill and market share. This way they can
systematically cater to every possible need of the sports segment right from the choice of drinks to
providing snacks.

The merger between PepsiCo and Quaker Oats was structured as astock for stock exchange. PepsiCo
shareholders own 82% of thecombined firms and Quaker Oats shareholders own the remaining
18%,therefore, PepsiCo owns the majority of the stock. This also means thatQuaker Oats is now a
subsidiary of PepsiCo. The approximate amountfor the recorded value of the acquisition of PepsiCo’s
books was $613million and the market value of the acquisition was $13 billion. Under theQuaker merger
agreement dated December 2, 2000, Quakershareholders received 2.3 shares of PepsiCo common stock
inexchange for 1 share of Quaker common stock, including a cashpayment for fractional shares. PepsiCo
issued approximately 306 millionshares of common stock in exchange for all the outstanding
commonstock of Quaker Oats. Quaker Oats’ trademark, goodwill, and in-processresearch and
development will not be recorded in the acquisition.The pooling-of-interests method was the
accounting method that wasused to account for the PepsiCo and Quaker Oats merger. The
reportingimplications for the pooling-of-interests method are as follows:1) Revenues and expenses were
combined retroactively for the twocompanies.2) Assets and liabilities of subsidiary (Quaker Oats)
continue to bereported at book value3) Combination costs are expensed as incurred.4) Both companies
were combined at book value.5) Both companies continue to exist.6) No goodwill is recorded.7) Shares
issued to create business combination is recorded based onthe book value of subsidiary’s contributed
capital and retained earningsat the beginning of year. The pooling of interests method impedesseveral
necessary and important accounting characteristics such asrepresentational faithfulness, neutrality, and
comparability. First, sincePepsiCo recorded all the assets and liabilities acquired from QuakerOats based
on its book value, financial statement users cannot tell howmuch was invested in the transaction nor
track the subsequentperformance of the investment. So both the predictive value andfeedback value of
the financial information about the acquisition areimpaired. Second, the internally developed
intangibles may go entirelyunrecorded under the pooling of interests method. At the same time,
thepotential financial benefits from the synergy of the business combinationwon’t be recognized either.