Due DiligenceTuesday, Oct 16, 2001
An Australian news item claiming that Fonterra is set to take over National Foods, Australia’s only
publicly listed dairy company has been dismissed as “smoke but no fire” demonstrates the difficult
task ahead for the executives of Fonterra.
Shares in National Foods are at a fourteen month high in spite of the company’s poorer performance this
past year. It could be that the Aussie share market is second guessing Fonterra’s plans.
It is well known by international operators that Fonterra has the resources, the will and the need to
urgently expand investments in selected markets. Yesterday’s news included items on Mexican dairy
processors seeking new owners or partners and undoubtedly the same applies in other parts of Central
and South America.
With so much of the world knowing Fonterra is in the market it will be surprising if some inflation
of takeover prices will not occur. Earlier this year the Dairy Board had the wit to walk away from
such a high priced deal for Brazil’s second largest dairy processor and distributor.
Recent experience with overseas investment by NZ companies has demonstrated how focused company executives
can become when examining each deal. So focused, that they become obsessed with the primary
benefit to the exclusion of all other risks.
For Air NZ it was the benefit of the passenger loading from Ansett as a feeder airline to the exclusion
of checking the maintenance status of the airlines aircraft.
Food production and marketing have many of the characteristics of travel – give the consumer reason
to question quality or continuity of supply and loyal customers vanish like snow in summer.
The warning is that this sort of acquisition blind spot can and does happen in all forms of business.
Fonterra directors have set themselves the task of ensuring their executives get it right virtually
every time to meet their promise to shareholders.
The expectation of Fonterra is high from all New Zealanders but for shareholders who have followed and
remained with the process of the merger from its inception, anything less than success is unthinkable.
The business policies, systems and procedures must be in place that ensure that Fonterra’s capital resources
are not wasted because of some inept due diligence.