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Due Diligence

Greetings Readers

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.

Good farming

Roy McCallum




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