During the lifetime of a company, the necessity of taking vital decisions implies a transformation and a change in the company’s usual business processes. The list of decisions might include simple strategic transformations, such as marketing innovations, and the introduction of new products, as well as major ones such as mergers and acquisitions. Mondavi Winery, a well-known company in the wine industry, is a perfect example showing the company going through the process of making vital decisions, as well as showing their unexpected outcome. In that regard, this paper examines the case study of Mondavi Winery, providing an analysis of their decision and the outcome of going public as well as the acquisition of the company by Constellation Brands.
Going public for companies can be seen as related to the general world trend of privatization. Although privatization is differentiated from private-sector flotations, there are many commonalities between the two processes. The main motive for going public is usually concerned with raising additional finance for the company to fund rapid growth. In that regard, Mondavi winery was no different in this case, although the retention of control was a factor in delaying such a decision. Accordingly, when the decision was considered, the objectives put by Mondavi Winery for going public can be outlined as follows:
- Raise capital to fund growth
- Minimizing the raise in taxes – the increase in taxes, and the fact that interest payments on debt are tax-deductible for the issuer is a major factor in this objective
- The need for cash flow for possible vines replacements caused by the risk of phylloxera bug
- Maintaining control over the company’s operations
Other advantages that Mondavi winery was to gain include the creation of liquidity, where the stock in a public company is more liquid than the private enterprise, the possibility for mergers and acquisitions using the company’s stock as a currency, and gaining a competitive advantage and prestige, an essential factor, considering that the company was analyzing such public companies as Levi-Strauss, The New York Times and Chalone Vineyards for the way going public might change the winery business.
The main factors influencing share prices are the news, and in that regard, the price is going up or down as a response to such news. The relation of the news to the price can be seen through its connection to the supply and demand theory, where the decrease in demand, as well as the increase in supply, might result in a drop in share prices. Defining the news that might influence the company, specifically in a negative way, any media coverage that shows the company in bad light might be sufficient to cause the drop in share prices.
In that sense, it can be stated that the article published in Forbes magazine, which outlined the pessimistic future of the company, pointing to the competition from foreign growers in Chile, South Africa, Australia, and Europe, and predicting the downfall of the company’s value, was a major factor in the decline of share prices.
The confidence in the market declined, resulting in a decline in demand, and accordingly, it might be assumed that many shareholders started selling their shares, which increased supply. The combination of low demand and high supply might have been the result of such a drastic drop in share price. An additional factor that played a role in the decline in the performance of other winery public companies, drawing the attention of the public to the absence of any prospect in buying the shares of the company.
Evaluating the attractiveness factors for the acquisitions by Constellation Brands, the general factors in acquisition might be considered. Such factors include the financial value of the acquired company, asset value, resale value, and the strategic impact on the acquirer. The latter can be divided into many sub-factors covering such aspects as the impact on the market, the technology, HR, distribution, and suppliers.
In that regard, analyzing Mondavi Winery, it can be seen that several factors might be considered when evaluating the acquisition decision. On the one hand, the company’s assets value (as of 2004) makes the company a valuable acquisition, especially for a company in the same industry. On the other hand, the company’s financial value is greatly affected by the company’s debts. Thus, it can be assumed that the main factor is that the company’s financial value was a factor in the price negotiations in the acquisition, and at the same time the company might be interested in increasing its share in the market by adding new brands and products to their existent line.
In retrospect, it can be seen that going public is a decision that contains many risk factors that might be overlooked by the necessity to increase the company’s finances. In the case of Mondavi Winery, the company might have overlooked certain disadvantages that the decision of going public contains. Such advantages might be seen through the pressures of the shareholders and their influence on the company’s value, and accordingly the reduced control. In the light of the aforementioned, it can be said that going public was a bad choice for Mondavi Winery.
References
Bradford, R. W. Strategic Evaluation of Acquisition Targets. Strategy Letter. Web.
Fields, E. (2002). The essentials of finance and accounting for nonfinancial managers. New York: AMACOM.
The Primary Factors that Influence Stock Share Prices. Quality Personal Finance Articles. Web.
WILLIAM MILLER ASSOCIATES. Going Public. WILLIAM MILLER ASSOCIATES. Web.