Blog 7 - AB InBev: an oligopoly company formed by merger and acquisition

I learned International Mergers and Acquisitions this week so I want to test my knowledge level by combining the knowledge I learned with an actual M&A case.

M&A case

Anheasur-Busch InBev became the largest brewer back in 2008 when Anheasur-Busch was acquired by InBev for $52 million.

In 2016, the two largest brewers in the world, Anheuser-Busch InBev and SABMiller, merged. The deal was worth $104.3 billion and combined In Bev's Budweiser, Stella Artois, and Corona brands with SABMiller's Castle Lager, in hopes to take them into the African and Latin American Markets.

SABMiller shareholders voted overwhelmingly in favour of the £79bn offer from Anheuser-Busch InBev, paving the way for the Belgian brewer to clinch the third-largest merger in corporate history after a year-long pursuit.

Megabrew, as the merger has been dubbed, combines the world’s two largest brewers in an industry that has heavily consolidated over the past decade and faces challenges from the growth of craft beer.

Lecture theory & Reflection

Types of Mergers

• Horizontal mergers 

        - Between firms in same business activity 

        - Rationale

           Economies of scale and scope

           Synergies (ex. combining of best practices)

        - Government regulation due to potential anticompetitive effects

• Vertical mergers

        - Combinations between firms at different stages

        - Goal is information and transaction efficiency

        - Possible “market power” advantages through combination 

• Conglomerate mergers

        - Firms in unrelated business activities

Based on the above theory, I can judge that this case belongs to horizontal mergers, because both companies are engaged in alcohol industry.

Change Forces Driving Mergers

1. Technological change 
2. Efficiency of operations 
3. Globalization and freer trade
4. Changes in industry organization
5. New industries
6. Deregulation and regulation
7. Favorable economic and financial conditions
8. Negative trends in industries and economies
9. High valuation of equities

M&A motivation affects the way of integration and the effect of M&A. Combined with the acquisition case of AB InBev, I mainly classified its M&A motivation as strategic motivation and efficiency motivation. 

Efficiency motivation can concentrate the scattered productivity together, and the high performance enterprises manage the low performance enterprises to improve the economic efficiency. This case realizes rapid expansion and improves competitive advantage through M&A.

Strategic motivation is that enterprises occupy a favorable position in market power and control power. Generally, enterprises directly reduce competitors through horizontal M&A to improve market share.

The impact of mergers

The economy

• Cowling et al. (1980) found efficiency gains neutralised by greater monopoly power, although two cases with benefits were noted.
• Research shows acquisitions have, at best, a neutral effect on economy.
• Although overall economic wealth may not increase, wealth redistribution can occur.

The shareholders

• Accounting studies indicate that acquisitions are unprofitable to the acquirer.
• Event studies (before and after comparisons) show that target company shareholders get significant gains while acquiring company shareholders get no gains or even a loss.
• Bidders may earn gains prior to the bid.
• Gain of target company shareholders' likely to be a result of bid premium.
• Acquiring company shareholders’ lack of gain may be due to anticipation of acquisition by efficient market.
• Many surveys conclude that acquisitions transfer rather than create wealth.

Managers and employees

• Acquiring company managers benefit from:

        - increased power and status

        - increased financial rewards

        - increased job security

• Managers of target companies tend to lose their jobs following an acquisition, while their employees also face uncertain futures.

SAB's two largest investors — Altria, the US tobacco company and BevCo, the family investment vehicle of Colombia's Santo Domingo family — were excluded from the vote, following a UK High Court ruling last month to treat them as a separate class of shareholder. Instead, Altria and BevCo, which own a combined 41 per cent of SAB, formalised in a separate vote their acceptance of AB InBev's partial share alternative of 0.483969 in AB InBev shares and £4.66 in cash for each SAB share. The UK court decision followed growing investor criticism about the influence of the two biggest shareholders and the deal's structure of two offers. The partial share offer, aimed at the two largest shareholders, ended up being more favourable than the cash offer because of the drop in the value of the pound after the UK's Brexit vote.

Outcomes

Haleblian et al. (2009) have listed a series of outcomes to acquisition performance, they are acquisition premium, turnover, customer and bondholder outcomes. After research, I found that these outcomes did happen.

Example 1:

Anheuser-Busch InBev is preparing to replace its long-serving chief financial officer Felipe Dutra as the brewer of Budweiser and Stella Artois seeks to revive its fortunes and share price, according to people briefed on the matter. 

One of the people said that Mr Dutra’s likely exit was linked directly to frustrations at AB InBev’s performance since its 2016 takeover of SABMiller, which left the group saddled with more than $100bn in debt. The other said that Mr Dutra, who has been CFO since 2005, was leaving for personal reasons after a long tenure. A third person familiar with the matter said there was no suggestion that Mr Dutra was being ousted and that he remained “widely respected” within the company.

Example 2:

The world's biggest brewer accounts for nearly one in four beers sold worldwide and nearly half the industry's profits. The sale of a minority stake in its Asian business would have been the largest initial public offering of the year.

On July 12th 2019, the share price barely wobbled. Fair enough. Asia accounts for just 14 per cent of group ebitda and the company was looking to float as little as 15 per cent of it. Moreover, AB InBev shares had already fallen 4 per cent last week, amid reports of soft demand for the offering. The punchy valuation the parent sought for its business was at least $54bn, or 18.4 times 2019 ebitda, says Jefferies. The broker, however, reckoned it was worth just $46bn. To the parent, that is a difference worth €3-€4 a share.

Further recommended readings:

ft.com/content/925d4c1e-84f7-11e6-a29c-6e7d9515ad15

ft.com/content/d67f4e38-314c-11ea-9703-eea0cae3f0de

Reference:

Haleblian, J., Devers, C., Mcnamara, G., Carpenter, M., & Davison, R. (2009). Taking Stock of What We Know About Mergers and Acquisitions: A Review and Research Agenda. Journal of Management, 35(3), 469-502.