Merger Analysis in July 2008,

Merger Analysis

In July 2008, multinational beer conglomerate InBev announced that it would be merging with Anheuser-Busch, the leading brewer in the United States. The merger announcement capped a months-long courtship process and created the world's number one brewer. With the merger, the company expects to develop global brand synergies and economies of scale needed to fight in an intensely competitive, but relatively mature industry.

The NAICS code for the beer brewing industry is 312120 and has been for the past several surveys. NAICS defines the industry as "establishments primarily engaged in brewing beer, ale, malt liquors and nonalcoholic beer." (NAICS, 2007).

Prior to the merger, Anheuser-Busch was the industry leader in the United States, with nearly half of the U.S. market (BBC, 2008) and a sizeable capacity in China. InBev was one of the world's largest brewing companies, with dominant market shares in Europe, Canada, Russia and Brazil. While A-B had remained a family-owned firm with a relatively small global presence and handful of core brands, its dominant position in the lucrative U.S. market made it one of the world's largest companies. InBev was created by the merger of Belgium-based conglomerate Interbrew and AmBev, a conglomerate based on Brazil. Together, the two companies have created one of the world's five largest consumer products companies (Anheuser Busch, 2008).

This merger has characteristics of both an acquisition and a merger of equals. In a true merger of equals, both companies surrender their stock and a new stock for the combined entity is issued. This was not the case with this merger, as InBev paid Anheuser-Busch stockholders $70 per share, thereby effectively retiring A-B stock. InBev stock, however, had continuity (Anheuser Busch, 2008). However, in terms of operations, the transaction better resembles a merger of equals (Investopedia, 2009). The resulting company is known as Anheuser-Busch InBev. Because the two companies have different geographical strengths, there are effectively two headquarters. InBev's North American headquarters was shifted from Toronto to St. Louis as a result of the transaction (Anheuser-Busch, 2008), reflecting A-B's dominance in the North American market. The company will maintain its global headquarters in Brussels, but the presence of a significant amount of sales volume and control in St. Louis indicates that the new firm is, despite the nature of the ownership shift, a merger of equals.

The main stated motives for this transaction were to build the world's best beer portfolio and establish a company with a dominant market position in the world's five major beer markets. In addition, the transaction provides global market access for the Budweiser brand, which heretofore only had a strong market position in a handful of countries -- mainly the U.S., Canada and China. In addition, A-B's distribution system will be utilized to build market share in the U.S. For InBev's core premium brands such as Stella Artois, Beck's and Bass. The constituent company's presence in China is geographically complementary, so that their respective distribution networks can be used to build each other's brands in their respective strongholds. Further, cost synergies of $1.5 billion annually are expected to accrue (Anheuser-Busch, 2008).

These claims are reasonable. There is little geographical overlap between the different brands. In particular in China, A-B is strong in the northeast, while InBev is strong in the southeast. The two companies are also complementary, with A-B strong in North America and InBev strong in Europe and South America. The experience of InBev in its previous major move in North America (the acquisition of Labatt's in Canada) was that it was able to build market share for InBev global brands by using the existing Canadian distribution system. Therefore, their expectation of replicating this success in the U.S. is reasonable. The claim of cost synergies is, however, questionable. While InBev claims a strong track record of cost synergies, previous M&A activity was largely in takeovers. A merger of equals leaves the company with two systems operating worldwide. There are no plans to rationalize capacity in North America. Cost savings in the $1.5 billion range, therefore, are unlikely to occur simply through corporate function rationalization in China and Toronto.

One of the most significant benefits of the merger is that it defends against the rapid growth of other major brewers in the world. As the industry matures, consolidation is rampant. Both InBev and A-B were threatened by the emergence of massive conglomerates such as MolsonCoors and SABMiller. The A-B InBev merger wards off any potential threat from these companies, since the new entity is much larger than any of them, and dominant market share in all of the world's major markets.