This case study discusses the merger of Anheuser-Busch and InBev. It looks into whether the merger strategically makes sense and how it gains value for the company.
Yiorgos Allayannis, Gerry Yemen, Mary English, Paul Voorhees
Harvard Business Review (UV6934-PDF-ENG)
September 04, 2014
Case questions answered:
- Does the merger of Anheuser-Busch and InBev make sense from a strategic point of view? If so, how is value being created?
- How much should InBev be willing to pay to acquire all of Anheuser-Busch’s shares? As a base case, please use the projections in case Exhibit 4.
- How much should InBev be willing to pay if it were to expect extra revenue synergies of Eur3,000 in 2008, which were expected to grow at 6%?
- Perform sensitivity analysis and identify the key factors affecting the price that InBev should pay.
- What alternative options does August Busch IV have to respond to InBev’s public bid on June 11, 2008? Please value the company as of December 31, 2007.
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This Bud’s for Who? The Battle for Anheuser-Busch Case Answers
This case solution includes an Excel file with calculations.
1.) Does the merger of Anheuser-Busch and InBev make sense from a strategic point of view? If so, how is value being created?
The merger of Anheuser-Busch and InBev makes sense from a strategic point of view because InBev proposed an all-cash acquisition of Anheuser-Busch and they were prepared to pay $65 per share – also included Anheuser-Busch’s 50.2% ownership of Grupo Modelo SAB – which would deliver to Anheuser-Busch’s shareholders and immediate cash premium of 35% over the 30-day average share price prior to recent market speculation and 18% over the previous all-time high achieved in October 2002.
Additionally, this merger would have implied obtaining the leadership in the industry and becoming one of the top five consumer products companies globally, with a pro forma 2007 beer volume of 460 million hectolitres, and net sales and EBITDA of $36.4 billion and $10.7 billion, respectively.
However, the answer of Busch IV was that he was not interested in a merger because he was considering that the current bid of $65 was too low, which caused the beginning of a hostile bid.
However, this proposal was actually a good deal in the eyes of external investors because the market’s reaction to it reflected more of an increase in stock value than Anheuser-Busch management had been able to achieve in seven years.
When compared to recent past performance and the fact that Anheuser-Busch’s shares had not surpassed the 60 per share peak value for some time, it would certainly be attractive to shareholders.
Thus, the value would have been created in the following ways:
1. Growth: The merger could have implied a rapid growth of the resultant company (increase in demand: revenues up), which could have illustrated the firm’s strategy to focus on growth through acquisition more than growing organically. The firm could have leveraged the synergies associated with mass production and brand diversification, allowing it to command a large local and global market share.
2. Cost Reduction: the resultant company would have been able to use existing distribution channels in target markets, thereby minimizing infrastructure costs. The firm could have employed an aggressive budgeting strategy while also running very lean organizations to reduce costs further. The firm could have had a global supply chain function, which manages the acquisition of every component of supply from a central system. Finally, the resultant company would have been able to establish long-term contracts with suppliers at meager prices for all the business units worldwide due to its enormous size.
3. Capturing value: The resultant company would have had a presence in multiple foreign markets, increasing customers’ willingness to pay by leveraging the brand equity of various global brands to its advantage. An example is the sale of the Stella Artois beverage, a beer with European origins, in Brazil. Even though the beer is produced in Brazil, it could be sold for a premium price in the Brazilian market. They could have capitalized on the Brazilians’ perception that Stella Artois is a premium product with European origins.
4. Improve Industry Attractiveness: their merger could have made Anheuser-Busch and InBev successfully grow, making the industry relatively more attractive to outsiders by providing increased regional competition, which would help reduce the threat of competition in the marketplace. In addition, the newly created company would have had greater resources and market share than its competitors, letting the business exercise greater control over its pricing.
5. Product Diversification: the merger of both portfolios would have implied a global expansion, which would have helped to reduce their risks because the company would have had a set of diversified products. Their multiple brands in the resultant product portfolio would have helped the company optimally manage costs and maximize profit. The negative impact of acquiring a company during times of low profitability in the beer market is immaterial.
6. Geographical diversification: both companies were operating in different countries. The merged idea came from Brito (CEO of InBev), who focused his attention on a new objective: the U.S. market, which had been a conspicuous gap in InBev’s global portfolio, and acquiring Anheuser-Busch seemed an…
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