The brewing industry has enjoyed high margins and steady growth for decades. The acquisition of Anheuser-Busch (hereafter to be referred as “AB”) by InBev was regarded as an opportunity and a challenge for the executives and shareholders of both companies. Our report would examine the strategic rationale of the merge and qualify and quantify the synergy effects from revenue and cost. Also, we provide suggestions about culture integration for the newly merged firm. Finally, though the premium overweighs the synergy effects, we believe the competitive advantage of combined firm would benefit its shareholder in the long run.
STRATEGIC RATIONALE The value creation by merger of InBev and Anheuser-Busch fits well the synergy analysis framework. First, from the Benefit-Cost analysis, the synergy comes from the increase in synergy and saving on overlapped cost. From revenue increase perspective, we can expect InBev and Anheuser-Busch could cross sell each product through each channel. Apart from that, for those regions two companies have cost overlapped, two companies could save manufacturing and distribution cost.
Second, the geographic dispersion helps the merger company become the largest bear company in the world. They diversify business risk and capture the different growth opportunity of both developing countries and developed countries. Third, the merger company could also benefit from economies of scale. The economies of scale come from manufacturing on cost side and also on decision side which means the company could make global decision. Finally, chances are that the culture of the new co- could incorporate the highlights from both company cultures.
However, this can be only the drawback to this merger which leaves chance to culture conflict. For the rest part of the report, we will quantify this effect to calculate the synergy benefit. SYNERGY EFFECTS Revenue Synergies As the two companies have different geographic and product coverage, we believe there is strong revenue synergy within this acquisition. First of all, through the integration, both companies will be able to access new markets with existing business models providing them with distribution channels, marketing, etc. It will help both of them save R&D expenses.
It also allows them to broaden product lines and obtain new potential customer segments using each other’s existing customer base and brewery technology. Second, with each of their local knowledge on different markets (and market segments), both companies will be able to introduce new products more smoothly and accelerate their localization. For example, because consumers in emerging markets tend to trade up from discount segments to more expensive products, we predict more beer drinkers in those emerging markets of InBev will make the switch.
AB’s experiences in the developed market, such as US, will help InBev in various aspects from product development to marketing, just as a transfer of first mover advantages. Third, in markets where both companies have a strong presence, the acquisition will give them more suppliers bargaining power, because they will have more product lines to offer at once, when negotiating with retailers. Those retailers could not afford to lose two big players like InBev and AB. It will also cost less for those retailers due to possibly combined shipment and sales transaction process.
Forth, the acquisition not only provides these two companies with broader geographic coverage, but also the advantage of cross market retaliation over competitors. For instance, when a global competitor starts a price war in US with AB, AB now has the power to retaliate in Latin America using InBev. It gives them flexibility in their markets and helps them reduce external risk. Cost Synergies We believe the merger create huge cost synergy due to the nature of operation. First, COGS and SG&A will reduce dramatically.
The proposed process benchmarking, supply chain integration and improved material usage would save a total cost of 730M. Second, the overhead fees would decrease. The merger creates a surplus in staffs. Thus, the proposed reduction of 1,185 positions and early retirements would save 150M. Third, the operations in China could be optimized from the merger. The integration of marketing and distribution channels in China would save 55M. In addition, improvement in operation efficiency is foreseeable. The merger would eliminate overlapping corporate functions such as information system management, inventory management and etc.
Also, the improvements in procurement and reductions in SKU would also create savings. In total, we estimate those effects would save 575M. At last, because of the leading position in brewing business and influential market power after the merge, we forecast a better rating for the corporate debt of the merged company. Thus, the cost of financing would reduce. Also, the exchange of best management practices between firms would not only enhance the operate excellence but also save money for the firm.
INSIGHTS: CULTURE INTEGRATION We regard the integration of cultures of both firms as a important value-added method. After the merger of InBev and Anheuser-Busch, the culture at the newly formed company is likely to be affected by certain factors that are contradictory to InBev’s and AB’s strategic policies and employee relations. Because of InBev’s traditional cost-cutting approach to mergers and Anheuser-Busch’s approach of luxurious spending, there might be a mismatch of objectives that will have to be realigned.
Also, as during the time of the Interbrew and AmBev merger, the management had followed an approach that was similar to the AmBev’s previous deals and included cost-cutting, eliminating unnecessary expenses and introducing incentives tied to performance to improve the merger’s earnings. The same might have to be introduced to ensure that this InBev-AB merger is successful. At last, persons from InBev can work with AB employees to inform them of InBev’s cost cutting strategies and vice versa.
Therefore, the two companies can merge their synergies together by ensuring that all the employees are clear of the new company’s strategies and policies and begin to implement them. CONCLUSION As shown in Exhibit 1 and Exhibit 2, the premium paid exceeds the synergy from M&A in 2008. However, as mentioned in the preview parts, we believe the merged firm would acquire huge market power, lower its costs and enhance the profitability, which creates strong competitive advantage in the long run. Therefore, although the synergy created cannot cover the premium paid for the acquisition, the stockholder would benefit from the deal in the long term.
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