Ab InBev: A Rich History of Mergers & Acquisitions - Essay Sample

Ab InBev's M&A History

Ab InBev has a rich history of mergers and acquisitions. The company was established in 2004 following InBev's acquisition of Anheuser (Companieshistory.com, 2019). InBev was itself the result of a merger between AmBev and Interbrew. Interbrew was established in 1987 from the merger of Artois and Piedboeuf, Belgium's then leading brewers. Interbrew was established in 1366 and expanded over the years, later acquiring Labatt Brewing Company in 1995. Labatt was Canada's leading brewer. In 2002, Interbrew acquired Beck's, the leading brewer in Germany (Companieshistory.com, 2019). On its part, AmBev was established in 1999 through a merger between Antarctica and Brahma, Brazil's leading brewers. Anheuser-Busch has been in existence since 1852 (Howard, 2014). The 2002 merger between AmBev and Interbrew was a consolidation between two big market players (Pedersen, Madsen, and Lund-Thomsen, 2013). Interbrew was then the third-largest brewer, whereas Ambev was the fifth largest. The result of the merger was the world's leading brewer (Companieshistory.com, 2019). The merger was valued at $1.5 billion. Further, it consolidated leading brands in major markets - Brazil, Germany, Canada, and Belgium.

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In 2004, Anheuser acquired Harbin Brewery (Howard, 2014). It then acquired Sedrin Brewery, a Chinese brewer two years later. This acquisition increased the company's market share, raising its profile to China's third-largest brewer. Ab InBev's next acquisition was undertaken by Labatt in 2007, with its takeover of Canada's Lakeport (Howard, 2014). InBev also raised it shareholding at QUINSA, subsequently affirming its foothold on the South American markets of Bolivia, Chile, Paraguay, Argentina, and Uruguay (Pedersen et al., 2013).

In 2008, InBev furthered its expansion with the completion of the Anheuser-Busch takeover (Pedersen et al., 2013). The completion of this deal meant that InBev met its promise of acquiring all of Anheuser-Busch's shares whose aggregate price was in the regions of $52 billion. Ab InBev acquired SABMiller in 2015 (Babor, Robaina, and Noel, 2018). SABMiller came with its history of acquisitions. Created in 1947, South African Breweries acquired Colombia's Bavaria Brewery in 2005. It later acquired Australia's Foster's Group in 2011 and England's Meantime Brewery in 2015. In 2012, InBev acquired Mexico's Grupo Modelo (Gammelgaard & Dorrenbacher, 2013). Another acquisition activity followed in 2017 when Ab InBev acquired Hiball as part of its commitment to responsible drinking. The acquisition of SABMiller was worth $70 billion (Babor, Robaina, and Noel, 2018). The company projected that the acquisition would give it control of a third of the share of global beer sales. Further, the company projected that the deal would enable it to realize half of the global beer sales profits.

Value Creation to Shareholders

Mergers and Acquisition Objectives

At the heart of an M&A is the creation of synergy value. This factor is viewed through one of three elements. First, the companies entering an M&A will be looking at their revenues and hoping to post higher values thereafter. Secondly, the companies will look at their expense. Since all M&s target positive outcomes, lower values will be preferred. Lastly, reduced capital costs will be a measure of a successful M&A. However, these outcomes do not come easy. Neither are they guaranteed. Hence, the company entering an M&A must be willing to take risks and cautiously make investments, considering that competitors become aware of the strengths of the revamped company. The company must equally explore multiple options and settle on the best alternative, which makes it more profitable in the long run. Also, the resulting company must exhibit a high level of resilience, patience, and dynamism.

Market leaders considering market expansion or those working to reduce their operational costs consider mergers and acquisitions as an efficient way to realize such goals. As a strategy, this approach helps the business to bypass the resources and time that is needed to achieve organic growth (Chen, King, and Wen, 2015). Before a company considers a merger or acquisition, it has first to determine if the target company is a strategic fit. Companies that operate in the same sector exhibit a certain degree of alignment with regards to their strategies, leadership style, or organizational structures (Lusyana and Sherif, 2016). An overlap of these factors makes it conducive for two market players to merge. The second important factor is the respective share markets and brand value of the two companies that seek to merge. It is no secret that one of the goals of company mergers and acquisitions is to increase market share, reduce competition, and increase brand value.

Whether mergers or acquisitions create value for shareholders in the long-term, depends on multiple factors. Foremost, there are two players, the target and the acquirer. In most cases, it is highly likely that shareholders of the target company will profit from the merger or acquisition. However, the same is not always automatic for the shareholders of the acquirer. Several studies have found that share prices in almost all the target companies increase upon a merger or acquisition (Chen, King, and Wen, 2015; Rahman and Lambkin, 2015; Yaghoubi, Yaghoubi, Locke, and Gibb, 2016). On the contrary, the share price of the acquirer does not always show a similar trend. In most instances, the share price of the acquirer shows a negative deviation at the time of the announcement of the merger or acquisition. These trends are more pronounced for domestic acquisitions and mergers as opposed to international ones (Chalencon and Mayrhofer, 2018). The other factor that determines the pattern of shareholder value upon a merger or acquisition is whether cash or securities are used. Variations, however, exist among different industries.

Synergy in M&A

Synergy refers to the concept in M&A where two or more companies combine to either reduce cost or to increased profits. It is the idea that the combined value of two or more companies will be greater than the sum of the individual values. It is the underlying factor in any M&A. A greater scale or efficiency is the result of a synergistic effect. Shareholders benefit when an M&A results in increased hare value, which is an indicator of a successful synergistic effect. Many factors contribute to synergy (Dutordoir, Roosenboom, and Vasconcelos, 2014). The two M&A may lead to talent and technology enhancement, reduced operational costs, or increased revenues. The success of an M&A synergy reflects on its balance sheet. It is however noteworthy that, whereas synergy may not have a monetary value, they still result in cost reductions and increased profitability.

Based on these factors, synergies can be divided into three - revenue, cost, and financial synergy. Cost-saving synergies are the product of improved information technology, supply chain efficiencies, improved sales and marketing, enhanced research and development, reduced salaries and wages, and sometimes, the elimination of patent fees. Revenue upside synergies result from the elimination of patent fees, improvement of complementary products to produce higher sales, and entry into complementary geographies and customers (Dutordoir, 2014). Financial synergy occurs when an M&A increases the financial advantage of the resulting entity. The company is, therefore, capable of confidently accessing higher financial credit.

Payments

There are six methods of financing M&As- exchanging stocks, debt acquisition, cash payment, IPOs, issuance of bonds, and loans. Exchange of stock is the most common method of financing M&As. An acquiring company is often considered to have plentiful stock. It is equally expected to exhibit a solid balance sheet. Hence, the acquirer exchanges some of its stock for the shares to the acquired company. It is a safe method of financing as it results in an equal share of risks between the two companies. Under debt acquisition, the acquirer takes on the seller's debt. One of the leading drivers of a company sale is an inability to catch up on payments (Bi, Shen, and Yang, 2016). In such cases, an M&A is considering as a viable approach to reduce the possibility of extra losses.

Cash payments are perhaps the easiest alternative as they are instantaneous and do not demand high levels of management. While this approach is less dependent on the performance of a company, it raises complexities when multiple currencies are involved due to varying exchange rates. Also, while this method is the easiest, the cost of M&As are usually too high for companies to afford to go this route. A fourth method is IPO. The ideal time to undertake an IPO is before an M&A. It is a good approach to raise the existing share prices. The risks of market volatility may, however, make it a very unreliable approach (Bi, Shen, and Yang, 2016). The fifth approach is to issue bonds, which is a quick route for raising cash from shareholders. However, this approach is only suitable for risk-averse, long-term investments. Lastly, companies may consider loans as an alternative for financing their M&As. However, this approach is disadvantageous because costs quickly rise due to the high value of M&As.

Capital Structure

Capital structure refers to the way that a company finances its combined operations and growth through the various sources of financing (Mkhondo and Pretorius, 2017). The company may consider debts, which arise out of long-term notes payable, or bond issues. On the other hand, the company's equity is derived from its retained earnings, preferred stock, common stock (Dutordoir, 2014). Further, the capital structure may be made up of short-term debts. These result from areas such as capital requirements. Therefore, a company's capital structure is its mixture of short-term debts, long-term debts, preferred equity, and common equity.

Debt and Equity

Debt refers to a method of raising capital from the capital markets. Many companies prefer debt financing due to the tax advantages that are associated with them. Interest payments from this form of financing are tax-deductible. Further, debts allow companies to retain ownership. However, debt financing has its share of disadvantages. Foremost, it may result in restrictions which hinder the company from venturing into opportunities beyond the scope of its primary business. Equity financing is less preferred because of its high expenses (Mkhondo and Pretorius, 2017). However, its greatest advantage is the non-requirement for the company to repay the money that is earned through it as it attracts no interest. While the company is under no obligation to make regular payments, the new partners get a say in the decisions of the company. Hence, the company cannot make independent decisions.

Impact of Debt and Equity on M&As

The end of an M&A opens a new chapter for a company's capital structure. The design of the M&A determines how the company's capital structure changes. For instance, if the acquirer opts for an all-cash M&A, the result will be substantial depletion of its cash holdings (Bi, Shen, and Yang, 2016). Most M&As are never financed using all-cash payments. Most of these companies prefer to finance their M&As through debt to cover for the potential of a strain of their capital structures through cash. While most of these M&...