Financial Management: Anheuser Busch and Inbev - Term Paper Example

? Financial Management Introduction: This is a merger between 2 companies which are Anheuser Busch and Inbev. These are two of the largest brewing companies by revenue and together they make a global brand as they brew some of the most sold beers for example Budweiser, bud light, and skol. This merger led to the creation of the largest brewing company with $36billion in sales.The merger has over 11600 employees in over 30 counties. The merger deal was completed in November 2008 (Anheuser-Busch InBev, 2008). Description of firms and industries: Anheuser-Busch: It’s a leading company that was established in 1860 in Missouri St Loius. It is considered as the largest and leading company that brews perfected beer with a volume of 49.2% share of beer sales (Anheuser-Busch InBev, 2008). In terms of volume of brewing it was considered as third in the world’s leading distributors of beer before it was acquired by In Bev in 2008 July and the merger was completed in November 2008. Based on revenue it was considered as the top notch in its industry. It operates 12 branches (breweries) in the United States of America and 17 other branches overseas. The products best known are Budweiser, Busch, Michelob, Natural light, Ice. In Bev: In Bev on the other hand was the second largest brewery in the world. While its core business is beer, it also deals in the soft drink market as well. It is a merger of Am Bev and Interbrew. Its headquarters was in Leuven, Belgium where Anheuser Busch is now located. It had approximately 86,000 employees who managed the day to day activities like production and supply of finished products (beer and soft drinks) around the world (Anheuser-Busch InBev, 2008). Before the merger with Am Bev, Interbrew was the third largest brewing company in the world by volume. In Bev had many operations in over 30 countries across the Americas, Europe and Asia pacific. Description of merger The merger between Anheuser Busch and In Bev created the global leader in beer followed by SAB Miller Company. It is also one of the top five Companies that produce commercial products like beer. In Bev was the second largest brewer in the world while Anheuser Busch was the largest brewing Company in the United States of America and also had the highest revenue or returns in investment (Anheuser-Busch InBev, 2008). Type of merger: This merger is a vertical merger or acquisition due to the fact that Anheuser Busch and In Bev are in the same level of operation, production and organization. The two companies also produce similar products like Budweiser. In Bev and Anheuser Busch were in the same production level because they produced many beer types resulting in a vertical merger. The merger amid the 2 organizations is a responsive merger, acquisition, takeover because it has a situation in which a target company’s management and board of directors agree to be acquired by another Company. In this case In Bev taking over Anheuser Busch. Here a public offer of stock or cash was made by In Bev and the board of directors of Anheuser Busch Company was publicly approved the buyout terms. They may be subject to regulatory or shareholder approval. Competitors: The major competitors that Anheuser Busch in Bev faces are the following: - Carlsberg, Heineken, SAB Miller Carlsberg is the fourth largest Company in the world. They have major markets in Asia and Europe with Northern Europe acquiring the largest markets of beers produced by Carlsberg. Their products or brands are many, over 500 to be exact (McShane, Sampson and Restrepo, 2008). Carlsberg does not only deal with beer alone, it also deals in soft drinks like coca cola whose production occurs in Denmark and Finland. Beer and soft drinks are the major products that help Carlsberg in achieving their desired returns in investment thereby realizing their initial objectives. These are some of the factors that help this thriving Company attain the fourth position when it comes to production and supply of products around. Brands differ significantly in price, volume and target audience. The better the quality the higher the volumes are produced by the company. Carlsberg is one of the beers that this brewery relies on to bring high rates if return in investment because it has a large target audience and positive image to consumers around the world. Some of the brands that Carlsberg breweries have to offer are beers like Baltika, Carlsberg and Tuborg. Heineken is another competitor faced by ABI. Heineken operates I more than 70 countries and produces more than 170 international brands of beer that are blended to perfection. Heineken does not deal in the beer category alone, they also deal in marketing of wines, sodas and other soft drinks. They have two principle brands that they sell internationally which are Heineken and Amstel. Heineken as a Company has premium, local and regional brands which include Tecate, Dos Equis and Cruzcampo. The other competitor is SAB Miller which is a company of South Africa. SAB Miller is involved in the production and the marketing of over 200 brands of beer worldwide and sells its products in over 70 countries worldwide. SAB Miller is the 2nd biggest manufacturer of beer in the United States of America, behind Anheuser Busch in Bev, holding 30% of the market share. The brands that SAB Miller produces are the following: - Pilsner, Pilsner ice, Pilsner Urquell, Miller Genuine Draft and Peroni Nastro Azzurro (McShane, Sampson, and Restrepo, 2008). Financial principles: Synergy gains Synergies will largely be driven by sharing best practices, economies of scale like production as this helps in producing larger volumes of products be it beer or soft drinks and also enhance on the issue of quality products as this helps to gain and retain consumers in the merger of Anheuser Busch and In Bev. ABI’s synergy will improve greatly due to the combined effort of both the Companies resulting to high sales thus high profits, only if they manage to use their resources wisely, meaning they avoid wastage at all costs. Lastly synergies will be largely driven by overlapping of corporate functions. In the past In Bev has been successful in the achievement of synergies when it was merged first by Am Bev and Interbrew (McShane, Sampson and Restrepo, 2008). Issues Pertaining Risk Reduction A merger increases the default risk of the acquiring firm which is In Bev. This is surprising because a set diversification ought to lessen occurring risk if not the newly-merged firm ABI takes some action to increase risk (Rosen, 2006). We associate a rise in increase with mergers satisfying one of the situations allied to agency exertion; mergers invested with stock like the merger of Anheuser Busch and In Bev acquires with a high market to book ratio and acquires with deprived stock price performance prior to a merger proclamation. Type of Merger The merger between Anheuser Busch and In Bev is a stock merger. This merger was completed in November 2008. The Company trade on the Euro next Brussels stock exchange under the new ticker symbol ABI. This transaction was funded by a group of leading financial organization. It offered $45 billion in debt and also financing another $9.8 billion in equity bridge financing. On the 18th of November 2008, In Bev announced the complete acquisition of Anheuser Busch, following the approval of the Companies ‘shareholders. Following the merger, the agreement term was that Anheuser Busch shares were to be acquired for $70 per share in cash, for an aggregate of $52 billion. Effect of Mergers on Stock Prices This is the process of acquisition. Since the Anheuser Busch and In Bev are both vertical mergers they have the same business value thus they can form a new corporation with new stock. In other cases we find two Companies when merged the value of the two businesses can be different. Here the significantly larger Company in terms of value can buy all the stock of the other Company and absorb all its assets by issuing of stock from the larger Company to shareholders of the small Company. Stock-stock swaps are common in this type of situations but sometimes cash is used (Pretin, 2013). Effect of Mergers on Management The impact of merger of Anheuser Busch and In Bev to become ABI affects management in that it may involve minor or major clashes. Each Company has its own culture so when they merge they may have different variations. When the merging process is completed, the manager to the main focus of the organization may be asked to implement such strategies or policies which may not be approved by him. In this case the manager is in the In Bev Company since In Bev is the acquirer of Anheuser Busch Company. Sometimes a problem may arise leading the organization to be diverted and the executives become busy either settling matters among them themselves or moving on. If however the manager involved is well\equipped or has a good strategy with a degree of qualification, the migration to another Company may not be troublesome at all. Effect of mergers on P/E ratio The price/ earnings is one of the most crucial ratios used to evaluate stocks, it is usually calculated by taking price per share/earnings per share. Well built and established companies usually have low P/E ratios while newly and maturing companies usually have higher P/E ratios than matured companies (Fundamental Finance, 2011). The Anheuser-Busch and InBev Merger was quite strategic, both being spectacular companies in the sale and production of alcohol their mergers led to a more an intergreted company thus having very low P/E ratios. The following chart shows the earnings per share of the merger: 2011 2010 Basic earnings per share 3.67 2.53 Diluted earnings per share 3.63 2.50 Basic earnings per share before non-recurring items1 4.04 3.17 Diluted earnings per share before non-recurring items1 4.00 3.13 (Fundamental Finance, 2011) The chart below shows the share price of the merger in years 2011 and 2010: Amounts in US dollar unless otherwise indicated1 2011 2010 Fair value of options granted 11.98 11.24 Share price 29.65 24.09 Exercise price 24.73 24.57 (Fundamental Finance, 2011) The chart below shows the P/E ratios of the merger in years 2011 and 2010: 2011 2010 P/E ratios of the merger 8.61 9.636 (Fundamental Finance, 2011) Per the charts above its clear P/E ratios of the Anheuser-Busch and InBev merger are becoming lower over the years thus meaning thus the merger has improved and developed the operations of their business thus making them very effective business partners. Tax Incentives and Benefits Mergers lead to various tax benefits on the companies that have merged especially if the acquired firm will be absorbed into the parent company with its tax attributes intact (Alan, Auerbach, Reishus 1987). Such tax incentives occur when a firm acquires another firm as a collection of assets allows a stepped up basis for the assets. These assets might be depreciable or depletable then receiving higher allowances than when not in a merger. On completion of the merger the acquiring company avoids capital gain taxes (Alan, Auerbach, and Reishus 1987). On the case of Anheuser-Busch and InBev Merger, they have been able to reduce their taxes significantly due to increased efficiency in operations. The chart below shows how tax has significantly reduced over the years due to the Anheuser-Busch and InBev Merger: 2011 2010 Current tax expense Current year (2 188 ) (2 272 ) (Underprovided)/overprovided in prior years 115 23 (2 073 ) (2 249 ) Deferred tax (expense)/income Origination and reversal of temporary differences 166 419 Utilization/recognition of deferred tax assets on tax losses 10 (106 ) Recognition of previously unrecognized tax losses 41 16 217 329 Total income tax expense (1 856 ) (1 920 ) (Alan, Auerbach, and Reishus 1987) Size of Merger Premiums A merger premium refers to the higher value of a firm that is being acquired. It is more than the market value of the firm. In Anheuser-Busch and InBev Merger the size of the premium of Anheuser-Busch increased significantly. At first InBev had made an offer to buy Anheuser-Busch at $46 billion, this amount was a 30% premium over the stock of what Anheuser-Busch was trading for in the market (Howard, 2008). Anheuser-Busch refused the offer stating that the offer did not cater for the value to shareholders basing their arguments on the market share and value they had in the U.S which is 48% of $90 billion and the successful brands that it had such as Budweiser, Bud light etc. Before a deal was struck Anheuser-Busch stock value rose by 8% to a staggering $66.50. Conclusion In conclusion the merger was perfectly executed under the right law and it gave birth to the world largest brewery with worldwide volume of 356 million barrels and $36billion in sales. This made it shoot to the top overtaking the SABMiller which was the largest before the merger. References Anheuser-Busch InBev (July 2008). Creating the Global Leader in Beer. Armonk, N.Y: M.E. Sharpe. http://www.ab-inbev.com/pdf/Final_Investor_Presentation.pdf InBev and Anheuser-Busch (July 2008). Bringing Home the Beer. Hoboken, N.J: Wiley. Data retrieved from http://www.economist.com/node/11735531. Howard (2008). Anheuser-Busch stock jumps as InBev raises its takeover offer. http://abcnews.go.com/Business/story?id=5361371&page=1#.UX-ycqJHJQA. McShane J., Sampson A., Restrepo R. (2008). AB InBev (NYSE:BUD). Data retrieved from: http://www.trinity.edu/smf/inc/reports/fl2010/bud.pdf Brussels and St. Louis, MO (November 2008). In Bev Completes Acquisition of Anheuser-Busch. New York, N.J: Wiley Data retrieved from: http://www.abinbev.com/press_releases/20081118_1_e.pdf Fundamental finance 2011: P/E Ratios. Data retrieved from http://stocks.fundamentalfinance.com/s_peratios.php Pretin J. (2013). The effects of mergers on stock prices. Data retrieved from: http://www.streetdirectory.com/travel_guide/144205/trading/the_effects_of_mergers_on_stock_prices.html Alan J., Auerbach, Reishus David (1987). The Impact of Taxation on Mergers and Acquisitions Data retrieved from: http://www.nber.org/chapters/c5822.pdf. Rosen, R. J. (2006). Mergers and risk. Data retrieved from: http://ideas.repec.org/p/fip/fedhwp/wp-06-09.html Financial Report of ABInBev 2011. Data retrieved from: http://www.sec.gov/Archives/edgar/data/1140467/000119312512102548/d310992dex992.htm Read More