Ab Inbev Takeover of Sabmiller - Term Paper Example

AB INBEV TAKEOVER OF SABMILLER By Student’s Name Code + Course Name Professor’s Name University/College Name City, State Date Contents Introduction 3 An evaluation of the relevant levels of strategy 3 A critical evaluation of the key stakeholders 5 The Brazilian Investors 5 The Belgian Families 5 Altria 6 The Santo Domingo Family 6 External Analysis (PESTEL Analysis) 6 Political Factors 6 Economic Factors 7 Social Factors 7 Technological Factors 8 Ecological Factors 8 Legal Factors 9 Industry Analysis (Porter’s Five Forces) 9 Entry Barriers 9 Supplier Power 9 Buyer Power 10 Substitute Availability 10 Competitive Rivalry 10 Conclusion 10 References 12 Introduction Business strategies are ways through which organizations achieve the goals and objectives that they have set up. Simply put, a strategy is a long term planning of the business, through which the management establishes a pathway through which the desired goals of the business are to be accomplished. In most cases, business strategies take a longer [period of more than three years]. Organizational business strategies are interested in major resource issues, ranging from raising finances to establishing new plants or factories. Strategies are also foundations on which decisions concerning the products that should be allocated major resources are made. Besides, strategies define the scope of a business, including the products they produce and where they operate from. There are two major categories of business strategies including generic strategies and competitive strategies. Generic strategies include growth, internationalization, and retrenchment, while competitive strategies include lower prices on products and product differentiation. AB InBev’s acquisition of SABMiller is a growth strategy that was meant to expand the company. This paper is going to analyse AB InBev’s strategy and the value that it has added to the general business of the company. An evaluation of the relevant levels of strategy The current business environment is experiencing various changes regarding products, competition, markets, the manufacturing process, technology and customers. Besides staying at per with the pace of change, companies are expected to innovate and outperform their competitors to ensure that the shareholder value is maximized (Galpin & Herndon 2007, p. 123). Inorganic growth strategies including acquisitions, mergers, spinoffs, and takeovers are deemed important in aiding companies penetrate new markets, reduce competition, increase customer base, consolidate and expand in size, and utilize new technology in line with processes, people, and products. As such, inorganic strategies are considered by most companies as strategies for fast track growth and tools for unlocking the company’s value to shareholders. AB InBev has for a long period employed aggressive acquisition as its strategy for growth concerning margins and revenues. The company has been growing significantly in its earnings per share and revenue over the past few years and the profit margin is extremely high for a consumer staple company. The company’s cash flow suffered in the short-term as a result of its acquisitions of Oriental Brewery in 2014 and Grupo Modelo back in 2013 (Kudla 2014). Nevertheless, the company’s aggressive strategy that involves investing in brands that have positive cash flows and within emerging economies has proved to be effective. The merger between AB InBev and SABMiller proves to be the company’s finest strategic move considering that SABMiller is already an established beer giant in the United Kingdom. The process of executing mergers and acquisitions is significant as it involves a blend of different activities including evaluation, strategy, negotiation, and corporate asset combination with the intent of building and preserving the business value (Frankel 2011, p. 215). Most organizations put more emphasis on integration and due diligence, but various important reasons as to why companies should be deeply involved in this process exist. This process is essential as it determines the kind of benefits that would be reaped from a merger or acquisition. As such, the business management should always focus on maximizing such profit throughout the process. There are various steps through which the process of merging or acquiring a business is actuated, with different companies either summing up some of the phases or breaking them further into subsections. Nevertheless, this section will focus on five common steps including M&A strategy, Target Screening, Due Diligence, Transaction Execution, and Integration. The M&A strategy is the first phase of this process, and it involves understanding the business of the acquiring company and the goals and values that the business wishes to uphold[Don11]. As such, the acquiring company should be able to understand the kind of business that they are, their scope, and the direction that their business ought to take. The second phase involves Target Screening, which is all about establishing a team that is tasked with identifying potential targets and screening them to identify if they meet the criteria for acquisition. The due diligence phase could be termed as the most important phase of the M&A process as it involves assessing, evaluating, investigating the targeted company in order to obtain more details that would help in deciding whether a deal should be finalized[Ema11]. It is at this phase that the acquiring company identifies the target firm’s assets, which would prove to offer additional value to their company, as well as the various components that pose significant risk, especially risk associated with the integration of the two companies. Phase four involves execution of the transaction, which starts with valuation of the targeted company. Upon establishment of such valuation, the two companies engage in discussions and negotiations with regards to the valuation, the roles of the target firm’s senior managers upon combination of the two firms, and any other legal, cultural, and operational issues that may affect the deal (Miller Jr. 2011, p. 25). The last phase of the process is integration, which involves addressing various questions including how quick to integrate, to integrate to what extent, how daily operations will be maintained, and how integration progress and plans should be communicated. A critical evaluation of the key stakeholders The shareholders both from AB InBev and SABMiller are major contributors to the ultimate decision that is to be taken concerning any merging or take over arrangements between the two companies. With the companies expecting to make one giant brewing company with $275 billion, the Belgian families and the Brazilian investors who control AB InBev and the Santo Domingo family and Altria, the tobacco group, who are the major shareholders in SABMiller (Pooler & Dombey 2015 ). The Brazilian Investors The Brazilian investors, who are also the founders of 3G Capital, a private Brazilian equity group are the second largest stakeholders in AB InBev. They control 22.7 percent of the company’s shares and have a strong reputation in executing large deals that involve huge brands in the drink and food sector (Pooler & Dombey 2015 ). This group played a major role in the establishment of AB InBev back in 208 through various brewing takeovers. Also, they cofounded 3G Capital. Their experience with large takeovers is important in the company’s deal with SABMiller. As an AB InBev shareholder, these investors are bound to benefit largely considering the dividend potential and the increases in share value. This group has faced various criticisms concerning its aggressive strategy at 3G Capital, which involves cost cutting. Eighteen months after 3G Capital took over Heinz, it axed 7,000 jobs (Pooler & Dombey 2015 ). The Belgian Families Three Belgian families own 28.6 percent of AB InBev. These companies have a history of brewing and their ties have led to their established majority control of the company. The three families, including the de Spoelbergh family, the Van Damme family, and the de Mevius family, have merged over the centuries to create the AB InBev (Pooler & Dombey 2015 ). Considering their experience in the brewing industry these shareholders would prove to be of great value to the merger, especially to SABMiller as they could share their expertise in ensuring that the business brewing values are upheld even after an acquisition has been established. Altria On the other hand, 26.6 percent of SABMiller is owned by Altria, a tobacco company (Pooler & Dombey 2015 ). The company is the producers of some of the greatest and high-value US cigarette brands including Benson & Hedges, L&M, and Marlboro. In a deal with AB InBev, it is highly likely that Altria will exchange its SABMiller stake with equity, with the view of avoiding the tax bill of large capital gains. On the other hand, as SABMiller shareholders, Altria are exposed to a 50 percent gain on their investment as a result of entering into a deal with AB InBev. The Santo Domingo Family Julio Mario Santo Domingo founded the Colombia brewing dynasty, which has controlled the Colombian beer industry ever since the 1960's to date. Mario Domingo died in 2011 with a fortune of $8.4 billion. The Santo Domingo group has a stake of 13.9 percent in SABMiller, forming its main asset (Pooler & Dombey 2015 ). The Santo Domingo group is bound to gain a 50 percent increase on their investment as SABMiller’s shareholders from any deal with AB InBev. External Analysis (PESTEL Analysis) Political Factors Not only is the beer industry monitored and regulated by the federal government, but it is also closely watched and regulated by the local and state governments as consumption of beer is deemed a “vice”. Most municipalities control alcohol selling through taxation and state-sponsored stores, among other limitations, with the aim of reducing alcohol consumption among residents or raising funds (Radcliffe 2009). Regulations and monitoring have an effect on the product’s supply in any industry. This is no exception in the beer industry, with such effects being both good and bad. As a result of the limitations placed on beer supply, increases are experienced in prices (Radcliffe 2009). Economic Factors An industry’s economic surrounding is an important determinant of the success of any company within such an industry. Nevertheless, if proper attention is given to the economic situation and an organization establishes a resilient strategic plan, the company will stand out even in cases where the economy is trending downwards. Just like the economy, the beer industry has undergone various changes over the past few years. Developed markets have experienced various changes with organizations being forced to respond to declining or constrained trends in beer consumption. An increase in the rates of unemployment means that there is a decrease in disposable income, an aspect that has a major impact on consumption of beer. According to the SABMiller website, as much as there was an increase in economic pressure in 2010 following the global economic recession in 2008, there were improvements in global beer consumption as compared to 2009 (SABMiller 2011). In most industries, and decrease or slowing of growth leads to an increase in consolidation of companies. According to DataMonitor, three major companies including AB InBev, SABMiller, and Heineken N.V. hold 41 percent of the total market share at 20.1 percent, 13.3 percent, and 7.7 percent respectively (DataMonitor 2011). As much as such consolidation provides various advantages to the industry, globalization also offers various benefits. Through globalization, there is standardization of products, an aspect that increases distribution networks and quality, thus improving economic efficiency (Jernigan 2009, p. 8). As further changes are experienced regarding the economy, trends in consumption of beer are likely to be driven by increases in disposable income. Nevertheless, unlike most industries, the beer industry can still grow in times of economic struggles given that other factors are well considered. Social Factors The social factors that influence a firm include values, beliefs, opinions, attitudes, and individual life-styles in the external environment, as defined by the ethnic, cultural, demographic, ecological, educational, and religious conditioning (Pearce & Robinson 2009, p. 73). As changes occur in the market place concerning social attitudes, organizations must adopt to such change in order to uphold profitability. One of the social factors that has been beneficial to the beer industry is the continued substitution of hard, traditional liquor with beer. In addition, the increased responsiveness of the consumers to the advertising and marketing, coupled with an increase in disposable income especially within growth markets has also benefited the beer industry. Furthermore, there has been an increasing trend in shifting from spirits towards beer, an aspect that increases the demand for beer. According to SABMiller (2011), there has been a continuous rise in the consumption of beer in Asia, Latin America, and Africa, defined by the increases in both incomes and populations and the improvements in the appearance and quality of beer. Technological Factors The beer industry is affected by the same technological factors as other industries. There is need for newer technology to be tested to employ their beneficial features in product quality improvement and to allow for improvements in the production capacity. It is critical for companies within the beer industry to understand that as much as efficient technology can facilitate positive changes within struggling companies, poor decisions in selecting and application of technology can inhibit success within the organization (Radcliffe 2009). It is crucial for firms within the beer industry to stay updated regarding technological trends and advances to survive as the market is highly competitive. Such firms should acquire technologies that will ensure efficiency in harvesting, production, and marketing of their products to uphold, price reduction, product development, customer satisfaction, and cost reduction. Ecological Factors Ecological factors have an equally important role to play in ensuring organizational competitiveness. In the beer industry, energy and water use are closely monitored, as well as the level of pollution that companies within the industry cause. The federal government regulates ecological factors through ensuring that the brewers meet the established ecological requirements. Organizations in the beer industry publish how they use resources and the goals that they have put in place to improve on such usage. In the yearly report of AB InBev, they mention Better World Initiatives that they are adhering to in view of ecological sustainability (ABInBev 2011). Legal Factors The beer industry is affected by legal issues when it comes to advertising, labeling, and packaging. During advertising, beer companies target consumers at or above the age of 21 years. Also, some of the nation, especially from the Middle East and various Islamic countries beer products advertisements have been banned (DataMonitor 2011). Therefore, beer companies including AB InBev are expected to obey the regulations and rules established by each respective country, where they establish their operations. Restrictions on the sale and importation of beer among other alcoholic products have greatly affected beer sales (DataMonitor 2011). Industry Analysis (Porter’s Five Forces) Entry Barriers In the beer industry, the part of the market that a new company is intending to enter determines the applicable entrant barriers. Considering microbrewery within the industry, the barriers to entry are lower than mass distribution and production firms such as SABMiller and AB InBev. Given that one can sell the high-quality beer products at premium prices, new entrants can enter the market as microbreweries on a small scale. New entrants can recover the high costs incurred procuring production equipment through addition of a high margin to the end product’s price (DataMonitor 2011). Nevertheless, this does not apply to the larger economies of scale. The amount required for new entrants to invest to enter such markets is high enough to keep most potential entrants at bay. There is an increase in the barriers to new entrants, owing to the increased consolidations within the industry. According to SABMiller, the rate of consolidations has steadily increased, with close to a half of the total volume of beer in the industry being produced by only four large brewers including AB InBev, SABMiller, Carlsberg, and Heineken (SABMiller 2011). As such, generally, the industry has moderate risk, regarding the level of entry barriers, to new entrants. Supplier Power Hops and barley form the major products that are utilized in the beer industries, together with bottles and barriers. The supplier power has decreased as a result of the continuous resolution among most large companies to harvesting their barley and hops as well as an increase in individuals who grow hops[Dat11]. An increase in the options at the disposal of the players within the industry leads to a decrease in the supplier power. However, the suppliers within the industry have maintained a certain level of power as a result of the importance of the raw materials on the quality of the finished products, with such quality being used as a tool for bargaining. Buyer Power Considering the availability of various beers and a wide range of beer prices, the buyer power is low. Nevertheless, a higher buyer power is experienced in cases of large chain supermarkets (DataMonitor 2011). Substitute Availability The availability of substitutes within the beer industry is very high. Considering a growth in the trend of growth of microbrewers and home brewers, there is an increase in the substitutes’ threat for major brands in the industry such as AB InBev (SABMiller 2011). Competitive Rivalry The beer industry’s globalization has led to an increase in imports as major competitive rivals across boundaries. An increase in disposable income has also led to continued spending among customers on custom microbrewers, an aspect that forms another category of competitive rivals. As much as the top three companies still hold more than 50 percent of the market share, their profits are bound to fail if they do not establish a competitive advantage and outdo their competitors in the industry (SABMiller 2011). Conclusion It is evident that mergers and acquisitions form an effective strategy for growth and expansion of organizations, and AB InBev’s takeover of SABMiller is a high-value deal considering SABMiller's economic strength, its professional capacity, and consumer base, all of which are bound to add value to AB InBev's business. The beer industry is full of competition and regulations, ranging from political to ecological, and thus requires organizations to ensure that they embrace strategic change and be at par with the latest trends to attain a competitive edge. The beer industry has a consolidated structure with the top three companies being AB InBev, SABMiller, and Heineken. Nevertheless, it is important for these large companies not to ignore the small companies, which, collectively, comprise a significant share in the market. References Don11: , (DePamphilis, 2011, p. 54), Ema11: , (Gomes, Weber, Brown, & Tarba, 2011, p. 161), Dat11: , (DataMonitor, 2011), > Read More