Friday, June 20, 2008

This Bud's For InBev

Seems like InBev is serious about acquiring Anheuser-Busch (A-B). The Belgian brewer has made an unsolicited offer of $65 a share, or $46 billion, in cash. That’s a significant premium over A-B’s current stock price. The financial and legal shenanigans are already taking place. A-B is looking to cut a side deal, maybe with the Mexican firm Grupo Modelo, to make itself less attractive. That has annoyed InBev CEO Carlos Brito, who warned A-B’s board that “…we believe it is important for you and your Board to understand that our proposal to combine with Anheuser-Busch by means of acquiring all Anheuser-Busch outstanding shares for $65 per share in cash is made on the basis of Anheuser-Busch’s current assets, business and capital structure.” He’ll probably have to up his bid, maybe to $70 a share. At what point does the price become untenable? Further, a number of other strategic issues should be taken into account, and they usually aren’t because the dealmakers usually see only the financial and legal aspects and ignore the so-called “soft” stuff that can easily screw up the rosy post-merger projections. If I was advising Brito, I’d warn him about four things to pay very serious attention to:• Good old fashioned politics. A-B is about as “American” a brand as one can imagine, Budweiser is the "King of (American) Beers", and there might be some stiff political resistance to a “foreigner” coming in—especially in a political climate where free trade and outsourcing are hot button issues. Already, Sen. Claire McCaskill, D-Mo, has formally urged the A-B board to reject the offer. Many local political groups have done the same. Is this just some normal posturing, or is it more than that? If neighbor Barack Obama of Illinois gets into the fray in an election year (remember, the Teamsters, who represent many of the A-B drivers, have endorsed him for President), things could really get interesting. • Good old fashioned unions. Teamsters or otherwise, they don’t like the deal, and unhappy employees are not something an acquiring firm would like to inherit. This is especially salient because InBev has a history of tough approaches with unions. The company has laid off hundreds in five countries in Europe, where it’s pretty hard to lay off anyone. • Good old fashioned differences in business philosophies. This one could be a big wild card. A-B is a marketing machine. Spend those umpteen dollars on a gazillion ads and promotions, no holds barred. Focus on innovation in marketing rather than on product development. That’s how—despite stagnant earnings and an unimpressive stock valuation-- it’s maintained a hefty market share with a pretty mundane lineup of beers. In contrast, InBev grows by acquisitions followed by aggressive cost cutting. You see the potential problem here? • Good old fashioned fantasy thinking. In my books and articles, I’ve pointed out that there are indeed good strategic reasons for acquisitions, like obtaining cutting-edge technologies or gaining a quick entre into a fast-growing market. But InBev’s strategy is different, and far riskier: It wants to buy market share, plain and simple. With one stroke of the pen, its current tiny presence in the U.S.would balloon to a nearly 50% share of the largest beer market in the world. That sounds nice, but consider: The U.S. beer market is now fragmented and hypercompetitive, new micro breweries with tasty products and loyal fan bases are springing up left and right, and most important, the U.S. market as a whole has been growing very slowly for years. On top of that, InBev’s basic premise is that A-B’s customers will cooperate with the deal; that is, they won’t defect. But there’s no guarantee of that, as so many serial acquirers have found. And if InBev’s cost-cutting campaign wipes out A-B's expensive marketing initiatives that have propped up market share for years, the problem could be aggravated further.


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