Merger Analysis in July 2008, Thesis

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The constituent company's presence in China is geographically complementary, so that their respective distribution networks can be used to build each other's brands in their respective strongholds. Further, cost synergies of $1.5 billion annually are expected to accrue (Anheuser-Busch, 2008).

These claims are reasonable. There is little geographical overlap between the different brands. In particular in China, A-B is strong in the northeast, while InBev is strong in the southeast. The two companies are also complementary, with A-B strong in North America and InBev strong in Europe and South America. The experience of InBev in its previous major move in North America (the acquisition of Labatt's in Canada) was that it was able to build market share for InBev global brands by using the existing Canadian distribution system. Therefore, their expectation of replicating this success in the U.S. is reasonable. The claim of cost synergies is, however, questionable. While InBev claims a strong track record of cost synergies, previous M&A activity was largely in takeovers. A merger of equals leaves the company with two systems operating worldwide. There are no plans to rationalize capacity in North America. Cost savings in the $1.5 billion range, therefore, are unlikely to occur simply through corporate function rationalization in China and Toronto.

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One of the most significant benefits of the merger is that it defends against the rapid growth of other major brewers in the world. As the industry matures, consolidation is rampant. Both InBev and A-B were threatened by the emergence of massive conglomerates such as MolsonCoors and SABMiller. The A-B InBev merger wards off any potential threat from these companies, since the new entity is much larger than any of them, and dominant market share in all of the world's major markets.

There are not expected to be any impacts on the U.S. market. Prices are low as a result of intense competition. Industry players are more oriented to trying to increase prices, since cutting prices further would damage the bottom line. The emergence of premium InBev brands in the U.S. would increase average beer prices, rather than decrease them. Further, the impacts of rationalization are unlikely to yield significant cost savings in North America, which means that the combined entity is unlikely to pursue lower prices, but will rather attempt to win market share through growth in the premium segment instead.

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