AB Inbev face their biggest integration challenge yet

Now Anheuser-Busch (AB) Inbev has purchased its big rival SAB Miller, one in every three pints pulled throughout the world will be sold by AB InBev, creating what is described as the world’s first truly global beer company. Despite their past success at integrating newly acquired companies analysts will be watching closely as AB Inbev has been under increasing pressure of late. Complex cultures and wide ranging geographies will make this integration AB Inbev’s most complex acquisition.

Now AB Inbev has purchased its big rival SAB Miller one in every three pints pulled throughout the world will be sold by AB InBevcreating what is described as the world’s first truly global beer company. Despite their past success at integrating newly acquired companies analysts will be watching closely as AB Inbev has been under increasing pressure of late. Complex cultures and wide ranging geographies will make this integration AB Inbev’s most complex acquisition.

In a slow growth market AB Inbev has been good at generating growth through acquisition over recent years and this merger has come at a time when cost savings and revenue growth were beginning to stall. On average, merging consumer products companies increases EBITDA by 3.2% of target net sales[1]. Yet annual savings as a percentage of revenue from previous transactions of AB Inbev range from 12% to 21%[2]. Looking at past performance the estimate of $1.4 Billion of synergy savings seems on the conservative side with analysts suggesting the figure will be closer to $4 Billion[3]. However, the size of this merger, the largest ever takeover of a British company, will bring about its own challenges. Couple this with the geographic and cultural challenges this deal has created and the integration teams have a tough time ahead of them.   

Performance improvements

Mergers and acquisitions are intrinsically disruptive, but this is a source of opportunity for many organisations. It is widely seen as a way to embark on wider performance improvement programmes across the newly merged organisation[4]. In consumer goods companies there are many drivers for integration both in terms of cost savings and creating greater revenue growth. The graphic below highlights some of the key drivers for consumer goods integration.


The core focus for AB Inbev will be on efficiency savings in the back office functions while sharing best practice to deliver the remaining 20% of the savings targets[5]. Companies often fail to consider how to optimise the performance of the combined organisation. There are areas of the business (typically front office functions) that take longer to assess and understand how they can be integrated to drive enhanced customer service. AB Inbev has proved in the past they are effective at also driving efficiencies in front office functions and using this to generate further revenue growth. 

Geography

AB Inbev stocks ended 2016 down 13.9%. They will look to SAB Miller’s presence in emerging markets, especially Africa, to provide a much needed boost in growth. Last year, the world beer market fell in terms of volumes sold by 1% (a trend likely to continue) but Africa grew by an estimated 3%. Integration work, as a result of the global nature of the deal, will prove more challenging than any previous integration they have undertaken. SAB Miller has operations in 70 countries around the world, with the majority in emerging markets. By contrast AB InBev operates in 26 countries, with Brazil and the USA accounting for almost half its sales. This will make it harder to make efficiency savings compared to the acquisitions of Grupo Modelo and Anheyser–Busch that were more regionally focussed takeovers with obvious synergies. AB Inbev has limited presence on the African continent and as a result it will be hard to cut many costs in Africa, relying heavily on the existing structures in place. Especially as a deal has already been done with the South African Government to ensure jobs would be protected. That said, they anticipate that 30% of the savings target will be generated by the closure of overlapping offices and other general realignment of overlapping administrative costs across the group[6].

People and Culture

Culture plays a large part in any organisation. The centralised nature of AB InBev versus the devolved strategy of SAB Miller will be one of the key cultural challenges to overcome. Ingrained in the culture of SAB Miller Executives is the ability to make decisions quickly and in greater isolation at a local level. Devolved structures give you the ability to react quickly to customer needs locally and stay close to your customers. In Bev’s more centralised approach enables greater possibility for efficiencies and global strategies are easier to put into action. These two approaches are very different and could cause a headache for the integration team who will need to establish a clear set of programme controls and governance.

As part of the cost-cutting drive at Inbev and SAB Miller 5,500 jobs will be lost which represents 3% of the combined workforce creating 30% of the estimated savings from the deal[7]. It is well understood that an acquisition creates uncertainty amongst employees of both organisations adding to integration challenges. This causes delays in moving forward with integration execution, as employees are distracted by what the integration means for them personally and their future role.

Supply chain and distribution savings

AB Inbev estimate that it will make 25% of its target savings from Procurement & Engineering[8] by using its increased buying power to drive down the price of raw materials and packaging. Another 25% of the savings will come from greater brewing and distribution efficiencies through the alignment of brewery, bottling and shipping productivity, along with the optimisation of other brewery and distribution processes across geographies. This is an area of integration where AB Inbev already have significant experience from past mergers.

Integration Programmes

Numerous studies have highlighted that over two thirds of integrations fail to deliver the stated benefits. Our clients have been clear that they intend to continue to increase spend on integration to help deliver the identified benefits of the deal.

There are 3 key measures that will help ensure an integration programme is set up for success:

  1. Clarity of purpose  - Create a clear understanding of strategic and financial rationale for the deal and being clear on what success looks like. Build the ‘blueprint’ for the integration as early as possible, and ensure that the executive team are in agreement on the ‘guiding principles’ for the integration.

  1. Governance and ControlEnsure that a formal governance structure is established to drive the integration forward at pace, make the difficult decisions and resolve issues quickly.

  1. Managing changeRemove uncertainty by implementing the new organisation design as quickly as possible and implement best in class communications.

Integrations are never easy. The SAB Miller integration will be the most challenging yet. Its success is likely to be judged on how well they integrate SAB Miller’s Africa operation as the biggest driver for the acquisition, enabling AB Inbev to access a key growth market. With stocks down in 2016 and the track record of integration success investors and analysts will be watching closely to see what level of savings is achieved and any potential issues that disrupt the integration.

[1] http://www.forbes.com/sites/baininsights/2015/01/09/how-merging-companies-can-beat-the-synergy-odds/#3607aab267a0

[2] https://www.jefferies.com/CMSFiles/Jefferies.com/files/Insights/ABInbev.pdf

[3] http://www.telegraph.co.uk/business/2016/09/28/megabrew-deal-clears-final-hurdle-as-sab-miller-and-ab-inbev-sha/

[4] http://www.bain.com/publications/articles/delivering-ma-benefits-ceo-forum.aspx

[5] http://www.ab-inbev.com/content/dam/universaltemplate/ab-inbev/investors/releases/28September2016/Presentations/Presentation%20-%20Building%20the%20First%20Truly%20Global%20Brewer%20-%2028%20September%202016.pdf

[6] http://www.ab-inbev.com/content/dam/universaltemplate/ab-inbev/investors/releases/28September2016/Presentations/Presentation%20-%20Building%20the%20First%20Truly%20Global%20Brewer%20-%2028%20September%202016.pdf

[7] https://www.ft.com/content/7fa29f5a-8ae4-11e6-8cb7-e7ada1d123b1

[8] http://www.ab-inbev.com/content/dam/universaltemplate/ab-inbev/investors/releases/28September2016/Presentations/Presentation%20-%20Building%20the%20First%20Truly%20Global%20Brewer%20-%2028%20September%202016.pdf

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Author

James Chapple Senior Consultant