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IMD Professor Reacts: Nuno Fernandes on a potential InBev SABMiller merger

Finance expert says SABMiller should not let InBev deal slip away

October 10, 2015

When the news surfaced of a possible merger between beer giants InBev and SABMiller, markets soared seeing the potential for a great deal. Now reports are out saying SABMiller has refused the latest merger offer.

Outstanding track record

I wouldn't count out a deal yet however. InBev has a great track record of deal-making. The deal the company made in 2004 to merge Interbrew and Ambev was a big success. The company acquired the Fujian Sedrin brewery in China in 2006, again successfully, and most recently merged with Anheiser Busch in 2008, making it the number one global beer company.

All of these deals point to the company's ability to pull off another big successful merger.

Reasons to merge

There would be a lot good reasons for these two companies to get together. Many possible synergies are there, and InBev's past performance shows that it can deliver.

InBev is already the world's biggest brewer and if this deal eventually goes through it would create a beer behemoth. The pricing power that comes with being so far ahead as the number one company is huge. The newly formed group would streamline its costs including overheads and purchasing, and, last but not least, it would financially benefit from more preferential international beer taxes.


But it won't be a piece of cake if an agreement is made. A deal of this magnitude that involves the two top players in the global beer market is going to have numerous anti-trust issues to overcome, and will involve significant divestitures in some markets.

An InBev SABMiller deal could, in theory, create a lot of value. In practice, however, more than 60% of M&A transactions destroy it.

5 golden rules

To succeed they should follow my five golden rules of mergers and acquisitions:

1] Before and after. Companies must have a continuous process linking the pre-deal phase, the transaction itself and the period afterward. Furthermore, their senior executives need to be involved from the start. Companies that destroy value in M&As often have different teams during and after the deal, and they don’t plan the post-merger integration properly.

2] Move fast and communicate. Companies that communicate quickly and constantly during M&A deals keep their focus better and reduce uncertainty among customers and employees—especially those of the target company. Talent exodus is a risk in most M&As, so senior managers must be ready to answer the “What happens to me?” question when employees ask it.

3] Avoid “strategic” deals. Good, quantifiable reasons for M&A deals include increasing a company’s product range, broadening its distribution, improving its manufacturing capabilities, and reducing its unit costs. Bad reasons include boosting a CEO’s ego and salary, empire-building, or doing a “strategic deal” when the benefits cannot be quantified. When a CEO says “This is strategic; we’d be stupid not to do it,” it’s usually a bad sign.

4] Think like a financial investor. Companies must be ready to say no to an M&A deal that goes above its “walk-away price.” They should not enter into auctions. And they should never fall in love with a deal. CEOs, meanwhile, must control their emotions, because overconfidence and ego can destroy value.

5] Never use investment bankers for the valuation. Investment banks are good for roadshows and financing, and market regulators sometimes require public companies to hire banks in M&A deals. But firms should not use them for valuing or negotiating a deal. This is because investment banks get fees for closing the deal, regardless of whether or not it creates value for shareholders after it is completed. A banker is always on the side of the deal, not the company’s side.

As I predicted before, 2015 is a big year for M&As, and InBev and SABMiller joining forces would be momentous. Will the deal go through? Will they make mistakes along the way? Stay tuned.

Nuno Fernandes is Professor of Finance at IMD, where he directs the Strategic Finance program and also Finance Fundamentals for Executives, a new IMD "Global Leadership in the Cloud" program. He is the author of Finance for Executives: A Practical Guide for Managers.

Read Nuno's Five Golden Rules for Mergers and Acquisitions

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