Acquisition Of Bass By Interbrew example essay topic

The purpose of this investigation is to establish whether the acquisition of Bass by Interbrew should be allowed. There will be many elements to look at in order to reach a final conclusion but in the first light, it seems that the takeover is a good idea. Interbrew is one of the largest brewers in the world and I think that the acquisition should go ahead because the merger would make interbrew one of the largest brewer in Great Britain with an overall market share of approximately 33% to 38%. The merger would lead to the creation of a duopoly between Interbrew and Scottish & Newcastle plc. The merger would also result in synergy benefits and cost savings. This suggests that while benefits may accrue to Interbrew as a result of the merger; there are practical concerns that the merger may not be in the public interest because of the creation of a duopoly.

It is this issue that I intend to investigate. Background Interbrew can trace its origins back to 1366 to a brewery called Den Horn, located in Leuven, a city just outside of Brussels. In 1717, Sebastien Artois, the master brewer, purchased the brewery and changed its name to Artois. Interbrew was formed in 1987 from the merger of Brasseries Artois, then the second largest brewer in Belgium, and Brasseries Pied boeuf, then the largest brewer in Belgium and the brewer of Jupiter. Interbrew soon acquired other Belgian speciality brewers, including Hoegaarden in 1989 and Belle-Vue in 1990. In 1991, Interbrew entered a phase of rapid expansion, and have since completed 30 acquisitions and strategic joint ventures, the largest of which were Labatt (Canada), Oriental Breweries (South-Korea), SUN Interbrew (Russia), Bass Brewers and Whitbread Beer Company (United Kingdom).

This helped the company gain recognition and have an increase in market share in order to try to become the "kings of the brewing industry" Interbrew acquired Labatt Brewing Company Limited, the second largest Canadian brewer, in 1995. With Labatt, they also acquired Rolling Rock in the United States and a 22% stake in the second largest brewer in Mexico, FEMS A Cervera. At the time, the acquisition of Labatt nearly doubled their turnover. Last year, Interbrew acquired Bass Brewers and Whitbread Beer Company, excluding Whitbread Beer Company's production of Heineken and Murphy's Irish Stout brewed under licence.

Respectively, these two businesses represent the second and fourth largest brewers in the United Kingdom and these acquisitions make Interbrew the largest brewer in the United Kingdom. The origins of Six Continents PLC (formally bass Brewers PLC) can be traced back to 1777 when William Bass established a brewery in Burton-on-Trent, trading under his own name. The business thrived under William, and his son Michael Thomas, developing into a leading domestic brewer and exporter. In 1876 their red triangle trademark became the first trademark to be registered in the United Kingdom.

As the business grew it actively participated in the consolidation of the industry, acquiring such well-known regional companies as Ten nents Caledonian in Scotland, and Mitchells & Butler in the Midlands. Bass merged in 1967 with C harringtons in London. In 1989 the government sought to reduce vertical integration in the brewing industry through the instrument of the Beer Orders, which limited the number of tied pubs that each of the major brewers could own. The Group's response was to dramatically reduce the number of pubs that it owned and focus on larger outlets more specifically targeted towards the new growth areas of the markets, which were being created by changing social and demographic trends. At the same time, it chose to direct the cash flow generated by its more mature businesses into developing an international hotel business.

Bass already owned a small chain of hotels, which had been acquired in 1987. This helped them expand the business away from the brewing industry and gain a foothold in another sector of a largely fast growing market. In 1996 the group acquired half of the Carlsberg-Tetley brewing business in the UK, in order to form a joint venture with Carlsberg, consolidate its position in the UK, and form the platform for further overseas expansion. By moving into the hotel business the company aimed to expand the company into new and fast growing areas. This move was blocked by the UK government and led to a renewed focus on developing the hotels and pubs divisions.

Over the next few years a number of smaller, non-core businesses such as Gala bingo and Coral bookmakers were sold, along with more pubs, including the leased estate. Nonetheless the pubs business grew and was increasingly branded, having opened its first O'Neills in 1994. The acquisition of Harvester in September 1995 was a turning point for the business, marking a significant commitment to the growing "eating out" market. In 1999 the group joined with Punch Taverns in a bid to acquire the pub estate of Allied Dome cq, which enabled it to cherry-pick the best 550 sites, for conversion to its brands, out of the total estate of over 3000 pubs. By buying pubs the expansion of the business could grow further and the integration could prove more profitable than just producing the beer. With the pace of consolidation in the global brewing business starting to accelerate, the group saw the opportunity to realise significant value from its brewing business and entered into an agreement to sell Bass Brewers to major Belgian brewer Interbrew in June 2000, for lb 2.3 billion.

This marked the final step in the refocusing of the group from a vertically integrated domestic brewer to a leading international, branded hospitality retailer - a process that had taken over ten years to complete. It also involved the sale of the "Bass" name and the subsequent name change to "Six Continents" to better reflect the global spread of the group's business. Investigation In the acquisition of Bass, Interbrew will have to look closely at economies of scale as well as the stakeholders who will be affected by the takeover. The main stakeholders in the business are: o Shareholders o Workers for Bass and Interbrew including Tenants o Bass pubs o Competitors o Customers The shareholders would be affected because these people have a clear financial interest in the performance of the business. They have invested money into the company through purchasing shares and they expect the company to grow and prosper so that they receive a healthy return on their investment. The return that they receive can come in two forms.

Firstly, by a rise in the share price, so that they can sell their shares at a higher price than the purchase price (this is known as making a capital gain). Secondly, based on the level of profits for the year, the company issues a portion of this to each shareholder for every share that they hold (this is known as a dividend). The shareholders are also entitled to vote each year at the A.G.M. to elect the Board of Directors, who will run the company on their behalf. The workers off Bass and Interbrew would be affected because if the acquisition goes ahead then the workers off bass could be made redundant thus creating downsizing. Bass Pubs will be affected because the takeover means that these pubs may be changed.

Interbrew could decide to extinguish brands that aren't making enough money and therefore consumers may find another brand not belonging to Interbrew in preference to Interbrew's products. Interbrew may also change the styling of the pubs to their own taste to show people that Interbrew own it and not Bass. Customers may not like this change in style and may find an alternative. The main competitor in Britain to interbrew will be Scottish and Newcastle. The takeover will create a duopoly between the two companies. This duopoly could prove to be unfavourable to consumers and other smaller competition.

It would create a Barrier to entry. This means that smaller companies could not enter the market for several reasons e.g. they cannot compete on price, or cannot provide enough choice for the consumer. Interbrew, because of being a powerful company could operate predatory pricing policy. As the title suggests, this is a policy designed to kill off competitors by reducing the price below cost price temporarily. The idea is that once the competitor is killed off, the firm can raise the price back up to the old level and steal all their customers. This is bad for consumers as well as competitors as it will eliminate a wider choice for the consumer.

Interbrew could also participate in price discrimination charging different prices to the consumer and bulk buyers. Customers are affected also by the sale of Bass to Interbrew. If Interbrew decided that one of the brands previously owned by Bass was not making enough money, they might decide to either stop production of it totally, or to modify it slightly so that it has a better taste / quality etc. This would be bad for consumers because the people who do drink that brand would have it changed and they might not end up liking it.

This would lead to customer dissatisfaction and as a result, Interbrew could end up losing that custom. Conclusion In light of this information, my original idea that the acquisition of Bass by Interbrew should go ahead was a quick and un calculated judgment. I have now come to the conclusion that the acquisition should not go ahead and that the takeover would not benefit the consumer. I have reached this conclusion because whilst investigating, I came across several pieces of information, which I had not seen when making my introduction. Also the competition commissions report aided my conclusion.

In reading it they made several valid points about the way in which Interbrew could abuse their power in the market, which I agree with. I do feel this is the best conclusion and is totally in the public interest. Bibliography web web web Glossary Vertical Integration- This is when a company obtains control of its suppliers (sometimes called backward integration) or of the concerns that buy its products or services (forward integration). Social and demographic changes- The study of human populations, including their size, composition (by age, sex, occupation, etc. ), and sociological features (birth rate, death rate, etc.

). Merger- The combination of two or more organizations for the benefit of all of them. The objective is invariably to increase efficiency and sometimes to avoid competition, although approval of the Monopolies and Mergers Commission may be required and the merger must be conducted on lines sanctioned by the City Code on Takeovers and Mergers. All the parties concerned, unlike some takeovers, normally amicably arrange mergers. Cash flow-The amount of cash being received and expended by a business, which is often analysed into its various components.

A cash-flow projection (or cash budget) sets out all the expected payments and receipts in a given period. This is different from the projected profit and loss account and, in times of cash shortage, may be more important. It is on the basis of the cash-flow projection that managers arrange for employees and creditors to be paid at appropriate times. Stakeholders- These are all of the people affected by a decision a business makes. Stakeholders are usually considered to be shareholders, customers, environment, the government and the workers.

Capital Gain- The difference between the sale and purchase price of an asset. Increases of over a certain threshold will be subject to Capital Gains Tax. Dividends- This is the total amount of 'profit after tax' that the business will issue to shareholders at the end of the financial year. The remainder of the 'profit after tax' will be retained in the business for re-investment. Economies of scale- These are reductions in the average cost of production, and hence in the unit costs, when output is increased. If the average costs of production rise with output, this is known as diseconomies of scale.

Economies of scale can enable a producer to offer his product at more competitive prices and thus to capture a larger share of the market. Internal economies of scale occur when better use is made of the factors of production and by using the increased output to pay for a higher proportion of the costs of marketing, financing, and development, etc. Internal diseconomies can occur when a plant exceeds its optimum size, requiring a disproportionate unwieldy administrative staff. External economies and diseconomies arise from the effects of a firm's expansion on market conditions and on technological advance. Downsizing- When staff is made redundant as a company restructures its organisation. Duopoly- A market in which there are only two producers or sellers of a particular product or service and many buyers.

The profits in such an imperfect form of competition are in practice usually less than could be achieved if the two suppliers merged to form a monopoly but more than if the two allowed competition to force them into marginal costing Barrier to entry- Factors that prevent competitors from entering a particular market. These factors may be innocent, e.g. an absolute cost advantage on the part of the firm that dominates the market, or deliberate, such as high spending on advertising to make it very expensive for new firms to enter the market and establish themselves. Barriers to entry reduce the level of competition in a market, i.e. they make it less contestable, thereby by enabling incumbents to charge higher-than-competitive prices. Predatory pricing- The pricing of goods or services at such a low level that other firms cannot compete and are forced to leave the market. While it has long been accepted that some firms resort to predatory pricing on occasions, the application of game theory to strategic behaviour has shown that predatory pricing is unlikely to occur very often as it is at least as painful for the predator as for the victim. This encourages most potential predators to look for a more cooperative plan.

Price discrimination- the sale of the same product at different prices to different buyers. Usually practised by monopolists, it requires that a market can be subdivided to exploit different sets of consumers and that these divisions can be sustained. Pure price discrimination rarely exists, since sellers usually differentiate the product slightly (as in first-class rail travel and different types of theatre seat). Governments may use price discrimination in order to redistribute wealth but usually it is a monopolist's way of extracting a higher pure economic profit.