Mergers and acquisition: Brazilian beer merger negotiations: Companhia Cervejaria Brahma, S.A., case study

Résumé du document

This final assignment deals with the merger of 2 companies specialized in the beer market, Brahma and Antartica, in Brazil. Brazil is the 4th beer market in the world after the United States of America, China and Germany. This market represents a huge market because of various factors (tropical climate, very young population, emerging middle-class). The merger takes place in the 1990's where the beer market has known economic recessions due to a stagnant evolution of consuming beverages and a devaluation of the local currency.

First, Companhia Cervejaria Brahma is a Brazilian company formed in 1988 producing a large range of beers (almost twenty different beers) under the brand of Brahma. The company has known a quick success in the Brazilian market at the beginning of the 2000's. Later, Brahma extended its activities in the South American market (Venezuela, Argentina, etc.). Thanks to alliances, mergers and acquisitions, the Brahma Company became rapidly the 4th leading world company in the beer market. Increasing their presence worldwide, Brahma diversified its range launching soft drinks too but not with the same success as beers

Extraits

[...] The purpose of this merger was to gather both companies and improve market position and raise market shares in the beer segment. When Brahma and Antarctica merged, the synergy enabled to combine their activities and brands portfolio; that is to say their distribution network, their sales, their production while cutting costs and reach a better competitiveness. The merger has permitted to achieve a 75% growth rate in terms of beer sales while saving 45 billion per year in sourcing, production, distribution and administration thanks to the new entity. [...]

[...] Their new position on the Brazilian beer market of the market) will also help them to merge their brand awareness and have a better position facing suppliers and consumers. Then, Brahma was in better position compared to Antarctica which was in a critical situation as their market shares were declining for several years adding an abyssal debt of more than $680 million. The merger with another player on the market was the best solution at that time and Brahma was able to negotiate well against Antarctica. [...]

[...] First, considering the fact that control belongs to the buyer, Brahma would have a larger influence on decision and voting. Thanks to an absolute majority, Brahma will have the veto right. The composition of the new board of directors is a big matter. Generally, such a merger damages the leadership of management of bought companies for a long time after the completion of the deal. Regarding executives, a strong support is also necessary as many bought companies lose their top-employees after an acquisition, which is a tough mission if the business goes bad. [...]

[...] For example, the complementary part can be paid in cash so that it will help Brahma to lower the debt of its counterpart. Concerning the listing on stock exchanges, the Newco will be referenced in the New York Stock Exchange (NYSE) and the Sao Paulo Stock Exchange and the Brazilian Mercantile and Futures Exchange (BM&FBOVESPA) . Conclusion . In conclusion, the case study of mergers and acquisitions between Brahma and Antarctica has raised several issues in terms of preparation and organization. [...]

[...] The value of a company will automatically decrease if the counterpart performs worse. That's why an exchange ratio has to be determined in order to equilibrate the share-to- share transaction. The formula (Conn and Nielson model) to calculate the maximum exchange ratio is: Information needed to calculate the maximum exchange ratio: A = Brahma B = Antarctica ER = Exchange ratio P = Price per share (Brahma: 637.5 / Antarctica: 39.6 ) EPS = Earnings per share PE = Price earning multiple (EPS Brahma: 30.79 / EPS Antarctica: - 48.23 ) E = Earnings before Interest and Taxes (Brahma: 451 / Antarctica: 81.1 ) in millions of reals S = Number of outstanding equity shares (Brahma: 343.7 / Antarctica: 62) Exchange ratio = - A + A PE AB] / P A S B Exchange ratio = - ( 343.7 / 62) + 81.1 ) - 0.638 ] / 637.5 * 62 Exchange ratio = 51.48 Therefore is the maximum exchange ratio (number of Brahma share per Antarctica) that Brahma shareholders would tolerate. [...]