Question

The following discussion describes a takeover attempt in the beer industry in 2008:

In June 2008, InBev NV, a Belgian-Brazilian giant, launched an unsolicited bid to acquire Anheuser-Busch Cos. for $46.4 billion, a move that would create the world’s largest brewer with annual sales of approximately $36 billion. InBev, the maker of Stella Artois and Labatt Blue, has long considered acquiring Anheuser-Busch, which controls nearly half the U.S. beer market. The two companies market about 300 brands on six continents and are the second- and third-largest brewers in the world in terms of volume. Anheuser has struggled with slow growth of its mass-market beers in recent years. U.S. sales have suffered from greater competition from a wide range of beers, including small-batch “craft” beers and imports, as well as from wine and spirits. There is increasing consolidation in the global beer industry as brewers try to balance slow growth in mature markets, such as the United States and Western Europe, with rapid growth in emerging markets such as China and Eastern Europe. There are also increasing expenses for commodities, such as barley, aluminum, and glass, making it important to gain economies of scale. InBev has only a tiny presence in the United States and would like to acquire Anheuser, which has led the U.S. industry since 1957. InBev, which is intensely budget-conscious, sees an opportunity to wring significant cost-savings out of Anheuser. The two companies have relatively little geographic overlap. By merging, they could gain a stronger position in China, where they both have been expanding recently. China is the world’s largest beer market by volume. InBev has secured commitments from banks to provide at least $40 billion in debt financing for the merger. Its success in raising the financial capital is an indication that banks are willing to lend substantial sums to companies with investment-grade credit ratings despite the continued turmoil in the financial markets and the efforts of a number of institutions to raise capital. InBev also has the U.S. public to consider because many U.S. citizens believe that Budweiser remains a powerful symbol of Americana. A Florida couple recently started a Web site called SaveBudweiser.com to rally support against a sale to InBev.

a. Based on the concepts in this chapter, discuss the factors leading to this proposed takeover merger in the beer industry.
b. What factors might create problems for the merger?

Consider a market with a monopolist and a firm that is considering entry. The new firm knows that if the monopolist “fights” (that is, sets a low price after the entrant comes in), the new firm will lose money. If the monopolist accommodates (continues to charge a high price), the new firm will make a profit.

a. Is the monopolist’s threat to charge a low price credible? That is, if the entrant has come, would it make sense for the monopolist to charge a low price? Explain.
b. What is the Nash equilibrium of this game?
c. How could the monopolist make the threat to fight credible?

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a. As with many mergers, there are several factors motivating this proposal: gaining economies of scale, increased operating economies, synergy/increased value, diversification (geographic), growth and elimination of competition. The importance of gaining economies of scale is an important factor behind the proposed takeover because of the increasing price of raw materials. Operating economies are a motivating factor because InBev is much more budget conscious than Anheuser. The ability to gain operating economies will likely produce synergies and increased value to InBev....

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