Introduction
Earlier this year, international brewing giant InBev made a bid to acquire the American brewing giant, Anheuser-Busch. This paper examines the merger, from the standpoint of DOJ and FTC guidelines. To properly analyze the proposed Anheuser-Busch/InBev merger, we must first determine the nature of the merger. This paper contends that the proposed merger is best understood as a conglomerate merger–that is, a merger between two firms with little or no economic interaction. This paper will demonstrate that the proposed merger can not be properly understood as a horizontal merger because Anheuser-Busch and InBev are not meaningful competitors. Nor can the merger be understood as a vertical merger, because neither corporation is a significant potential customer of the other. Rather, the proposed merger is a conglomerate merger, and understood as such, clearly violates Section 7 of the Clayton Act. This paper will proceed as follows: Section I will demonstrate that the proposed Anheuser-Busch/InBev merger is a conglomerate merger in a loosely oligopolistic market. Section II will demonstrate that InBev is the most likely entrant to the U.S. Beer Market. Section III will apply a potential entry theory analysis of the merger. Section IV will conclude.
Section I – Conglomerate Merger
According to the Federal Trade Commission & U.S. Department of Justice horizontal merger guidelines, for a merger to quality as a “horizontal merger,” the merging firms must directly compete. We find that the proposed Anheuser-Busch-InBev merger fails to meet this criterion. The data shows that, in the U.S. Beer Market, Anheuser-Busch (AB) and InBev are not direct competitors in any meaningful fashion.
In 2006, AB and InBev reached an agreement, whereby AB would distribute InBev’s products in the United States, beginning in 2007. Accordingly, to clarify our analysis, we will use data from 2006, when all of InBev’s distribution was handled through its subsidiary, Labatt USA.
A simple analysis of market concentration is sufficient to demonstrate that InBev and AB do not compete in a meaningful fashion. In 2008, Miller and Coors merged. After which, U.S. Beer market shares were distributed as follows:
Acquired in 2002, Labatt USA is a wholly owned subsidiary of InBev. In 2006, the 3.6 million beer barrels shipped by Labatt USA accounted for only 1.7% of InBev’s total global shipments (210 million bbls). Approximately half of Labatt’s 2006 shipments were other InBev brands, including Stella Artois, Beck’s and Bass. When juxtaposing InBev’s 1.7% 2006 U.S. Beer Market share against AB’s 47.9%, we see that, to any extent that InBev is a competitor, it is not a significant competitor–InBev’s U.S. shipments are a mere 3.7% of AB’s.
This point is more clearly demonstrated by taking a closer look at the U.S. Beer Market. The U.S. Beer Market is commonly divided into four submarkets: 1) imports, such as Beck’s, Heineken and Guinness; 2) super-premium beers, such as Budweiser Select, Michelob, and craft beers; 3) premium beers, such as Bud Light and Coors Light; and, 4) value-priced beers, such as Busch Light, Keystone Light, and Pabst Blue Ribbon. Consumers do not substitute easily between these markets. Under this more narrow market definition, InBev and AB compete in completely separate markets. InBev’s products are confined to the imports market. AB produces in the premium, mid-grade and low-grad beer markets. Though some consumers may substitute between imports (InBev had 11% of the U.S. Import Beer market share in 2007) and premium beers, AB’s presence in the premium beer market is minimal.
The point of this is simple: AB and InBev are not meaningful competitors in the U.S. Beer market, or the more narrowly defined submarkets. This does not mean, however, that the proposed merger is lawful.
For the sake of completeness, we should mention that the proposed merger does not qualify as a vertical merger. Though AB currently distributes for InBev, neither is a significant potential customer of the other–both produce finished goods. Rather, this proposed merger is a conglomerate merger, and its competitive effects must be analyzed as such.
Taken as a whole, the U.S. Beer Market resembles an oligopolistic market–that is, a market controlled by relative few firms. In this case, the top two firms–AB and SABMiller (a conglomerate of South African Brewing, Miller and Coors)–control over 75% of the market. No other firm controls more than 4% of the U.S. Beer market share. If one were to purchase a representative 12-pack of U.S. beer, six beers would be made by Anheuser-Busch, three beers would be made by SABMiller-Coors, and the last three beers would each contain a few drops produced by the remaining fifteen-hundred-plus U.S. brewers.
Section II – InBev the Most Likely Entrant
In 2007, Anheuser-Busch made nearly $6 billion in profits–a profit margin of 35%. Compared with a food and beverage industry average of 8.2%, AB’s profits certainly seem “supernormal.” According to an article from the Beer Marketer’s INSIGHTS, InBev has been “clearly dreaming” of entering the U.S. Beer market “for years.” We argue that InBev is the most likely entrant into the U.S. Beer.
InBev’s position, demonstrated by the proposed merger, combined with a process of elimination applied to other brewers, clearly demonstrates its status as “most likely entrant.” The table below summarizes the global beer market shares in 2006:
In 2006, InBev was the world’s largest brewer by volume and revenue (WDMD, 2007). In 2007, SABMiller and Molson-Coors merged to become the world’s largest brewer. The proposed merger would once again make AB-InBev the world’s largest brewer. Based on the above chart, we will evaluate whether each of these firms is able and/or likely to enter the U.S. Beer Market (for firms with 2% or more of the world market share–it is assumed that smaller firms would have insufficient financial resources to make a significant entry).
– InBev: likely entrant. Recent series of mergers (Labatt in 2002, Brazilian giant AmBev in 2004) demonstrate ability to generate large amounts of capital, ability to move in international markets
– SABMiller: merged with Molson-Coors in 2007. Already a significant competitor in the U.S. Beer market, with 28.5% market share
– Heineken: Already a competitor in the U.S. Beer market, largest competitor after SABMiller-Coors, with 4% of the market share
– Modelo: AB is currently a majority equity owner in Modelo, which currently participates in the U.S. market. If the AB-Inbev merger succeeds, AB’s share of Modelo will be bought out. Modelo is currently in merger negotiations with SABMiller-Coors, with the expectation of the merger’s success.
– Molson-Coors: See above.
– Carlsberg: Potential entrant, but may not possess enough capital to make a timely, likely and significant entry.
– Tsingtao: AB currently owns at 27.5% equity share in Tsingtao, which will be transferred to InBev if the merger succeeds.
– Fomento Economico Mexicano SA de CV (FEMSA): Potential entrant, but not likely to possess enough capital to make a timely, likely and sufficient entry.
The above simple analysis suggests that InBev is the most likely entrant in to the U.S. Beer Market. Moreover, InBev is also the only firm large enough to deter anticompetitive effects by its threat of entry. InBev has the capital, experience, and history to make it a likely entrant and, in the scope of the World Beer Market, the most likely entrant.
The SABMiller-Coors merger and the proposed SABMiller-Coors Modelo merger are representative of a larger trend toward concentration within the brewing industry, which is already a loose oligopoly. This trend toward increasing market concentration is clear: in 1947, the top five brewers controlled 19% of the market share. By 1995, the number of brewers had declined by 90%, such that the top five brewers now controlled 87% of the U.S. Beer Market. After the 2008 SABMiller-Coors merger, the top two firms now control 75% of the market share. The respective Herfindahl-Herschman Index numbers for 1947, 1997 and 2008 are: 140, 2813, and 3200 (Elzinga and Swisher, 2005).
Section III – Potential Entrant Effects on Competition
As mentioned previously, InBev’s bid to acquire AB was announced immediately after AB announced its 35% profit margin on 2007 sales. The timing the merger announcement, in and of itself, suggests that AB may have overexploited its market power through short-term profit maximizing, causing InBev to make a bid to acquire AB.
Potential entry theory states that “the possibility of independent entry by a large firm outside an oligopolistic market deters companies in that market from fully exploiting their power through short term profit-maximizing or other such behavior, because supernormal profits would encourage the competitor to enter,” (Harvard Law Review, 1973). Stated differently, the credible threat of entry by another large firm should be sufficient to prevent large incumbent firms from exploiting their market power, as doing so would encourage potential entrants from entering.
In United States v. Penn-Olin Chemical Company, the issuing opinion found that:
“The existence of an aggressive, well equipped and well financed corporation engaged in the same or related lines of commerce waiting anxiously to enter an oligopolistic market would be a substantial incentive to competition which cannot be underestimated.”
If there are no potential entrants, this effect is mitigated. If a large firm in an oligopolistic market does not have to worry about entry, its incentives will be to raise prices as much as possible.
In Section II, we demonstrated that InBev is the most likely entrant in to the U.S. Beer market, whether broadly or narrowly defined. If InBev and AB are to merge, the effect will be to remove a potential entrant from the U.S. Beer Market, which, in turn, will encourage anticompetitive behavior on the part of both AB and SABMiller-Coors. To comply with Section 7 of the Clayton Act, InBev much choose between entering as an independent entry (by, for example, creating a new brand of premium beer), or no entry at all. Acquisition violates Section 7 to the extent that the “effect of such acquisition may be substantially to lessen competition.”
Section IV – Conclusion
The proposed AB-InBev merger is, by nature, a conglomerate merger. The U.S. Beer market is an increasingly concentrated oligopolistic market. In this market, InBev is currently the most likely entrant. The presence of InBev as a potential entrant prevents incumbent firms from overexploiting market power. The effect of the merger would be to remove InBev as a potential competitor. Consistent with the findings in Kennecott Copper Corporation v. FTC (U.S. Court of Appeals, 10th Circuit. – 467 F.2d 67), acquisition of AB by InBev would tend to increase anticompetitive behavior by the merged firm. As such, the proposed merger violates Section 7 of the Clayton Act, and should not be approved.
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A PDF version of this article, with complete citations, is available here: http://www.eateggs.com/files/ab-inbev-merger.pdf
