This article first appeared in the St. Louis Beacon: June 13, 2008 - Just about anything you might want to know about InBev, the suitor for Anheuser-Busch, can be found in its name -- a stripped-down, technocratic-sounding word that reflects a strategy for merging breweries and cutting costs.
"They are a bunch of machete-wielding investment bankers," says Ann Gilpin, an analyst for the independent financial research firm Morningstar.
"InBev's management is distinguished by its cost-cutting execution excellence," says a recent report by the UBS investment bank, issued before InBev made its formal offer for Anheuser-Busch.
All companies tout money-saving efforts. Anheuser-Busch issued first-quarter results in April noting that "our cost reduction efforts are significantly mitigating the impact of industry-wide cost pressures." But InBev seems to attract the most attention in the beverage world.
Just start with the name. InBev reflects the combination of Belgium's Interbrew and Brazil's AmBev, both of which were established via mergers of family-owned breweries.
Even the word InBev was whittled from the original InterbrewAmBev, which was revealed when the companies disclosed merger plans in March 2004. By the time the deal closed in August 2004, the number of letters had been cut by almost two-thirds.
On the Belgium side of the equation, Interbrew is the corporatized moniker reflecting the 1987 merger of the Artois and Pidboeuf breweries.
On the Brazil side, AmBev is shorthand for American Beverage Co., the English translation of Companhia de Bebidas das Americas. Companhia reflects the combination of two old-time brewers, whose names, in the interest of brevity for this article, are shortened to Brahma and Antarctica.
All of the InBev-related merger activity during this decade has led to significant cost-cutting on a global scale; and analysts say Anheuser-Busch can expect the same treatment if InBev's takeover is successful.
InBev has even promised to give the combined company a name "to evoke Anheuser-Busch's heritage, reflecting the strong history of Anheuser-Busch's key brands."
Regardless of the new name, the new boss won't be the same as the old boss.
HOW MUCH COST CUTTING?
Investors got an inkling of InBev's attitude thanks to a phrase tucked into the fourth page of a seven-page press release announcing the offer. To pay for Anheuser-Busch, InBev said it would borrow at least $40 billion, offer some type of equity financing and divest "non-core assets."
InBev didn't discuss details, and its executives say divesting could affect both companies. Wall Street already has speculated that Anheuser-Busch's theme parks subsidiary would be the first to go and that its packaging subsidiary was also on InBev's hit list. Last year, the entertainment subsidiary contributed 8 percent of net sales and 6 percent of net profit. The packaging unit contributed 10 percent of sales and 4 percent of net profit.
Some analysts question how much effective cost-cutting InBev can achieve with Anheuser-Busch, adding that InBev's behavior is a mixture of desire and necessity.
"Can a company cost-cut its way to prosperity?" asked Marc Greenberg, an analyst with Deutsche Bank Securities, in a report issued before InBev made its offer but after a Financial Times had published an outline of the deal in late May. His firm has had a non-investment banking relationship with Anheuser-Busch, and he had a hold rating on the stock.
"The potential for cost savings extraction is diminishing as the InBev business becomes increasingly efficient, raw material inflation absorbs cost savings and the business requires requires additional investment," says a May 27 UBS report by analyst Melissa Earlam, who has a neutral rating on InBev.
"We have argued for some time that InBev is therefore under pressure to make a sizeable acquisition in order to target a new pool of cost savings," adds Earlam, whose firm doesn't have an investment banking relationship with InBev. UBS has had a recent investment banking relationship with Anheuser-Busch.
Earlam believes that the St. Louis brewer represents "the largest pool of addressable cost savings remaining in the global beer industry."
STYLE AND SUBSTANCE
InBev practices zero-based budgeting, a strategy in which all expenses for each corporate element must be justified for each new planning period. It doesn't matter if the total budget for the upcoming period is larger or smaller than the previous total budget.
InBev describes its zeal for zero-based budgeting in its 2006 annual report by citing an example. In its main office in the United Kingdom, space shortages forced the company to pay for additional office space from an outside supplier when meeting rooms were needed.
Using zero-based budgeting, the management committee "gave up their individual offices" and now sit with members of the marketing and sales teams. The offices were turned into meeting rooms, "thereby dramatically reducing costs spent on external facilities."
InBev also employs "voyager plant optimization," or VPO, which the company describes as a strategy to improve performance. "Behavior change and effective decision making are important elements of the VPO toolkit," the company says.
UBS' Earlam says the savings from zero-based budgeting, VPO and cuts in advertising and promotion expenditures will continue shrinking on a relative basis through 2010. That's why InBev needed to buy something else, she says.
Deutsche Bank's Marc Greenberg remains skeptical about how much realistic cutting InBev can do at Anheuser-Busch. "Zero-based budgeting is not the greatest thing since sliced bread," he writes. "This brings a culture of thrift to most organizations, but does not ensure material competitive advantage in our view."
He worries that zero-based budgeting could dissuade the type of long-term strategic investments that require three to five years to prove themselves. "Cost reduction as a sole rationale has a shelf-life," he says. "When it's concluded, another piece of new -- expensive -- business may be needed to drive system profits."
Robert W. Steyer, a freelance journalist living in New York, was a business writer for the St. Louis Post-Dispatch.