In this paper, we will analyze, through four specific questions, the Brazilian beer merger between Brahma and Antarctica. In 1999, Brahma's CEO, named Marcel Telles, informed the firm's executives team about the negotiation of a possible merger with another Brazilian firm: Antarctica. The main objective of this assignment was to prepare a bargaining strategy to guide negotiations and conclude the deal.
The first part will focus on the estimation of the value of the different synergies and also determine intrinsic value per share of Antarctica (the target company). On the second part, it will determine the relative merits of cash and common stock as form of payment in this deal. Then, a share-to-share transaction will be brought in to find out the maximum exchange ratio in this condition. Moreover, we will enhance factors that determine the maximum and the minimum of this ratio. Finally, we will conclude with a description of deal design and some recommendations concerning this specific business case.
The merger with another firm enables to exploit a lot of opportunities as reinforcing its position in the market, creating economies of scale, sharing knowledge and know how. There are different mergers and acquisitions activity drivers. According to our business case between Brahma and Antarctica, we have faced rational managers and markets.
Brahma's managers pursue a competitive advantage to reach objectives in terms of market shares to become a "global total beverage company" in Latin America. In order to reach its objectives, Brahma has to take market shares from competitors as Antarctica.
[...] The number of Antarctica's shares before transaction was 12,000,000 shares. So, maximum intrinsic value per share of Antarctica is 3,012.5/12,000,000 = R$ 251.04. Question 2 What are the relative merits of cash and common stock as form of payment in this deal? In your view, will the amount of consideration to be paid depend on the form of payment? Why or why not? In this deal, there are a lot of advantages in cash and common stock for both the companies. [...]
[...] You have to think like an investor to bring the negotiation to fruition. You have the past to keep in mind, as well as the present and the future of the target company to suggest the best deal. All risks and opportunities must be carefully analyzed and considered while setting up the merger project. The financial situation of Antarctica and the forecasts have to be used as basis to negotiate a good price for the deal. If you chose a share for share transaction, as advised, you should accept a maximum exchange ratio which would amount to 0.0621. [...]
[...] Synergies are not automatic. Managers have to modify the new company's structure to create synergies. The main aim was to integrate another company and not to absorb it. In this case, Brahma is the most efficient producer of beer in Brazil and Antarctica is the second largest producer of soft drinks. In order to provide a satisfying answer to this question, we have to distinguish between two different kinds of synergies. In a merger operation, there could have some “cost synergies” or some “revenue synergies”. [...]
[...] But there are some constraints in terms of monopoly and antitrust regulations. Outcomes: Analysts expect that the merger enables Newco to create revenue synergies and cost synergies amount to R$166 million. Strategy: The main objective of this merger is to enable Newco to tackle international market and to consolidate its position in Latina America. Even if Newco firm is limited in Brazil, where the new firm will get about 70% of market share, the internationalization remains as a good strategy. [...]
[...] There are different mergers and acquisitions of activity drivers. According to our business case between Brahma and Antarctica, we faced rational managers and markets. Brahma's managers pursue a competitive advantage to reach objectives in terms of market shares to become a “global total beverage company” in Latin America. In order to reach its objectives, Brahma has to take market shares from competitors as Antarctica. However, in this situation, this strategy can be slow and costly and Brahma can be constraint by antitrust regulations because the firm is already the leader in the market. [...]
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