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Tsingtao Case

Cross-border Mergers & Acquisitions


143670 Wang Zhao
143666 Jing Xiong

143428 Martin Aladzhov

143543 Edgaras Karklius


considered the benefit prospect. Tsingtao seemed positioned for stro ng earnings growth and was viewed as a potential acquisition target. In 2001 the Chinese beer market was the second largest in the world after the US beer market. Better market performance noticed by investors As text mentioned “Tsingtao was gaining market dominance and the attention of Chinese and foreign investors. ○ 4 A-B’s limited growth potential Chinese beer market was dominated by the cheapest beer category (85% by volume). But the Chinese market represented the huge profit and growth potential. Tsingtao’s market dominance. ○ 1 Chinese market Chinese per capital consumption of beer compared with USA and Germany not seems that’s not big number. but had gained foothold only in premium categories with limited growth potential. So it’s better for A-B hold more share in Chinese company to profit from the major category of market. 1. (25%)  List and explain at least three major drivers (push factors) mentioned in the text and in exhibit-1 of cross-border mergers and acquisitions (M&A). They already had 5% in 1993 which give A-B a big fortune. This is good time to buy more shares in Tsingtao. get more share of market In order to ensure the dominance Tsingtao need more money to develop and compete with its competitors.” It’s attractive M&A target with strong profit growth in the short-run. ○ 3. Tsingtao was evaluating other alternatives for strengthening its equity position. ○ 2. Better market performance is good symbol for acquisition. Get rid of the limitation. The value proposition for Tsingtao was quite clear: The brewery had gained the upper hand in its market through acquisitions that would now begin to add earnings with rationalisation and modernisation through the brewery’s operational excellence. It’s good opportunity for A-B to hold more shares in Tsingtao. while the middle market (10%) and premium markets (5%) stagnated in sales. Cross-border drivers – Mergers & Acquisitions. 2 . A-B tries to penetrate the Chinese beer market. ○ 5 competitors challenging The competitors is becoming challenging. A-B will offer a mergers & acquisitions a reasonable price for deal. One alternative was for Tsingtao to issue additional shares in the Chinese equity markets.

Undervalued prices of stocks which means missed opportunities for bigger profit. the high level of capital expenditures in 1999 and 2000 could well drag on in the next few years. The brewery had achieved major reductions of its net working capital (NWC).World fifth place in biggest beer companies. Well-assimilated merger companies like the small breweries is appreciated by investors. Year 2001 was a post-merger period – time of struggle under heavy cash payback pressures.Distributional and brewery perfection which gives the company stable ground and good reputation 4. Opportunity 1. Product number one in China (beer market) 2. Very big market share. Increasing NWC with 1% in the period 2000-2005 is impressive considering the money spend on assimilating the merger companies. The majority of accumulated breweries were on the bottom of the market with negative profit margins 2.Numerous acquisitions (34 acquisitions in just four years) which gradually start to pay off through the brewery’s operational excellence 2. SWOT analysis for Tsingtao for year 2001. 3. Anheuser Busch (AB) and a profitable investor. Series of price wars during this post-merger period 4. 3. 2. Furthermore.Exporting to 30 countries (broad international market) 3. Issuing additional shares on the Chinese equity market may lead to a very fast raising of capital because of their attractiveness as a company with potential. (25%) Anheuser Busch’s financial analysts were of different opinions about the outlook for Tsingtao. 2 of the competing companies all together have a bigger market share than Tsingtao 2. but much of that was accomplished before really tackling the complexity of absorbing many of the new acquisitions. Threat 1. Prepare a SWOT analysis as of year 2001 for the Tsingtao Brewery. Large experience because the company was established in 1903 5. Weakness 1. The analysts therefore suggested a SWOT analysis be made to highlight Tsingtao’s strength and weakness and market opportunities and threats. 3 . Issuing additional shares on the Chinese equity market – This may lead to diluting of the shares which means spreading among a lot of shareholders and inefficiency may occur. Strength 1. This means that they will not have to pay interests on their borrowed money by issuing stocks. 4. This process of merging led to a substantial borrowed financial resources (debt) 3.

00 2.5% 3.8 4. and the lower cumulative discounted free cash flow.5% 2.5 flow Debt capital/total liabilities undervalued . Debt ratio decrease to 44.2% 4. AB will take more consideration to decide to hold more shares or not.43 1.low share value(equity value). it decreases. That’s best-case which increase the more capital of investment in the end(T. Finally the equity value is 3. In current situation.More cumulative discounted free cash flow which is 4716. NOPAT of sales decrease to the 4.34.NWC increase to the 2.0% 1. It seems that it will profit in buying share in this company.5% 2. decrease the equity value to the 1.2% 4. the input data below. mostly they will not buy more in worst case. Compute the “best-case” and “worst-case” scenarios using the forecast model (exhibit 2). 3.At Hong Kong stock exchange is 2. increase the risk of company(debt ration).7.0%.5% 3.2% 4.739.2% 4. Mostly it will affect AB to hold more shares in Tsingtao.4% means less debt in company.the rest of variables stay same.0% Best-case Most likely Worst-case Sales growth 18% 15% 12% NOPAT of sales 4.390.0%.291. still growing and not too much debt pressure.0% Capital expenditure of sales 2. The NOPAT also shows that the profitability of company. assuming that the “most likely” development of Tsingtao lie somewhere in between. 4 . and comment on the results (How would each scenario affect AB’s decision on raising its share of equity in Tsingtao?) Best-case Most likely Worst-case Sales growth 18% 15% 12% NOPAT of sales 4.8 Cumulative discounted free cash 4. Undervalued! In another case is like sales growth decrease to the 12%.00.4 3.lower cumulative discounted free cash flow 2988.6% 70% Equity value (RMB/share) 3.8 2. Capital expenditure of sales increase to the 3% which generate the lower terminal value is 3291.7 4. Although increase NWC of sale but more expenditure.02 When the sales growth is 18%. Compare with the most likely case: Generating the more terminal value is 5390.0% NWC of sales 1.988.0% 2. Tsingtao is in the kind of dangerous level now.02.2005. Scenario analysis for Tsingtao for the years 2001 .4% 49. it has big debt pressure which will be risky for the company to keep balance also the low value of share is not normal as usual.0% 1.220.0% 2. That’s worst case which decrease the value of investment at end of period (terminal value).716.0% Terminal value 5. (25%)  Anheuser Busch’s top management wanted before making their decision a scenario analysis of what it considered “best-case” and “worst-case”.0% Capital expenditure of sales 2.V) and decrease the debt pressure and increase the share value(equity value) it is good suggestion that AB would take to buy more share in Tsingtao. and the current condition in Tsingtao is good.0% NWC of sales 1.increase the debt ratio. All that shows the Tsingtao is grow with risk.

underdevelopment information tech,conservative culture barriers. Risk from weakness and threat: 1. As the company make cross-border acquisition. Risk assessment of Anheuser Busch investing in Tsingtao. Risk from Scenario analysis: After the scenario analysis for the Tsingtao. We can predicate the company is risky. (25%)  Based on your conclusions to question 2 and 3 and other relevant factors. Tsingtao was struggling with the post merger digestion of the acquisition period (under heavy cash payback pressures from the rising of debt used to finance the acquisitions. That’s all may become a part of operational risk. 4. we can see in the worst case. low technology workshop. Also the 49. If we indicate the future in another variables. how do you rate the overall risk of Anheuser Busch’s Chinese strategy in 2001 when the company considered increasing its minority interest in the Tsingtao Brewery Company? Risk analysis: Political Risk: As everyone knows China is largest socialism country in the world. we change some of input variables. The system is special between the other countries. China is still in the inchoate developing period. With a lot of problems such as: language barriers. Fighting for the Chinese beer market share ( competition with major competitors) 5 . the low terminal value. the debt ratio is 70%. In the most likely case: the sales growth is positive.6% debt is kind of risky also. not good for develop the business ) 3. the negative profit margin 2. it grows year by year. especially in socialism country) 2> Different regulations 3> Nonstandard law enforcement Operational risk: During 1995-2001. The Operating cash flow is growing more but the NWC is become negative and less expenditures. 1> Corruption problems (like many other developing countries. It’s a barrier for foreign company to execute the business partnership in China. and the heavy debt crisis. we should consider 3 points of it. It is developing in high speed with bring out a lot opportunities. In this case we will not to hold more share any more.) 4. the NWC of sale is becoming smaller (too much payable and expenditure.

it will grow bigger and bigger in the future. In order to catch the ball before the bound. establish the factory in China and so on in the future. market in China is a delicious cake. sooner or later. On another hand. such as buying Chinese beer brand. Type of risk Probability Corporate strategy risk medium Sales risk Medium Research & Development risk Low Manufacturing & Quality risk high Personnel risks Medium Credit & Interest rate risks Medium Currency risks Medium Liquidity risks Medium Final conclusion: After analysis we suggest that A-B should make decision to hold more share of Tsingtao in stock market. From the predication. 6 . then make a strategy to dig more business gold. First hold some shares in Tsingtao. the price will grow we will definitely benefit. should step in Chinese market faster than others.