Tsingtao Case

Cross-border Mergers & Acquisitions

Group12

143670 Wang Zhao

143666 Jing Xiong

143428 Martin Aladzhov

143543 Edgaras Karklius

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 1. Cross-border drivers – Mergers & Acquisitions. (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).

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1 Chinese market
Chinese per capital consumption of beer compared with USA and Germany not seems that’s not big
number. But the Chinese market represented the huge profit and growth potential. In 2001 the Chinese
beer market was the second largest in the world after the US beer market.

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2. Tsingtao was evaluating other alternatives for strengthening its equity position.
One alternative was for Tsingtao to issue additional shares in the Chinese equity markets. This is good time
to buy more shares in Tsingtao. It’s good opportunity for A-B to hold more shares in Tsingtao. They already
had 5% in 1993 which give A-B a big fortune.

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3. Tsingtao’s market dominance. Better market performance noticed by investors
As text mentioned “Tsingtao was gaining market dominance and the attention of Chinese and
foreign investors. 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. Tsingtao seemed positioned for stro ng
earnings growth and was viewed as a potential acquisition target.”

It’s attractive M&A target with strong profit growth in the short-run, considered the benefit prospect,
Better market performance is good symbol for acquisition.

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4 A-B’s limited growth potential
Chinese beer market was dominated by the cheapest beer category (85% by volume), while the middle
market (10%) and premium markets (5%) stagnated in sales. A-B tries to penetrate the Chinese beer market,
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. Get
rid of the limitation.

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5 competitors challenging
The competitors is becoming challenging, get more share of market In order to ensure the dominance Tsingtao need
more money to develop and compete with its competitors. A-B will offer a mergers & acquisitions a reasonable price
for deal.

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 2. SWOT analysis for Tsingtao for year 2001. (25%)
Anheuser Busch’s financial analysts were of different opinions about the outlook for Tsingtao.
The brewery had achieved major reductions of its net working capital (NWC), but much of
that was accomplished before really tackling the complexity of absorbing many of the new
acquisitions. Furthermore, the high level of capital expenditures in 1999 and 2000 could well
drag on in the next few years. The analysts therefore suggested a SWOT analysis be made to
highlight Tsingtao’s strength and weakness and market opportunities and threats. Prepare a
SWOT analysis as of year 2001 for the Tsingtao Brewery.

Strength
1. Product number one in China (beer market)
2.Exporting to 30 countries (broad international market)
3.Distributional and brewery perfection which gives the company stable ground and good reputation
4. Large experience because the company was established in 1903
5.World fifth place in biggest beer companies. Very big market share.

Weakness
1. The majority of accumulated breweries were on the bottom of the market with negative profit margins
2. This process of merging led to a substantial borrowed financial resources (debt)
3. Undervalued prices of stocks which means missed opportunities for bigger profit.

Opportunity
1.Numerous acquisitions (34 acquisitions in just four years) which gradually start to pay off through the brewery’s
operational excellence
2. 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. This means that they will not have to pay interests on their borrowed
money by issuing stocks.
3. Increasing NWC with 1% in the period 2000-2005 is impressive considering the money spend on assimilating
the merger companies.
4. Well-assimilated merger companies like the small breweries is appreciated by investors. Anheuser Busch (AB)
and a profitable investor.

Threat
1. 2 of the competing companies all together have a bigger market share than Tsingtao
2. Year 2001 was a post-merger period – time of struggle under heavy cash payback pressures.
3. Series of price wars during this post-merger period
4. 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.

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 3. Scenario analysis for Tsingtao for the years 2001 - 2005. (25%)
 Anheuser Busch’s top management wanted before making their decision a scenario analysis of what
it considered “best-case” and “worst-case”, assuming that the “most likely” development of Tsingtao
lie somewhere in between. Compute the “best-case” and “worst-case” scenarios using the forecast
model (exhibit 2), the input data below, 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 4,2% 4,2% 4,0%
NWC of sales 1,0% 1,0% 2,0%
Capital expenditure of sales 2,5% 2,5% 3,0%

Best-case Most likely Worst-case

Sales growth 18% 15% 12%
NOPAT of sales 4,2% 4,2% 4,0%
NWC of sales 1,0% 1,0% 2,0%
Capital expenditure of sales 2,5% 2,5% 3,0%
Terminal value 5,390.7 4,739.4 3,291.8
Cumulative discounted free cash 4,716.8 4,220.8 2,988.5
flow
Debt capital/total liabilities 44.4% 49.6% 70%
Equity value (RMB/share) 3.00 2.43 1.02

When the sales growth is 18%,the rest of variables stay same. Compare with the most likely case: Generating the
more terminal value is 5390.7.More cumulative discounted free cash flow which is 4716; Debt ratio decrease to 44.4%
means less debt in company. Finally the equity value is 3.00,At Hong Kong stock exchange is 2.34,it undervalued .
That’s best-case which increase the more capital of investment in the end(T.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. It seems that it will profit in buying share in
this company, and the current condition in Tsingtao is good, still growing and not too much debt pressure. Mostly it
will affect AB to hold more shares in Tsingtao. Undervalued!

In another case is like sales growth decrease to the 12%, NOPAT of sales decrease to the 4.0%,NWC increase to the
2.0%,
Capital expenditure of sales increase to the 3% which generate the lower terminal value is 3291,lower cumulative
discounted free cash flow 2988,increase the debt ratio, decrease the equity value to the 1.02. That’s worst case
which decrease the value of investment at end of period (terminal value), increase the risk of company(debt
ration),low share value(equity value). Although increase NWC of sale but more expenditure. The NOPAT also shows
that the profitability of company, it decreases.
In current situation, Tsingtao is in the kind of dangerous level now. 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; and the lower cumulative discounted
free cash flow. All that shows the Tsingtao is grow with risk.
AB will take more consideration to decide to hold more shares or not, mostly they will not buy more in worst case.

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 4. Risk assessment of Anheuser Busch investing in Tsingtao. (25%)
 Based on your conclusions to question 2 and 3 and other relevant factors, 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. It is developing in high speed with bring
out a lot opportunities. The system is special between the other countries. As the company make cross-border
acquisition, we should consider 3 points of it.
1> Corruption problems (like many other developing countries, especially in socialism country)
2> Different regulations
3> Nonstandard law enforcement

Operational risk:
During 1995-2001, China is still in the inchoate developing period. With a lot of problems such as: language
barriers, low technology workshop, underdevelopment information tech，conservative culture barriers. That’s all may
become a part of operational risk. It’s a barrier for foreign company to execute the business partnership in China.

Risk from Scenario analysis:

After the scenario analysis for the Tsingtao. In the most likely case: the sales growth is positive, it grows year
by year. The Operating cash flow is growing more but the NWC is become negative and less expenditures. Also the
49.6% debt is kind of risky also. If we indicate the future in another variables, we can see in the worst case, we
change some of input variables. We can predicate the company is risky, the low terminal value, and the heavy debt
crisis, the debt ratio is 70%. In this case we will not to hold more share any more.

Risk from weakness and threat:

1. the negative profit margin
2. the NWC of sale is becoming smaller (too much payable and expenditure, not good
for develop the business )
3. 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.)
4. Fighting for the Chinese beer market share ( competition with major competitors)

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 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, the price will grow we will definitely benefit. On another hand, market in China is a delicious cake; it will
grow bigger and bigger in the future, sooner or later. In order to catch the ball before the bound, should step in
Chinese market faster than others. First hold some shares in Tsingtao, then make a strategy to dig more business gold,
such as buying Chinese beer brand, establish the factory in China and so on in the future.