Introduction
In 2014, the Japanese company that is mainly famous for its spirits business bought an American liquor company, Beam. Suntory has purchased Beam and now wants to integrate operations of both companies to enjoy synergies and expand rapidly in the International market. Both companies evolved from being a family-owned business in the past.
As part of an external audit, the Suntory board asked us to review the acquisition bid and the integration process. They want to know if the 25% bid premium was justifiable and what they can do to realize potential value. For this reason, we carried out detailed information about the Beam Suntory. We also analyzed the synergies that can be exploited and the hindrances to the achievement of synergies. Apparently the merger is expected to achieve its potential benefits.
Proposed portfolio of businesses and its impact on Suntory’s market position/portfolio
The proposed portfolio as a result of the integration of Suntory and Beam makes sense because both companies have different products and thus the new portfolio will be able to cover not only all price points but all segments of the market as well. Suntory has a relatively successful business spanning not only Spirits industry but also in food and health and wellbeing industries. Its Spirits products have mostly Japanese taste which is also its biggest market and focused mostly on a premium brand. On the other hand, Beam is a successful Spirits conglomerate. By 2014, Beam owned more than 40 sub-brands spanning six variations of whiskey, as well as vodka, tequila, rum, cognac, gin, and Spirits categories that cover all price points. It has several famous Spirits brands.
Apparently, the Beam products and brands have the potential to work in tandem with the Suntory’s products. This is because the whiskey profile of Japan differs greatly as compared to the United States. As a result, there is no fear of any kind of cannibalization. Moreover, their strength in the relevant market is also complimentary. The beam is strong in US market whereas Suntory is very strong in the Japanese market. As a result, both companies can benefit from the distribution network of each other and can grow in each other’s home markets. Suntory’s sales in Spirits segments are stagnated and it needs growth. Its limited business in the US is successful and so with the help of Beam, it can grow seriously in the United States, the market that is not only most profitable as far as Spirits industry is concerned but is still growing. The acquisition would also make Suntory as the third largest Spirits company in the world which would also increase its market power. Apparently, Beam seems to provide Suntory with the opportunity to successfully occupy significant share in the most lucrative Spirits market in the world which will boost its declining Spirits segment. As we already know that Spirits is declining in share in sales for the company. Moreover, this acquisition is also important for the survival of the company. This is because the Japanese market is shrinking and is already very mature. That is the main reason of decline of the share of Suntory’s Spirits segment in its sales. That is why the purposes portfolio of business makes sense as a corporate strategy.
The extent can Suntory increase the value of Beam as a stand-alone entity
Suntory is one of the biggest Spirits companies in Japan. It has well-established marketing and distribution network and that is why in 2012 it contracted with Beam to market few of its famous brands in the Japanese market as well as selling and distributing the Coca-Cola company’s brands in the Japanese market. Beam has all types of brands for all kinds of consumers including cheaper as well as premium brands as well as covering different categories of Spirits. So it has a perfect portfolio for the Japanese market where the young generation likes to consume cheaper Spirits options. Moreover, there is a general liking of American brands in the world as well as in Japan. Therefore, Suntory can increase the sales and profits of Beam as far as the Japanese market is concerned. Moreover, Suntory can also improve the distilling process at Beam to increase its production as would be required as a result of increased demand, particularly in the Japanese market. However, in order to realize all the benefits, the smooth integration of both companies is very important. Otherwise, the acquisition can even decrease the value of Beam as a standalone company.
Stand-Alone Value of Beam Assuming No Operational Changes
If we assume no operational changes, then the Beam’s value is the value of its stock price. Although there are other ways to calculate the value of an enterprise like discounted cash flow model, however, that is not possible to apply in the current case because we do not have financial or due diligence report of the Beam. As Suntory paid 25% premium on the current stock price of 66.67, therefore, the actual value of Beam is 12 Billion USD.
Can Suntory Make Money on The Deal?
Apparently, there are synergies to be achieved which can help Suntory make money on the deal. First of all, they can improve the sales of Beam in Japan without cannibalizing the sales of Suntory products. Then, they can utilize the marketing and distribution network of Beam for selling Suntory products, particularly in the huge market of the United States. Then, as Suntory’s production systems are not large enough to fulfill its increased demand as a result of the acquisition and subsequently increased sales in the USA and in other parts of the world, they can utilize Beam’s facilities for the production of Suntory products to be sold in the USA. This would also reduce transportation costs and thus will improve the profitability of the company as well. Moreover, the company can use other instances of synergies, for example, a decrease in the management layers and utilizing the economy of operations, more profits can be made. Therefore, apparently, there are many opportunities to profit from the deal and Suntory can make money on the deal.
How Synergies Result in Cash Flows (Lower Costs or Increased Revenue)
The synergies can come in both ways, i.e. in lower costs and increased revenue. However, increased revenue is the major driver for the cash flows. This is because Suntory understands the Japanese market very well and has a strong distribution and selling network there. So it can use its existing channel for selling Beam’s products. Then, Beam has some similar capabilities in the US. Therefore, Suntory’s sales are expected to be boosted in the United States where already its operations are successful. Therefore, it is mainly sales that would boost the cash flows. However, costs can also be controlled by rationalizing the management and economies of scale. The strong market power of the Beam Suntory would also make it getting lower prices on its inputs. Moreover, the common sharing of the head office would also bring costs cuts as well as the sharing of other departments like procurement risk management and marketing. The group will also benefit from integrated research and development and distillation optimization.
Nature of The Integration Required to Realize the Synergies
From the facts explained in the case, it appears that the most important part of integration required to realize the synergies is the integration of the two cultures. The company needs to sell the idea of a merger to its employees. Only then it can benefit from the available synergies. Assays that “the employees of organizations whose post-merger integrations have been successful over the long term identify with the new organization and its purpose and potential. They feel responsible for making a new organization a success, and they can inspire others to work with them to bring the organization’s potential into being. At every level in these successful mergers, there are people who are willing to let go of their own limiting beliefs to grow, learn, and improve – who understand their own impact, and work to use it more effectively”. So, Suntory needs to focus on cultural fit in order to realize the available synergies.
Organizational Factors That Support or Hinder the Synergies
The factors that support the synergies is the vision of the leadership of both companies. They know from where synergies may come. However, the cultural fit is the major problem in this case. The cultural issues with the group can hamper its performance seriously.
Specific Steps the Company Should Take Now to Realize as Much of the Potential Value As Possible
First of all, the company needs to achieve the cultural fit. As many employees of Beam are leaving the company because they are not satisfied how Suntory is managing beam, its operations may get affected. Each initiative that Suntory decides to take, it should first get buy-in from the employees. For that matter, communication lines need to be improved and the confusion in the chain of command should be sorted out.
Secondly, the company needs to evaluate the possible synergies in detail. For example, there is an opportunity to fulfill a shortage in supplies of Suntory by manufacturing it in the Beam’s premises in the US. Then after getting the buy-in from the relevant stakeholders within the company, it should start implementing the steps to ensure it achieves synergies from the project.
How might the deal lower costs and/or increase revenue?
There are several ways with which this deal can lower the costs and increase revenues. First of all, by integrating the corporate headquarter, the overhead costs can be reduced. Then, due to the economy of scale, the prices of the inputs can be reduced. Then, synergies and cost savings can also be achieved through integrated marketing and selling campaign of two companies. This is feasible because both companies have a complementary portfolio.
There are several opportunities for revenue increase as well. The beam can utilize the distribution and sales network of Suntory in Japan. This would result in increased in sales without cannibalizing the sales of Suntory because both have completely different portfolios with respect to taste and prices. Then, Suntory can do the same by utilizing Beam’s American capabilities. This will result in increased sales. As the capacity of Suntory is insufficient to meet the increased demand, the company can utilize Beam’s production facilities to produce its own brands. However, for this purpose, it needs little alteration in the manufacturing process of Beams products.
Which Synergies Are More Promising?
Apparently, the revenue synergies are much more prominent than the cost savings. This is because both companies are very strong in their home markets respectively. Now both markets can use the strengths of other company in its home market to increase its sales. Suntory has seen success in the US market already and so after full fledge entry to the market, its sales and demand can grow greatly. On the other hand, Beam has the portfolio that is ideal to Cater to the Japanese market and its underlying segments. For example, Suntory is mainly a premium brand whereas Beam has all types of products for all types of markets.
Anticipation of More Resistance From Beam or Suntory Employees
It is anticipated that the Beam’s employee will resist more in case of any proposed change, for example altering the production process of Beam’s products. They may also resist against the change in chain of command (in case the company tries to listen to the Suntory’s employees which are already facing problems due to change in the chain in command. Moreover, Japanese executives and management work differently than the American managers. Japanese focus more on paperwork. This could further alienate Beams’ employees.
How Likely is it That Proposed Synergies Will Be Realized?
The proposed synergies will most probably be realized now. This is because most of the employees that were against the merger and management practices afterward have left the company already. The team which now managing Beam is more aligned to Suntory’s way of doing things than the previous team. Moreover, the sale and profits of both Beam and Suntory are rising after the merger. In fact, 13% of the growth in profits came due to increased profits of Beam. The sales are rising rapidly and now Suntory is short of capacity to produce more and so it is planning to produce that liquor in Beams’ plant. This would further increase both synergies and profitability. Therefore, I believe that Beam Suntory’s stock will increase in value because the profits are rising which is the most important buying signal for the investors. That is why it is strongly recommended that Beam Suntory’s stock should be held as it will increase in value and thus will provide higher returns to the investors.
Conclusion
The management wants to know whether the price they paid to purchase Beam is appropriate. For once, it seems very high price, the 3rd highest paid in Japan to acquire any company. The value of the company before selling is $12 billion. However, the company paid 16 billion.
However, there are so many synergies available in this merger that it can remain highly successful in the long run and the new company after the merger, Beam Suntory is not expected to disintegrate now. Most of the synergies that can be realized are in shape of increased revenue. However, there are several opportunities to save the cost are also available. For example, the new company can merge several of its departments for cost saving. Moreover, the shortages of supplies of Suntory products can be fulfilled by getting it produced in the Beam’s facilities.
The most important factor that the company needs to control is the cultural fit. Apparently cultural fit is impacting the operations of the company. The company needs to instill confidence in its employees regarding the action it takes and get their buy-in. I believe that Beam Suntory’s stock will increase in value because the profits are rising which is the most important buying signal for the investors. That is why it is strongly recommended that Beam Suntory’s stock should be held as it will increase in value and thus will provide higher returns to the investors.
Reference
Bohlin, N., Daley, E., Sue D. Little, S.A. (2018). Successful Post-Merger Integration: Realizing
The Synergies - Institute for Mergers, Acquisitions and Alliances (IMAA). Institute for Mergers, Acquisitions and Alliances (IMAA). Retrieved 27 September 2018, from https://imaa-institute.org/successful-post-merger-integration-realizing-the-synergies/