From April through October, I race a 37-foot sailboat every Thursday night. The course changes weekly, and ranges from three to seven miles long, depending on the wind.
Before the race, we review the course and weather conditions and decide our strategy for the starting line. During the race, we generally enjoy the sail and competition, with only the occasional bout of yelling. We also enjoy a good beer while on the boat and afterwards when we retire to the local Irish pub.
Some of the crew order the same brew every time, while others are always trying something new. As I looked down the row of taps, it struck me that while the beers might taste different, many are owned by the same company.
And it’s about to get worse.
In a deal that’s worth more than $100 billion, two mega-brewers, Anheuser Busch InBev ($BUD) and SABMiller ($SAB), are merging. The companies control 45% and 20% of the US beer market respectively, offering more than 350 brands.
In addition to category kings like Budweiser and Miller Lite, they own Goose Island, Corona, Landshark, and 10 Barrel Brewing. While InBev is bigger in the US market, SABMiller has some of the better names, including Australian brews Fat Yak and Dirty Granny.
After more than a decade of consolidation in the beer market, this merger seems like the ultimate culmination.
As fast as micro-brews open – and they open every week – big players snap them up. Without additional markets to exploit, or more drinkers buying beer, the entire game boils down to stealing market share from competitors. To grow, the logical path is to buy them out.
In general, mergers and acquisitions have to make financial sense. Perhaps one company is much stronger than another and can produce goods more efficiently. But more often than not, the acquiring company is simply buying growth instead of creating it because opportunities are limited.
And with low interest rates and high stock prices, it’s been easy.
Using debt issued at a cheap interest cost, highly valued shares of the company’s stock, idle cash, or a combination of the three, the purchaser can vacuum up market share without going through the hard process of expanding organic sales.
When companies go through mergers and acquisitions, they typically talk about the synergies that the resulting combination will achieve. There might be some productivity gains here and there, but most of the time, “synergy” is a euphemism for firing people.
Who needs two accounting departments, or twice the HR staff? Let’s face it, head count is expensive. If you can slash employment costs and keep production the same, then the cost per unit declines, leading to more profit.
A Look Back Suggests a Harsh Economic Future
If history is any guide, the most deals come just before an economic fall.
The tools used for mergers and acquisitions – cheap debt, high stock prices, and idle cash – typically show up at the end of the business cycle, before everything goes down.
This makes the current cycle look long in the tooth and signals trouble ahead.
Not only are interest rates low, stocks high, and companies flush with cash, but also mergers and acquisitions are on track for a record year in the US, and the highest global total since 2007.
Through the first half of the year, over 20,000 deals were announced worldwide, valued at $2.2 trillion.
$1 trillion of that was just in the US.
That likely signals that we’re closer to an economic decline than many are willing to stomach. If we get higher interest rates in the short term and a selloff in equities, the flow of mergers and acquisitions could dry up quickly, revealing the modest pace of actual growth.
This could lead to a lot more people reaching for a beer to drown their economic woes. By that point, whatever they choose, chances are it will be made by InBev and SABMiller, no matter what the label says.
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