Article Review #3 Anheuser-Busch

Overview/Summary Anheuser-Busch has been a fixture of American culture since 1860 and is synonymous with some of the best half time commercials during the Superbowl, including Spuds MacKenzie, the Wassup guys and the Clydesdales. Its marketing approach has proven effective, yielding an average of 16.4% to company stockholders from 1972 through 1999, compared to a 10.6% average for the S&P 500 during that same time period.

Opinion/Analysis Anheuser-Busch has managed to increase its stock performance without substantially growing its product market. Furthermore, its domestic sales performance during a ten year span, 1990-2000 was stagnant. Despite this, from 1996 through 1998 the company managed to invest $1.9 billion in capital yielding $13.4 billion in enterprise value, with a total net growth of $11.5 billion in market value. This was all made possible by the use of real options, specifically growth options. Anheuser-Busch intuitively focused is business on its core objectives, sold off a snack food branch and the St. Louis Cardinals and increased its enterprise growth by investing a few million dollars as a minority interest holder in foreign breweries whose demand was escalating. Companies like Mexicos Grupo Modelo, Brazils Antarctica Empreendimentos e Participacoes, Chiles Companhia Cervecerias Unidas and the Philippines Asia Brewery all shared one thing in common, Anheuser-Busch held a minor stake in the form of growth options with each company. Anheuser-Busch would form a joint venture with the foreign brewery and with the help of a local company; brew Anheusers products while the local firm marketed the product. This occurred simultaneously as Anheuser held growth options in the companies that it held minority investments in. This permitted Anheuser the ability to learn about the foreign market and test the waters for its product, thereby limiting its financial risk. This strategy combined with the flexibility in changing its product line, enabled Anheuser to create a value exponentially greater than its cost of doing business. The growth options allowed Anheuser to invest larger sums of money if it was beneficial to do so. Anheuser was able to learn about its new market share and the cost of doing business in its new market, and then invest accordingly, giving Anheuser the right, not the obligation to invest money in the foreign breweries. This gave Anheuser the unique ability to calculate the demand for its product prior to committing substantial sums of money for brewing and distribution facilities.

Relevance to Financial Management

The value of the growth option in this case relied on Anheusers ability to create real options worth more than they cost. A relatively small investment led to substantial gains in timing options. Anheusers investment and marketing strategy led to $11.5 billion in market value. The information that Anheuser-Busch gathered as a result of its joint venture with foreign breweries, allowed the company to make wise investment decisions at a later date, utilizing the power of real options. In summation, Anheuser-Busch epitomizes the use of a real option. A real option allows the investor the obligation to take actions to alter the influx of money even after the project is placed in motion. Real options entail expansion, abandonment, investment timing, output and input flexibility.

References: Arnold, Tom and Shockley, R.L. Jr. Value Creation at Anheuser-Busch: A Real Options Example, Journal of Applied Corporate Finance, Vol. 14, Summer 2001, pp. 41-50. Fundamentals of Financial Management, Brigham, Eugene F., Houston, Joel F., Copyright 2009, 12th. edition, South-Western Publishing Co. Merced, Michael J. de la. (2008, July 14). Anheuser-Busch Agrees to Be Sold to InBev. The New York Times. Retrieved February 17, 2010 from: www.nytimes.com