Sunday, May 3, 2009

No More Drunk Driving at Anheuser-Busch

I don't drink Budweiser (because I'm an elitist snob who likes "craft" beer), but I have friends who do, and so I have a bit of an interest in the progress at Anheuser- Busch. Some of you may remember that several months ago Belgian brewer InBev approached A-B several times offering a merger, only to be turned away several times, and threatened with defensive tactics, such as buying dead-weight companies to scare InBev off (That would have been stellar strategy.) In the end, A-B's board couldn't say no to their European wooers, and caved, much to the chagrin of jingoistic Amer'can protectionists everywhere (mostly in St. Louis).

At the time, many wondered (myself included) how InBev could justify spending $52 billion on a giant, low-growth company. Well, now we know, and it looks like this deal might have been a stroke of genius.

In the business world, we always like to talk about synergies when discussing mergers. According to this WSJ piece on the merger's progression, there were no synergies with A-B. InBev intended to make them.

Since taking over the company, InBev has been attempting to change the culture at A-B from that of an extravagant, perk-pumping employment mill to that of a lean, mean, profit-generating machine. Consider just these changes:

After InBev swooped in last fall with a $52 billion takeover, it sacked about 1,400 employees in the U.S., equal to 6% of the U.S. work force before the merger, and 415 contractor positions. These followed 1,000 employee buyouts accepted at Anheuser-Busch just before the merger.

InBev has overhauled the U.S. division's compensation system for salaried employees, as part of what an internal memo called "an increased focus on meritocracy." In the future, the company will pay salaried workers 80% to 100% of the market rate for comparable jobs, "and any increases above that require special justification and approvals," said the memo. That changed a system in which "high performers...might have seen fewer rewards as dollars were spread more evenly."

Dollars do not spread well. The compensation system is just one change, but I think it is one of the most important, as it lines up incentives when done properly. This can remove the need for a lot of other expensive measures down the road. This little detail is great:

Anheuser-Busch InBev in November gave a total of 28 million stock options to about 40 executives companywide, as an incentive to combine InBev and Anheuser-Busch successfully and lower corporate debt. The executives will be able to cash in the options, potentially worth tens of millions of dollars to each recipient, if the company reduces its debt-to-income ratio by about half in five years.

Meanwhile, the company will halt contributions to its pension plan for salaried employees in 2012. And in January, it will stop providing retiree life insurance.

Stock options are really tricky things, and are usually done wrong, but this idea seems really interesting. Normally stock options are pretty worthless as an incentive because most employees have very little influence on stock price, and thus on whether their options will make money. This vesting criteria of halving debt/income, on the other hand, sets a clear objective that every employee can help affect, through both raising revenue and cutting costs/borrowing.

And providing retiree life insurance is just dumb. Good going InBev. However, your beer still sucks. Work on that.

1 comment:

  1. Great analysis of A-B. I did a bit of consulting there a few years back (lived in St. Louis) and your assessment of compensation is absolutely right. Its good to see InBev changing things for the better. Is it time to buy?