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Article Review #3

Anheuser-Busch

Overview/Summary

Anheuser-Busch has been a fixture of American culture since 1860 and is synonymous withsome 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, comparedto 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 substantiallygrowing its product market. Furthermore, its domestic sales performance during a ten yearspan, 1990-2000 was stagnant. Despite this, from 1996 through 1998 the company managedto invest $1.9 billion in capital yielding $13.4 billion in enterprise value, with a total netgrowth of $11.5 billion in market value. This was all made possible by the use of realoptions, specifically growth options. Anheuser-Busch intuitively focused is business on itscore objectives, sold off a snack food branch and the St. Louis Cardinals and increased itsenterprise growth by investing a few million dollars as a minority interest holder in foreignbreweries whose demand was escalating. Companies like Mexicos Grupo Modelo,BrazilsAntarctica 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 alocal company;brew Anheusers products while the local firm marketed the product. Thisoccurred simultaneously as Anheuser held growth options in the companies that it heldminority investments in. This permitted Anheuser the ability to learn about the foreignmarket and test the waters for its product, thereby limiting its financial risk. This strategycombined with the flexibility in changing its product line, enabled Anheuser to create avalue exponentially greater than its cost of doing business. The growth options allowedAnheuser to invest larger sums of money if it was beneficial to do so. Anheuser was able tolearn about its new market share and the cost of doing business in its new market, and theninvest 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 itsproduct prior to committing substantial sums of money for brewing and distributionfacilities.

Relevance to Financial Management

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The value of the growth option in this case relied on Anheusers ability to create real optionsworth more than they cost. A relatively small investment led to substantial gains in timingoptions. 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 foreignbreweries, 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 theinvestor the obligation to take actions to alter the influx of money even after the project isplaced in motion. Real options entail expansion, abandonment, investment timing, outputand input flexibility.

References:

Arnold, Tom and Shockley, R.L. Jr. Value Creation at Anheuser-Busch: A Real OptionsExample,Journal of Applied Corporate Finance, Vol. 14, Summer 2001, pp. 41-50.

Fundamentals of Financial Management, Brigham, Eugene F., Houston, Joel F., Copyright2009, 12th. edition, South-Western Publishing Co.

Merced, Michael J. de la. (2008, July 14). Anheuser-Busch Agrees to Be Sold to InBev. TheNew York Times. Retrieved February 17, 2010 from:www.nytimes.com

http://www.nytimes.com/http://www.nytimes.com/http://www.nytimes.com/http://www.nytimes.com/