Anheuser-Busch InBev (AB InBev), the worldwide brewing and beverage company, proposed a $20.1 billion buyout of Mexico’s Grupo Modelo last June. The merger would mean that AB InBev, which currently owns 49% of Grupo Modelo, would add Corona to the impressive list of beers it already owns, including Budweiser, Stella Artois, and Beck’s.
The U.S. Department of Justice (DOJ) said no.
The Antitrust Division of the DOJ filed suit in Washington D.C. in January, challenging the merger on the grounds that it would give AB InBev too large a stake of the U.S. market and allow it to raise prices on its products. AB InBev has since submitted a revised plan in order to appease the JOD and get the merger through.
This is the latest in a long line of high-profile mergers that are occurring across industries. Is the JOD helping competition or hindering it with enforcement of antitrust laws, and what does it mean for consumers?
Monopoly’s not just a game: Why antitrust laws exist
Antitrust laws are intended to prevent companies from becoming too big and fixing prices. Excessively large corporations gain in power not only by squashing current competition but also by making it nearly impossible for new companies to enter the marketplace and compete. The rise of large conglomerates in the late 19th century coupled with the increased power of the federal government from the Interstate Commerce Act in 1887 led to the adoption of the antitrust laws over the next 60-odd years.
Companies planning to merge must notify the Antitrust Division of the JOD as well as the Federal Trade Commission (FTC) for merger control, or a review of their merger plans. The goal is to prevent them from reducing competition and acquiring market power, which would allow them to raise prices without losing customers. Market power usually comes from controlling a large portion of the market. This is bad news for consumers who, lacking alternatives, have no choice but to pay the higher price for the same product.
AB InBev is no stranger to mergers. The behemoth began as a merger between Interbrew (a Belgian company itself composed of two breweries) and AmBev (a Brazilian company also composed of two breweries) in 2004. In 2006, InBev acquired Chinese brewery Fujian Sedrin, and in 2008 it merged with Anheuser-Busch, making it one of the top 5 consumer product companies in the world. When they began talks last June to buy Grupo Modelo, they were already discussing how to deal with concerns over antitrust issues.
Difficulties of predicting corporate merger outcomes on consumers
The goal of the Antitrust Division is not to prevent large mergers, but to ensure that they don’t adversely affect the market, and thus consumers. Often, large-scale mergers allow new conglomerates to compete more effectively in the market. For example, the $11 billion merger of US Airways and AMR (owner of American Airlines and American Eagle) will bring their combined domestic market share to roughly 23.7%, allowing them to compete with United (with 21.7% domestic share) and Delta (with 20.5%). While this might allow the new company to stand up to its competitors, consumers might not benefit.
The FTC uses economic theory and crunches numbers to come up with what it thinks may happen in the marketplace, based on what it knows now. It’s an imperfect system at best. In the famous break up of AT&T in 1982, after a lawsuit brought by the DOJ led to Bell System splitting into small companies, the results for consumers were mixed. While competition in long-distance telecommunications increased and prices dropped, rates for local telecommunications rose. In the end, the break up was generally considered a good thing for consumers, but the fact is that it’s not so easy to say what the end result will be. After all, the marketplace is complex, and the DOJ can’t predict the future.
And if the Anheuser-Busch InBev, Grupo Modelo merger goes through?
We may find ourselves paying more for the beer we love, and having fewer options in the marketplace, despite the proposed changes to the merger. Or maybe we will see no substantial difference in the marketplace here in the U.S. as AB InBev focuses on increased sales in emerging markets. A decision from the JOD on the revised merger is expected soon.
