17 Financing Acquisitions and Growth: The Ambev Case Daniel Penido de Lima Amorim¹ ¹ Fundação Dom Cabral - [email protected] KEYWORDS ABSTRACT Mergers and acquisitions; This case study aimed to investigate the growth driven by M&As of Ambev in Financing; the period between 1999 and 2015, emphasizing two sources of financing Theory of Free Cash Flows; addressed in Jensen (1986). On the one hand, the Free Cash Flow Theory Leveraged buyouts; postulates that managers would apply resources generated by self-financing in Ambev. acquisitions. On the other hand, companies could incur on debts to perform the so-called leveraged buyouts. To verify if any of these theoretical Received 28.07.2017 Revised 05.09.2017 constructions is consistent with the Ambev case, were analyzed the free cash Accepted 18.10.2017 flows and the company's indebtedness. The results show that each of these theories bears similarities to a specific period of growth of the company. At ISSN 1980-4431 Double blind review first, this growth refers to leveraged buyouts. After 2008, the strong reduction of indebtedness and increased self-financing refer to the Free Cash Flow Theory. These results unveil a model of growth that can be adopted strategically by other companies. 1 Introduction 2012). But which resources financed this growth through M&As? In general, self-financing The Companhia de Bebidas das Américas resources are used for such purposes, as well as (Ambev) is a multinational beverage company debt, and exchange of shares may also occur headquartered in Brazil, currently participating in (Damodaran, 2001; Gugler, Mueller, the largest conglomerate of this industry in the Weishcelbaumer & Yortoglu, 2012; Jensen, world, Anheuser-Busch InBev. By 2015, Ambev 1986). ranked among the companies which had the Although it is possible to use combinations highest market value in Brazil and Latin America. of these financial resources, payments with those Before reaching this prominence position, originated from self-financing or from debt are Ambev’s history was characterized by many recurrent in acquisitions, while stock exchanges mergers and acquisitions (hereafter, M&As), usually occur in mergers. However, mergers are starting with its origin in 1998, from the merger of not very regular, both in the set of M&As in Brahma brewery with Antarctica company. Brazil (Camargos & Barbosa, 2003) and in the The literature on M&As presents several history of transactions carried out by Ambev. As a reasons that justify them (Camargos & Barbosa, result, this case study focuses primarily into 2003, Camargos & Coutinho, 2008, Kloeckner, analyzing the company’s self-financing and 1994). As for Ambev, M&As were mainly indebtedness. implemented to penetrate markets in countries Two theoretical constructs disseminated in a where the company was not yet active (Santos, seminal paper by Jensen (1986) provide a basis Revista de Negócios, v. 21, n. 3-4, p. 17-24, July, 2016. 18 for acquisitions that use these two sources of would not act according to the shareholders' funds as a form of financing. On the one hand, the interests (Jensen & Meckling, 1976). Free Cash Flow Theory advocates that the The Agency Theory, formalized by Jensen manager would pursue the company’s growth for and Meckling (1976) for the context of this behavioral reasons, using the resources generated relationship, brought to light the existence of by self-financing to make acquisitions. On the asymmetries of information and conflicts of other hand, the theoretical construction addressing interests between managers and shareholders. The the so-called leveraged buyouts proposes that asymmetry of information can be illustrated by the companies could incur debts to make acquisitions. fact that managers are well aware of confidential Given this theoretical framework, this case internal resources, which are strategic to the study aimed to investigate the growth driven by company, whereas the shareholders do not know M&As of Ambev in the period between 1999 and much beyond what is published in financial 2015, emphasizing two sources of financing as reports (Tirole, 2006). Conflicts of interest are addressed in Jensen (1986). To fulfill this purpose, manifested when the manager, despite being hired it was analyzed the free cash flows and to act in order to maximize shareholder wealth, indebtedness based on Ambev’s financial data. would put his private interests as a priority The importance of this study is its (Jensen & Meckling, 1976). These conflicts would pioneering approach to M&As oriented growth be more intense in companies whose ownership of financing in Brazil. No other studies on this topic capital is widely dispersed, while decision-making were published in Brazilian scientific journals. In power is highly concentrated in managers (Tirole, addition, data from one of the largest Brazilian 2006). companies in terms of market value are analyzed, which shows a growth strategy that can be 2.2 The Free Cash Flow Theory adopted by other companies. After this introduction, Section 2 discusses The Free Cash Flow Theory refers to a Agency Theory, Free Cash Flow Theory and specific circumstance in which the conflict of leveraged buyouts. Section 3 addresses the interests between managers and shareholders methodology, describing the data origin and occurs: the payment of dividends. Distributing which analyzes were used to verify if any of the dividends to shareholders reduces the financial theoretical construction is consistent with the resources controlled by the manager (Jensen, Ambev case. Section 4 presents, in fact, the 1986). On the other hand, a manager wishes to financial analysis of the company, empirically control more resources to fulfill his interest in verifying if the information refers to the seeking the growth of the company, since this theoretical constructions. Finally, Section 5 would imply an increase in his prestige and contains the final considerations. compensation (Easterbrook 1984, Marris 1963 and Murphy 1985). 2 Theoretical Framework Thus, acquisitions would be one way for managers to use these resources with the purpose 2.1 The Agency Theory of making the company grow rather than distributing them to shareholders (Camargos & With the separation between ownership and Barbosa, 2003; Jensen, 1986). Such growth is also management in publicly traded companies, the a way for managers to prevent the companies they figure of the professional manager appeared. Such manage from becoming the target of hostile agent would be hired to lead the company so as to takeovers, which would jeopardize their positions. maximize financial performance and hence (Fama 1980; Tirole, 2001, 2006). shareholders’ wealth (Berle & Means, 1932). This Free cash flows are the surplus of resources relationship would be governed by contracts that resulting from the company's operating activities, would regulate the manager's acting, while also that is, the self-financing. These cash flows tend granting him certain authority to make decisions. to be a considerable amount in companies in However, if both parties were utility-maximizing, economic sectors where competitive pressure is there would be reasons to believe that the manager not strong enough to reduce extraordinary profits (Jensen, 1986); or even in companies that have Revista de Negócios, v. 21, n. 3-4, p. 17-24, July, 2016. 19 more than the necessary capital to finance all the free cash flows and excellent investment new available projects that have positive net opportunities, which would justify contracting the present value after discounting the cost of capital debt (Jensen, 1986; Tirole, 2001). (Camargos & Barbosa, 2003, Jensen, 1986). According to Jensen's (1986), the targets of The Free Cash Flow Theory postulates that, leveraged buyouts would be companies that although shareholders claim that this capital be historically presented high volumes of free cash distributed in the form of dividends, it would be flows. For this author, the surplus cash flows, used by managers to promote company growth from the target company, would be used to pay through acquisitions (Jensen, 1986). Considering the debt contracted to carry out the transaction that there are several reasons that justify until a capital structure, which would be acquisitions (Camargos & Barbosa, 2003; permanent, was reached (Jensen, 1986). In this Camargo & Coutinho, 2008; Kloeckner, 1994), in sense, this approach has a transactional character order for the acquiring companies to be included (Cohn, Mills & Towery, 2014). in this theory, they should perform very favorably More recent studies contrast with Jensen's regarding the free cash flows generation before (1986) theory. Cohn, Mills & Towery (2014) these operations. In addition, such capital could be analyzed leveraged buyouts in the United States used even in the acquisitions of underperforming over the past two decades and found strong targets (Jensen, 1986). This seems reasonable persistence of debts contracted by acquiring firms. when the decision-making in relation to the Axelson, Jenkinson, Stromberg & Weisbach transactions comes from the manager's particular (2013) conclude that the cost and availability of interests, disregarding the creation or not of credit have a greater influence on leveraged wealth for the shareholder. buyouts than levels of indebtedness or the Graham, Harvey, and Rajgopal (2006) generation of free cash flows. conducted a survey that strongly corroborates this Table 1 lists some important aspects for the behavioral motivation.