Even more on mergers

You’ve heard it before and it is true… this industry has experienced more change in the past 12 months than in the decades before.  And the amazing thing is that it is not yet remotely over.  Many of these changes are driving interest in mergers to a record level.  So let’s think a little about mergers…

 

First, those unconsolidated Miller and Coors houses.  Obviously if it were easy in these markets, something would have been done a long time ago.  There is a reason why so many Miller and Coors distributors have consolidated… it simply makes sense.  And along the same lines, there is a reason why they haven’t consolidated in other markets.  Generally the reason is that neither party was willing to “give”… i.e. sell.  The A-B guy has loved this situation and has been laughing all the way to the bank.  Please read that last sentence again.

 

So what to do?  I think there are at least four options:

1.                  Neither side give… basically playing a game of chicken on who ultimately will get the brands.  I’ve never liked the game of chicken because with strong and/or stubborn players, generally both sides lose… see A-B laughing all the way to the bank above.  But it is an option… and one which MillerCoors could live without.

2.                  The Miller distributor purchase the Coors distributor.

3.                  The Coors distributor purchase the Miller distributor… points 2 and 3 make sense but as I mentioned above, it would seem if this were going to voluntarily happen, it would have already occurred.  And yes, if I’m the purchaser I want to purchase all the brands… none of this crap where you try to sell only the major and keep the imports and crafts and compete against me.  Can you say non-compete?  No one worth his salt is going to buy without this clause in the contract… get over it.

4.                  Both parties accepting the reality they face and instead seeking a win-win compromise… and in many cases this compromise is a merger of some sort.

 

Let’s look at the four options in greater detail… I believe the worst course of action for both parties is probably the game of chicken.  Of course you might win, but then again you might lose.  Long, drawn out lawsuits… if you haven’t had the “pleasure” of a business lawsuit you don’t know what you’re missing.  You’ll blow through $50K in the first two weeks… plan for hundreds of thousands in legal fees… the magic million dollar mark is easily attainable.  And again, you may just lose.  This is kind of the nuclear option… to be used as the last resort. 

 

Either party purchasing the other… as I mention, if this were going to happen it probably would have happened some time ago.  But if you want to give this one last shot, you’ll have to make a high offer.  Don’t waste everyone’s time trying to get a low-ball deal now… step to the plate and give the other party a reason to take the money and run.  Of course even with a high offer there is no guarantee the other party will accept it – this is often about far more than money… but you have to start with a premium offer.

 

Or the fourth option… both parties looking in the mirror and saying I want to stay and I can’t force them to leave… therefore what can we do that will work for both of us? Ahhh, that magic word… compromise.  80% of something is much better than 100% of nothing.

 

There is a study on the analysis of strategy with nicely captures the reality these unconsolidated markets face… the Prisoner’s Dilemma… (note much of the following has been liberally plagiarized).  A guy named Tucker first came up with the Prisoners' Dilemma to illustrate the difficulty of analyzing "certain kinds of games." His simple explanation has since given rise to a vast body of literature in subjects as diverse as philosophy, ethics, biology, sociology, political science, economics, and, of course, game theory.  It’s an interesting area for reading.

 

The Prisoner’s Dilemma can be stated as:

Suppose two burglars, Bob and Al, are captured near the scene of a burglary and are given the "third degree" separately by the police. Each has to choose whether or not to confess and implicate the other. If neither man confesses, then both will serve one year on a charge of carrying a concealed weapon. If each confesses and implicates the other, both will go to prison for 10 years. However, if one burglar confesses and implicates the other, and the other burglar does not confess, the one who has collaborated with the police will go free, while the other burglar will go to prison for 20 years on the maximum charge.

The strategies in this case are: confess or don't confess. The payoffs (penalties, actually) are the sentences served. We can express all this compactly in a "payoff table" of a kind that has become pretty standard in game theory. Here is the payoff table for the Prisoners' Dilemma game:

		Al
		confess	don't
Bob	confess	10,10	0,20
	don't	20,0	1,1

 The table is read like this: Each prisoner chooses one of the two strategies. In effect, Al chooses a column and Bob chooses a row. The two numbers in each cell tell the outcomes for the two prisoners when the corresponding pair of strategies is chosen. The number to the left of the comma tells the payoff to the person who chooses the rows (Bob) while the number to the right of the column tells the payoff to the person who chooses the columns (Al). Thus (reading down the first column) if they both confess, each gets 10 years, but if Al confesses and Bob does not, Bob gets 20 and Al goes free.

So: how to solve this game? What strategies are "rational" if both men want to minimize the time they spend in jail? Al might reason as follows: "Two things can happen: Bob can confess or Bob can keep quiet. Suppose Bob confesses. Then I get 20 years if I don't confess, 10 years if I do, so in that case it's best to confess. On the other hand, if Bob doesn't confess, and I don't either, I get a year; but in that case, if I confess I can go free. Either way, it's best if I confess. Therefore, I'll confess."

But Bob can and presumably will reason in the same way -- so that they both confess and go to prison for 10 years each. Yet, if they had acted "irrationally," and kept quiet, they each could have gotten off with one year each.

Now I’m not claiming the unconsolidated Miller and Coors distributors are like criminals, it’s just that the decisions they face are much like Bob and Al.  There are many iterations of this game, going in all directions.  For our Miller Coors distributors, they get to “play” the game many times over… it’s not just a one-time affair.  This makes the benefits (and warm fuzzies) of cooperation even more enticing.  I believe if most of these wholesalers made a decision table like the one above, they would quickly see the tremendous upside to cooperation… and this cooperation is spelled by one word… merger.

 

How this merger might work, protecting each parties interests, various individual’s roles… these and a hundred other things will need to be decided, but they can be decided down the road.  The first step is opening your minds to the concept of merger… and the multi-interactions and ability to communicate which tweaks the strategy of the Prisoner’s Dilemma.  Give me one week and we can quickly determine if a merger will work in your specific situation with your specific merger partner(s).

 

Other types of mergers… There is also a great deal of interest in mergers all across the board… small guys wanting to get bigger… large wanting to get larger… horizontal mergers (overlapping territory)… vertical mergers (adjacent territory)… you name it.  The interest in these types of mergers is in many ways like the Miller Coors discussed above… wholesalers who are analyzing the landscape and expected future operating environment and coming to the conclusion that some degree of compromise is a wise and necessary business decision.

 

If you’re a 1.5M case A-B wholesaler… are you big enough to be long-term sustainable?  Think about the Prisoner’s Dilemma… sure seems a course which should at least be examined would be some sort of compromise where you become long-term sustainable.  Or perhaps you’re a 4M case distributor… is there a possible model where you could become part of a 20M case operation?  With all the benefits and power that come along with it?  The problem always comes back to “that other SOB won’t sell”.  Of course don’t’ forget that you’re the “other SOB” from the other guy’s perspective.  So do we play chicken with all the risks that entails?  Or do we at least consider a win-win compromise which sets all parties up for long-term success and sustainability?  I can tell you a lot of folks are reconsidering their feelings on this subject.  And of course all suppliers LOVE mergers since in the end they get a larger, stronger distributor who is not sitting on a mountain of debt.  They really love that aspect and supplier approvals should not be a concern.  This lack of debt ain’t a bad thing for the merger partners either…

 

If you are interested, I can get us a long way down this road in a week’s time.  I start with confidential one-on-one interviews with all parties… discovering their goals, ideas, objectives, concerns, lines-in-the-sand.  After that we get together as a group and discuss if there is any reason to proceed… our first go / no go decision (and there will be many more in the process).  In this process I don’t represent any one distributor’s interests but I represent ALL distributor’s interests… all of the parties become my client and in effect I work for this yet to be formed entity.  Do we always move forward?  Heck no.  In fact in many cases after the initial interviews it becomes apparent the merger can’t work with the parties various demands.  At least these fundamental conflicts are then out in the open and all parties can decide whether to change their minds… or to let the thing set for now.  Either way, a great deal of value can be gained in a relatively short time.

 

Is a merger for you?  Heck if I know.  But in many cases they make tremendous sense… everyone wins and in situations where no one wants to leave, they may be the only real solution… other than sitting back, playing chicken and just seeing how it all works out in the end.  If it were mine, I wouldn’t willingly choose the chicken option.

Comments

[John Conlin]

I received this response to this article and had to post it. As I emailed back to this reader… he is 100% correct. I stand corrected! Please feel free to add other insights…

John,
I always enjoy your articles and your insights are usually correct. Your comment, however, that the Coors buying Miller or vice versa should have happened if it were not for stubborn Distributors is only partly true and not in the majority of cases. It was the breweries Miller and Coors who blocked these mergers. As recently as two years ago Miller blocked, successfully, the purchase of a very small Miller-Coors house by a Coors only Distributor. In the end the Miller products had to be divided between two Miller only houses; in a very inefficient way. The Coors part was then purchased by the Coors only Distributor. Now for the irony of all this ego crap by the Big Breweries. The same Coors only Distributor is being TOLD to buy the Miller only Distributor.
So, lets put blame where blame belongs.

After I asked for his permission to post this, he responded…

John,
Yes, please do. I would like to see what other Distributors have experienced in the last few years. What bothers me is the Miller-Coors JV must have been in some CEO’s minds while they were telling good Distributors that they could not be shared houses.

[Dennis Barriault]

Some wholesalers are not in a favorable position to merge with the other wholesaler because of size differences. In our case Coors is 16% of our total business. Were simply not going out of business because Coors merged with Miller. If the Miller wholesaler wants to trade some respectable brands for the Coor's Brands than let's go. Millercoors and A-B will eventually kill each other's brand equities down the road anyway. Who says there can't be life outside these two franchises.