Dethroning the King

by Julie MacIntosh

  “They just completely missed the boat when eastern Europe opened up, and when there was growth in Latin America,” said Harry Schuhmacher. “They did have an early cue in China, but as far as the rest of the world, it really allowed SABMiller and then later InBev to just take all of those opportunities. That was just the culture. It was a Midwestern culture of conservatism, insularity and cronyism. It started to open up when August Busch IV rose through the ranks.”

  Unfortunately, The Fourth’s efforts were too little, and way too late. By mid-2008 when InBev made its approach, the results of Anheuser-Busch’s decades of expansionary paralysis were visibly clear. On a glass map of the world that hung in the lobby of the company’s executive offices in St. Louis, an array of tiny lights scattered across the screen were meant to signify the breadth and reach of its facilities around the world. The United States and China were well illuminated, but most of the rest of the map remained pitch black.

  Chapter 7

  A Babe in the Woods

  He was like Bambi, like a deer in the headlights.

  —Advisor to Anheuser-Busch

  As The Fourth started to reach out to some of the parties his father had alienated over the years once he became CEO, it became apparent that he was operating with one hand tied behind his back, and his own father had fastened the knot. The Third hadn’t fully loosened his grip on the company’s scepter. A full year after his son took over, The Third remained an imposing presence at the company. He was still visiting wholesalers, causing confusion about who they should interact with at the mother ship, and he only moved out of his office at Anheuser-Busch headquarters at the end of 2007 when the board forced both him and Pat Stokes out of the building.

  “A succession from a strong CEO, let’s say Jack Welch to Jeff Immelt, is hard,” said board member Sandy Warner in reference to General Electric, where he also served as a director. “In the case of Immelt and Welch, which I’ve lived through, Welch hasn’t been in the building once since he retired as CEO.”

  “August Busch III kept his office,” Warner said. “Never moved his office. So it’s hard to start when you succeed a brilliant, successful, long-term CEO. It’s doubly hard when the guy is still on the board, still in his seat, still in the same place everybody has been used to for over 20 years . . . Then add to that that he’s your father, and you’ve created an absolutely impossible situation.”

  “He knew that company from the lowest employee to the highest, and all of the procedures and processes. I think it was difficult to let go,” said fellow board member Ambassador Jones. “I think there were some judgment calls and management decisions that The Third didn’t agree with, and some he disagreed with more vehemently than others.”

  The Fourth had won the promotion he had always aspired to. When he pulled a business card out of his wallet and read the title, that’s what it said—Chief Executive. He never felt like he was really in charge, though. It was maddening. As one former strategy committee member said, “I can’t remember the titles we all had, because the reality was that August III was always there.”

  August IV was concerned that Anheuser-Busch was vulnerable to a takeover, however, and he was desperate to convey his growing sense of uneasiness and urgency to his colleagues.

  During a meeting with The Fourth and Anheuser Chief Financial Officer Randy Baker in St. Louis not long into The Fourth’s tenure, a high-ranking Citigroup banker named Leon Kalvaria ran through a list of dangers Anheuser-Busch faced at the hands of its rivals. Kalvaria’s ties to the beer industry ran deep—he had advised Lemann, Telles, Sicupira, and the other Brazilians at AmBev during their merger with Interbrew, and had watched as the Brazilians asserted control over the operation and ousted John Brock, Interbrew’s CEO. Kalvaria had also worked with SABMiller several times, both when it took a majority stake in Italy’s Peroni in 2003 and when it bought Grupo Empresarial Bavaria, Colombia’s largest brewer, for $7.8 billion in 2005. After working for so many years in the brewing space and spending so much time with its top executives, he knew what made each of Anheuser’s competitors tick and where they had stashed any skeletons in their closets.

  Kalvaria’s warnings were enough to compel August IV to invite Citigroup, Goldman Sachs, J.P. Morgan, and some other Wall Street bankers down to Cancun, Mexico, a few months later, on February 7, 2007, to present their views to a group of Anheuser executives. August IV encouraged the bankers to get creative, hoping that they would help light a fire beneath his troops.

  It had been nearly a year and a half since Wilma, a Category Five hurricane, had smashed into Cancun, wiping out cruise ship piers, flattening hotels, and washing away entire beaches. Much of the area had been rebuilt and was just starting to seem functional again. Rainstorms passing through town that week, however, had knocked down branches and soaked the grounds around the Ritz Carlton, where the beer executives were assembling. It made for a treacherous morning jog for Goldman Sachs’s Tim Ingrassia, but he needed to clear his head ahead of what was bound to be an interesting gathering.

  While Goldman Sachs now stood in Anheuser’s good graces, its history with Anheuser-Busch was messy and complicated. The bank and the brewer had been close through the 1990s, but the trouble with Anheuser-Busch from Goldman’s perspective was that it rarely executed the types of transactions that paid the best fees—large mergers and acquisitions. By mid-2001, when the German brewer of Beck’s beer came up for sale in an auction Goldman was running, the two companies’ relationship had waned, and Byron Trott, who later became a household name for being Warren Buffett’s favorite banker, was working to maintain Goldman’s relationship with Anheuser-Busch out of Goldman’s Chicago office.

  Anheuser submitted a first-round bid for Beck’s, but the offer was so low that Goldman dropped Anheuser from the second round of bidding. August III was furious.

  “He decided Goldman was a bunch of jerks, but really, they just didn’t bid enough,” said a person with knowledge of that deal. “The thought was that this would just blow over,” said another person close to the saga. “But The Third can hold a grudge. What we heard in hindsight is that the message went out: Goldman Sachs is not welcome here.”

  It took that soured relationship years to recover, and in the interim, responsibility for covering Anheuser-Busch passed through several reluctant Goldman bankers before falling in the lap of Peter Gross. Gross had a reputation for persevering in the face of all sorts of difficulty, but Anheuser-Busch was a tough nut to crack. His firm had offended August III so deeply that the response when he called the company was: “Don’t even bother calling here. No one will talk to anybody from Goldman Sachs.”

  Gross shifted strategies. He apologized to CFO Randy Baker for anything Goldman had done to upset the company and decided to focus his efforts on Anheuser’s efforts overseas, including one particular burr in its saddle: its century-long battle with tiny Czech brewer Budejovicky Budvar, which also claims to produce the world’s only genuine Budweiser beer. Gross even helped set up a meeting for August IV in Prague with the prime minister of the Czech Republic at the time.

  Goldman wasn’t able to solve the Budvar problem. But by spending so much time on a niggling issue—and by strategically avoiding run-ins with a still-bitter August III while doing so—he ingratiated himself enough to pull Goldman back toward relevance and into a relationship with The Fourth. The Fourth seemed to trust that Gross, after all the time he had spent on mundane issues, would offer the best advice he could.

  The night they arrived in Cancun, Gross and Ingrassia joined another handful of bankers who had flown in from New York, along with roughly 20 Anheuser executives, for cocktails and dinner at the Ritz. Some of the bankers showed up expecting a relatively private audience with Anheuser’s top executives, but they arrived at the Ritz’s bar to find themselves surrounded by the same competitors they ran into at New York’s popular watering holes. It was the first time some of them realized they would be making their pitches against so many competitors t
he next day. It had all the makings, in Wall Street parlance, of a “beauty pageant.”

  “It was all people I know, so nothing about it was awkward,” said one of the bankers in attendance. “But I don’t know if any of us thought necessarily that we were showing up to drink with each other.”

  The next morning, as they watched roughly a hundred of the company’s top managers settle into their seats in the hotel ballroom, the bankers also realized they weren’t going to be making intimate presentations to a selected audience of Anheuser-Busch executives. Large multimedia screens had been set up at the front of the room to make for easy viewing of PowerPoint slides, and it seemed like half the company had relocated to Mexico for the festivities.

  The bankers made their 90-minute pitches one team at a time, and they each pounded on similar messages. The dispatches from Goldman and Citigroup were the hardest-hitting. Kalvaria and his Citigroup colleagues Jeffrey Schackner and John Boord spent a few minutes shooting down the notion that Anheuser-Busch should develop liquor brands, an idea that had consumed some of August IV’s time, and then decried the excuses Anheuser had been using to explain why its business was flatlining. The company had been slapping away such questions rather than addressing them, blaming everything from their competitors’ new can designs to the maturing U.S. market. During one board meeting, sales and wholesaling executive Evan Athanas showed a slide that indicated sales of Bud Light were suffering heavily against Coors Light. With little reaction from the audience, Athanas was just about to move to the next slide when board member James Forese interjected.

  “Wait a minute—why is this happening?” Forese said, glancing around the room in wonderment to see whether anyone else was bothered by the company’s flagging performance.

  Coors had introduced a new, vented wide-mouth can for Coors Light, Athanas replied offhandedly—it was all a gimmick, really. The explanation seemed to suffice for many of the other executives in the room.

  “It may be a gimmick, but our market share is tanking!” Forese said, perplexed as to why no one else saw this as cause for concern. “Shouldn’t we dwell on this for a minute? We’re getting slaughtered here!”

  Citigroup’s team reinforced that concern in Cancun. “If you can’t grow the beer market in the U.S., why are Corona and Sam Adams making hay in your backyard?” they asked. Kalvaria focused on one slide in particular that showed that Mexico’s Modelo was accounting for much of Anheuser’s growth, and the dynamic in the room grew briefly uncomfortable—Modelo chief Carlos Fernández, a member of Anheuser-Busch’s board, was sitting in the crowd. Then the Citigroup team pitched the deals they felt Anheuser should consider: They could buy the rest of Modelo, and InBev was a natural fit. InBev, however, which was swelling in size and already closely controlled by a small group of shareholders, wasn’t likely to surrender its independence.

  Goldman’s Gross and Ingrassia were next, and they came out swinging. If Anheuser-Busch didn’t make some significant changes, Gross said, it was just a matter of time before InBev came knocking. They had one and a half to two years before InBev would attempt a takeover, he and Ingrassia predicted, surveying the room to make sure the first few bars of their presentation were ringing home. It appeared they were. The dozen or so members of the strategy committee had heard this warning a million times. The rest of the room seemed startled. “If you stand on a perch as lofty as Anheuser-Busch, it’s very hard to also consider yourself vulnerable,” said one person who was there that day. So the bankers went on.

  Even if InBev didn’t turn predator, they said, Anheuser-Busch was still a sitting duck for activist shareholders. It was a wildly successful and well-positioned company that had let its massive advantages slip away in recent years. While Anheuser’s executives blamed the company’s stagnant earnings on the high prices of commodities, Coke and Pepsi—which were also in the business of wrapping metal around a liquid and selling it to customers—were growing, as were the world’s other brewers.

  “If InBev and SABMiller keep doing what they’re doing, you’re going to be picked off,” Ingrassia said, while noting that for now, Anheuser-Busch still made more money and more beer than anybody else in the world. “If you don’t take control of it, others will.”

  That day stands out in several Anheuser staffers’ minds as the moment in which sentiment shifted. Anheuser’s corporate planning committee had evaluated whether InBev could buy Anheuser and had ruled that the Brazilians wouldn’t be able to pull off a deal. Those assurances had soothed some of the company’s top executives. Others felt Anheuser’s planning group was out of its league on this one, and felt Anheuser’s planning group was out of its league on this one, and still too beholden to The Third. Asking a group of subordinates to determine whether you’re vulnerable is akin to “asking my wife if I’m handsome,” said one of Anheuser’s advisors. “If you only ask certain people, you’re going to hear what you want to hear.” With Anheuser in transition under a new CEO, the bankers made it clear in Mexico that InBev might pounce.

  “I think that was an epiphany for a lot of people,” said a strategy committee member who was hit particularly hard by the warnings. “There had always been a lot of work done around ‘Who could possibly buy the company?’ That it was outrageous that someone would come in and buy Anheuser-Busch. There was a certain level of thinking that it just wasn’t possible, that no one could possibly afford it.”

  “That’s when we began talking earnestly about how we needed to address the bigger picture,” the executive said. “There was broad recognition across the management team that it was time for us to move forward and make some fundamental changes in the way we did things.”

  Those changes were going to have to involve buckling down like never before to slash the company’s bloated costs. Several bankers had chastised the group for taking its eye off the ball and ignoring the need to keep costs low.

  “A well-run A-B would have been bid-proof—that’s what we told them in Cancun,” said one of the bankers who presented that day. “They were the biggest, baddest guys in the biggest profit pool: the U.S. That’s why everybody wants to be here. It’s the biggest profit pool in the world.”

  “They were losing market share to their competitors, who didn’t have all of the advantages they had. They lived in their little microcosm as the real world was developing around them. The company had so much money that they became fat and happy. And they underestimated the threats to their business and their organization.”

  Some of the bankers had deliberately avoided preaching that a big merger would solve Anheuser’s problems—they knew it would look like they were shilling for business. Many of the company’s staffers still felt like they had been slapped in the face by Wall Street honchos whose bonuses depended on their ability to conjure up deals.

  “It was a very good discussion, because we were a very insular company and we had never really had that kind of frank discussion,” said one strategy committee member. “But August brings these guys in, and each gives us a scenario that’s worse than the other. ‘You’re going to be taken over if you don’t do this.’ Those guys all come in with a grin and say, ‘I did the Cheerios deal,’ and you’re all rolling your eyes and going, ‘We get it.’ The message really angered a lot of us because all of these guys from Wall Street come in and tell you, ‘You’re doomed. You’re going to be taken over. However, here’s where we can help you! You should buy these guys, you should do this . . . the clock is ticking!’ ”

  Such sniping and resentment was pointless to another top executive, however, who said Anheuser was already half-dead in the water by the time the group landed in Cancun. Anyone who first realized that InBev was a threat while sitting in that ballroom had been deluding themselves, the executive said. It had been clear for years. Whether the group from St. Louis cared for the bankers’ persuasive tactics or not, they were right.

  “It was arrogance that caused us to ignore them for so long.”

  That same arrogance allow
ed the fire that had been stoked in people’s bellies down in Mexico to cool over time. After a few months passed and none of their competitors tried anything sinister, many of the company’s executives returned to business as usual. “If you know a threat is coming, recognition is one thing. But you’ve got to then act on it,” said one advisor to the company. “There’s a big difference in life between recognizing a potential threat and truly addressing the possibility of it and acting accordingly.”

  “I think if we were to all look back, we would probably all agree we would prefer to have acted on some of these things sooner.”

  August IV did make a few moves in that direction. After Cancun, he hired Goldman and Citigroup and looped in Skadden, the company’s longtime corporate law firm, to evaluate Anheuser’s options and defend it against unwanted advances. The team kicked quickly into gear with a review that lasted roughly half a year. The Fourth also paired Anheuser CFO Randy Baker up with public relations firm Kekst and charged him with a mission that was largely kept under wraps: preparing for a potential attack from an activist investor.

  When The Third launched into his tirade at the quail hunting plantation in Florida, however, he had a point.

  “I was very, very nervous about a whole bunch of banks giving their perspective,” said one of the bankers who presented in Cancun. “I was worried they were having too many banks come to talk to them, and I was worried they’d be too honest with too many banks. Some of the banks not selected would be heavily incented to go and shop some of the information they had picked up in a fairly confidential environment.”

  The Fourth’s inclusion of so many banks in Mexico did appear to come back to haunt the company once InBev made its play for Anheuser. J.P. Morgan, whose Cancun presentation didn’t click with the audience, wasn’t picked to work with Anheuser on its defense strategy. In the end, though, that suited J.P. Morgan just fine. When InBev started hatching its takeover plan roughly a year later, just as the financial markets were starting to disintegrate in the wake of Bear Stearns’s collapse, it knew it needed to recruit one or two of the world’s strongest banks if it was going to successfully rustle up $40 or $50 billion in financing. The first person InBev looked to was Jamie Dimon, the head of J.P. Morgan, who had just taken control of Bear Stearns and was emerging as one of the U.S. government’s favored partners on Wall Street. Dimon was happy to accept such a lucrative piece of business.