The two companies’ bankers and lawyers were briefed on the meeting within hours of Santel’s departure from Mexico City, and The Fourth called Fernández soon afterward to confirm that he supported the terms that had been outlined. “I’m more than happy to work with you on the future of Anheuser-Busch,” The Fourth said.
Months later, however, interpretations differed as to exactly when August IV and his team first agreed to let Carlos be chief executive—and whether Carlos pushed for it himself as a condition for starting talks.
“It was absolutely clear that Carlos was going to be the CEO and run the business” from the very first meeting, one of Modelo’s advisors said. “So from Carlos’s perspective, that actually had some appeal.”
“Carlos would have never gone to his board and everybody else if that wasn’t on the table,” another Modelo advisor said.
People on Anheuser-Busch’s side of the fence saw things a bit less clearly. While August IV and Santel may have suggested that Carlos could be CEO or co-CEO during the early stages of the companies’ talks, they say, The Fourth never explicitly admitted that his team made the offer right from the start.
“No one would admit they had promised him the job,” said one of Anheuser-Busch’s advisors. “I bet he was promised the job. But no one will own up to having guaranteed him on day one that he would have that job.”
“I’m not aware, and I don’t believe that it happened, that August would have offered him that,” said Sandy Warner. “There was no commitment at that moment. There was never any commitment to Carlos.”
Even Santel wasn’t able to clear up which promises were made to Carlos.
“I think there was some confusion there,” he said. “I recall there was confusion on who said what to whom.”
“We were certainly willing for him to run the whole international show. That was one of my jobs, but I’d be happy to have him do it, too.”
Regardless of when the suggestion was made and how firm a commitment it represented, there was no question that Carlos’s reputation exceeded The Fourth’s when it came to operating a beer business. If the two executives had been pitted against each other and asked to whip up an inventive marketing campaign, The Fourth would have had a big edge, but Carlos was viewed as one of the better operators in the beer industry, even by executives within Anheuser-Busch.
“If you look at Modelo, it basically grew market share and was a tightly run company with very low expenses,” said a person close to Modelo. “And that was all Carlos.” If Anheuser-Busch was considered the U.S. beer market’s “category killer” in 2008 with a 48.5 percent share of the market, Modelo warranted a different term entirely. By the end of that year, it controlled 63 percent of the Mexican market for domestic and exported beers.
Handing control to Fernández seemed like the responsible thing to do, and it looked like the best way to enlist the full support of the Modelo families. It could also be a way for August IV to escape the rigid, stifling box in which he had been suffocating since taking his current job. If either he or Anheuser’s board had doubts about his leadership abilities now that he was 18 months into the gig, this was their chance to hand his crown to Fernández under the auspices of the deal. The Fourth would never have to admit he wasn’t cut out for the position.
“When the card got played for Carlos to be CEO . . . and August to have a ceremonial role, at that stage in the game it was pretty smart because August was probably like, ‘I’m done, I can’t take it anymore,’” said a former Anheuser-Busch executive.
“I sense that he had . . . some feeling of kinship and responsibility to the other managers and employees,” said one advisor to the company. “With just getting out of the limelight or stepping aside, it wouldn’t have been that the company was lost on his watch, and it wouldn’t have been that the people who mattered to him—the employees and managers—were toast. That was a much better result than InBev, even if he was not going to be CEO under either circumstance.”
“It really created a much better company,” said a person close to Modelo. “And Augie [IV] was a disgustingly awful CEO, so it actually was better.”
To put less of a strain on its finances, Anheuser wanted to use its own stock to pay for as much of Modelo as possible. Companies that sell themselves are often turned off by the notion of accepting stock as payment, but under the structure Anheuser-Busch was proposing, the Modelo families could end up owning about 15 percent of the company—four times more shares than the Busch family did. That would make them the most powerful group of Anheuser-Busch shareholders by far, and they’d be controlling an even bigger company.
The proposition of owning the single largest stake in the company, combined with the notion that Carlos would be in charge, helped Modelo come around pretty quickly to the idea of accepting stock as currency. With Carlos at the helm, the value of their shares would depend on his leadership, not on August IV’s. It was a much more palatable concept.
Santel’s proposal in Mexico City was just an early-stage foray. Carlos and María knew it could take weeks of negotiations to strike up an actual deal. The tone his visit had set was unmistakable, though. Anheuser-Busch looked desperate—at least, that’s how The Fourth’s team had telegraphed it by making such a generous proposal right up front. They were offering Modelo the moon, not just by handing away control of the company but by proposing to pay a huge price to do so. It seemed backward, frankly. During merger negotiations, companies tend to lobby hard to either win control or to pay a lower purchase price, not to sacrifice control and pay extra to boot. The offer sounded too good to be true.
Kindler and Cravath lawyer David Mercado thought as much. Modelo was willing to kick off formal talks based on what Fernández heard from Santel that day. As the company sprang into action, the two advisors issued their first of many warnings.
“This is all very interesting, but you’d better stay close to InBev,” Kindler cautioned. “You’re just a ’stalking horse’”—an option used by a takeover target to lure higher offers from other parties. If that were true, Modelo could get dumped by Anheuser-Busch at the 11th hour and be stuck with InBev as its new half-owner. Given the history between the U.S. and Mexican brewers, such a move was certainly not out of the question. “The Mexicans had chips on their shoulders—they were waiting to be insulted,” said one Modelo advisor.
Even if Anheuser-Busch was truly intent on a deal, the sheer concept that its board of directors would ultimately agree to hand the CEO’s spot to Fernández still seemed shocking.
“I could not see the Anheuser-Busch company merging with Modelo and allowing a Mexican national to become CEO of the American gem,” said one of Modelo’s advisors. “I couldn’t see it. I became a believer as people kept telling me, but on our initial briefs, we were like, ‘Okay ...’”
To protect itself in case Anheuser-Busch planned to use it as a pawn, Modelo knew that it needed to get cozy with InBev, too. The Mexican brewer had to look out for its own interests first, and it needed to try to preserve its rights in case InBev took over. That could require some rough negotiating tactics. If Fernández and his team agreed to turn their backs on Anheuser-Busch and supported InBev’s bid, they would undoubtedly improve InBev’s chances of success. And they might be able to win more freedom from InBev in exchange. They could use the threat of such a move as leverage against both sides.
InBev’s Marcel Telles had actually reached out to Fernández, whom he had known for some time, just a few days after InBev first offered to buy Anheuser-Busch. Fernández was at home with his family when Telles called, but he stepped aside for a few moments to listen to what Telles had to say. InBev had great plans in store for Anheuser-Busch, Telles professed, and it wanted to build a strong partnership with Modelo. A few weeks later, the two men met at Cravath’s law offices in midtown New York to discuss their companies’ structures and family traditions.
Cravath’s Mercado had a long history with InBev. He was a Texas-born, fluent Spanish spe
aker who specialized in Latin American deals and had worked closely with the Brazilians in the past—including on the 2004 deal to merge AmBev with Interbrew. Kindler and Mercado had come to know and trust each other long before that deal, which happened roughly around the time the more senior Kindler left Cravath for his first job in banking, as global head of mergers and acquisitions for J.P. Morgan. Kindler wasn’t the only lawyer on Wall Street who had jumped ship for the banking side of the M&A business, with its splashier headlines and bigger pay packages. As the Modelo situation was proving, he still had plenty of chances to work with his old colleagues.
He and Mercado pulled in another one of their frequent collaborators—public relations maven Joele Frank—to advise Modelo on strategy and media tactics once things got rolling in mid-June. Modelo realized that things could get sticky if a deal with Anheuser-Busch neared the finish line. There would be countless investors to appease and dozens of reporters to lobby—not to mention the very families that controlled Modelo, who needed to be corralled for critical discussions and votes. A few members of Congress were bound to take note and start asking questions if the Mexicans took control in St. Louis. And if talks fell apart, Modelo was going to need a bulldog to press its case behind the scenes and keep the media on its side. While the documentation that lay behind it looked somewhat shaky, Modelo believed its original agreement with Anheuser gave it the right to veto a takeover of the company. At the very least, Modelo thought it could forcefully adopt that stance and become a burr in InBev’s saddle, making life in Brussels painful until InBev agreed to some sort of compromise.
Mercado and Kindler had known the boisterous Frank for decades and had worked with her on plenty of deals—Mercado had even been staffed, as an associate just five years out of Yale Law School, on Frank’s first-ever transaction: an $820 million hostile bid in 1989 by Vitro, the Mexican glass maker, to buy Florida-based Anchor Glass Container Corporation. Vitro spent 66 days battling to subsume Anchor Glass, whose biggest customer, interestingly enough, was Anheuser-Busch.
On Sunday, June 15, four days after InBev bid for Anheuser-Busch, Mercado put in a phone call to Frank and caught her in the middle of her son’s graduation ceremony at Stanford University in California. Oprah Winfrey was the university’s graduation speaker, and her speech made headlines, largely because she had endorsed Barack Obama in the upcoming presidential election after a career spent staying out of politics. Frank ended up with less time than she had expected for reveling in her moment as a proud mother.
“You have to be in Mexico City now,” Mercado told her bluntly. “They want you there now.” It was an abrupt flash back to reality, but Frank knew this was her best chance to get involved in what was shaping up to be the year’s most exciting takeover battle. Anheuser and InBev were already working with other communications firms, and Modelo was the next-biggest player tied up in the fracas.
She left her family earlier than planned on Sunday and flew from San Francisco to Los Angeles to catch a connection to Mexico City. She didn’t have much time to get up to speed, but reams of coverage of the budding war over Anheuser-Busch had been in all the papers. Frank spent the flight to Mexico scouring packets of media clippings that detailed The Fourth’s checkered history, the warped dynamics of the Busch family, and the tainted relationship between Anheuser-Busch and Modelo. There were lots of bases to cover.
Mercado seemed just as concerned about the prospect of trying to negotiate with InBev, however, as he was about Modelo’s talks with Anheuser-Busch. Based on the work he had done with InBev’s Brazilian honchos in the past, he knew that swimming in both companies’ shark tanks at the same time could be dangerous. The Busches tended to wear their prejudices on their sleeves, and the messy history between the two companies was already out there. Talks with InBev’s steely crew, on the other hand, could be trickier to navigate. And the stakes for Modelo were incredibly high.
“Mercado knew InBev really well, and he was really, really concerned,” said one Modelo advisor. “He just kept saying, ‘You’ve got to understand these people. What we’re doing is really going to be nasty.”
Chapter 11
The Board: August, August, and Augusta
You’ve got this perception on Wall Street that we’re dysfunctional. Well, maybe. But every company looks dysfunctional at a time like that, don’t they?
—Former Anheuser-Busch marketing ace Bob Lachky
On the night before Anheuser-Busch’s first takeover-related board meeting in St. Louis, the teams from Goldman Sachs and Skadden touched down relatively late. It was late enough that the best place they could find with a kitchen that was still open for dinner was an old Italian restaurant in a sketchy warehouse district just off the banks of the Mississippi River.
The place was nearly empty when the small group of bankers and lawyers sat down, but the questionable digs didn’t bother Skadden’s Joe Flom, who launched an impressive attack on a massive surf and turf platter. Flom, a man in his mid-80s who, “dripping wet out of the shower, might weigh 105 pounds,” according to one colleague, pounded down substantially more than his diminutive frame seemed it could handle. But he had as aggressive an appetite for a good takeover fight as he did for food, and he was gearing up for battle. He needed all of the energy he could muster.
Flom’s work for Anheuser-Busch far predated the creation of InBev, as did his close relationship with The Third, and the Brazilians ’ hostile bid appeared to have set his blood to boil. His aptitude for defending vulnerable corporate clients had grown legendary over the years. He had a knack for finding alternate takeover suitors or, at the very least, wringing more money out of bidders’ pockets when they appeared to be bone dry.
Flom had been a key figure on Wall Street since the late 1970s, when he and rival corporate attorney Martin Lipton were considered the best in the takeover business. Flom was particularly well known in deal-making circles for the “Jewish dentist” defense, which he concocted in 1975 while defending dental equipment maker Sterndent against a hostile bid from Magus Corporation. Flom decided that attention should be drawn to the fact that Magus was part-owned by Kuwaitis, and started loudly proclaiming that if the deal occurred, Sterndent’s clients—many of whom were Jewish dentists—were bound to take their business elsewhere. The scare tactic worked well enough to give him time to find another bidder for his client, and the episode showed how a well-run public relations campaign could bolster traditional legal takeover defense measures.
“His first instinct was to show a good, strong defense,” said one Anheuser-Busch advisor. “If you do that, you’re going to be able to negotiate or find something else. Flom’s theory has always been ‘You give me enough time, and I’ll find a solution.’”
“At the end of the day,” said the advisor, “Joe always has an incredible instinct for moving things around so you can maximize value.” Flom was getting to be somewhat long in the tooth, however, and wasn’t as intimately involved with Skadden’s day-to-day practice as he used to be. That was where Paul Schnell, another top Skadden M&A attorney, came in. The two spearheaded Skadden’s team of advisors to Anheuser-Busch, with Schnell handling many of the particulars.
Anheuser’s directors were accustomed to meeting 9 or 10 times a year. The Busches traditionally hosted dinner for the group in St. Louis on the night before each of their gatherings, which had always given the board’s members plenty of time to catch up on anything that had transpired in the last month and a half.
But they were about to start getting to know each other much, much better. On May 29, six days after news of InBev’s interest hit the papers, the board had met to discuss the rumors. Gossip had been swirling for months that the Brazilians were on the prowl, and the board knew InBev was big—and getting bigger. It was clear that Anheuser-Busch needed to keep growing to avoid being consumed. But few of the board’s members believed that the company was already within InBev’s reach. “I don’t think anyone on the board felt that it was as close as it
was—that InBev would be able to amass enough capital to buy Anheuser-Busch,” said General Shelton. “That part of it caught us by surprise.”
With so much uncertainty suddenly facing the company, the board had a solid docket of issues to cover that day. Goldman’s team outlined how InBev might try to finance a bid at the rumored $65 per share, the company’s executives laid out their progress on their Blue Ocean cost-cutting plan, and Skadden made the first of many presentations that covered the board’s duties to shareholders. They mulled over the potential for a deal with Modelo, and debated whether to try to meet with InBev to hear things straight from the horse’s mouth.
But when the board disbanded that day, the ball was in August IV’s court. Barring any overtures from InBev, they planned to let him and the rest of Anheuser’s management push ahead with their cost-slashing efforts and restructuring plans. And as the days ticked by with no word from Belgium, Anheuser’s directors began to hope the takeover threat had dissipated. Maybe InBev couldn’t cobble together the financing it needed, or had thought twice about the wisdom of sparring with its joint venture partner.
They weren’t off the hook for long. When InBev faxed in its offer, everything dropped right into their laps, and their collective nightmare began. Many people who serve as corporate directors would relish the chance to bid for a rival company, but few are eager to be placed under a microscope on the receiving end. Suddenly, a raft of investors and news anchors turned their focus toward Anheuser’s 14 board members to gauge how they might react. And their judgments weren’t pretty.
Anheuser’s board of directors during the fight against InBev constituted a significant improvement on its governing bodies of old. Past directors of the company had included a deputy U.S. defense secretary who resigned in an insider trading scandal and a wealth of cronies and St. Louis-based supporters of the Busch family. Facing a barrage of criticism from shareholders, The Third had taken some halfhearted steps late in his tenure to flesh out the group with a few people who seemed more independent. But The Fourth said he wanted to push those efforts further to “bring new board members on that have a diverse point of view.”
Dethroning the King Page 24