Dethroning the King

by Julie MacIntosh

  The Fourth, however, had not appointed a single new board member since becoming CEO. All of the directors he answered to were installed by his father with the exception of James Forese, a former chairman of IKON Office Solutions and IBM executive, who was elected in 2003 while Stokes was in charge. “They were trying to change the board, and I was the last member to go on as sort of the ‘next generation,’ ” said Forese, who spent several weeks at the company with both The Third and The Fourth when he was appointed, learning about the business.

  The convoluted relationship between August III and August IV wasn’t the only thing that made for complicated dynamics within the group. Nine of its members had served for at least a decade, which led to complaints that they were too heavily entrenched in August III’s camp. Several served together on the boards of other companies. The Third, for one, sat on the boards of AT&T and Emerson Electric with three other Anheuser directors, and he and fellow director Edward E. Whitacre Jr. had known each other for decades. The Third had been one of the AT&T directors who approved a controversial $161.6 million pay package for Whitacre in 2007, the year he retired.

  The heaviest criticism tended to center on the financial relationships between certain directors. Anheuser-Busch paid for tens of millions of dollars in auto rentals and other services each year from Enterprise Rent-A-Car, which was run by board member Andrew Taylor, although Anheuser argued that the amount it paid wasn’t big enough to represent a conflict of interest. The company used the services of some firms that employed its board members and made donations to others. Pat Stokes came under fire because his son owned a lucrative Anheuser-Busch beer distributorship.

  Four directors were considered insiders: Stokes, the two Augusts, and Carlos Fernández, Modelo’s CEO. Everyone else was considered “independent,” despite some of their longstanding business and personal ties to each other. Close relationships can yield certain benefits in the boardroom. But they can also lead directors to strike allegiances that pollute their decision-making abilities with insider politics. “There was a lot of cross-stocking of the board,” said beer industry scribe Harry Schuhmacher. “They were all friends, and they were all on each others’ boards. They all kind of looked after each other. That helped to insulate the company from the real world.”

  Accordingly, Anheuser-Busch was awarded a grade of “F” in corporate governance from The Corporate Library—the worst score possible—in April 2008. It was taken to task for potential conflicts of interest between its board members and the advanced age and tenure of certain directors, among other things. Anheuser’s score from RiskMetrics, another shareholder advisory firm, was higher, and the Corporate Library boosted its grade slightly to “D” in June. But it was still nothing to be proud of.

  When August III was questioned at the outset of the InBev battle about the ties between board members, he said the directors at issue didn’t sit on any committees that could pose conflicts. “Second thing is, there’s a great advantage to being able to communicate with the person who was running Emerson, the person who was running AT&T,” he said. “Think of the cross-pollenization and communication that we had on planning, finance and other matters.” He closed with a sweepingly broad statement: “As far as integrity is concerned, people who are running major companies in this country today would never touch something that was a conflict of interest [except] in a few publicized cases. So I don’t think there are any questions with overlapping or cross-pollenization of boards.”

  Most of Anheuser’s advisors say its directors got too much flak for their apparent conflicts. There were lots of connections between members of the group, they admit, but that didn’t detract from their professionalism. “The board as a body, contrary to what everybody believed was going on, was actually doing their work very diligently,” one company advisor said.

  Nevertheless, the directors took a bruising in the media for ostensibly being beholden to August III, and it served as a major point of frustration. To counter the persistent criticism, Anheuser-Busch’s board went to great lengths to do everything by the book during its battle with InBev. They were advised to meet in person as often as possible, and they obliged, knowing their every move would be viewed under a magnifying glass. But rather than convening at headquarters, where they knew they might be spotted by employees and the hungry local media, they agreed to sequester themselves within Anheuser’s private airplane hangar at the Spirit of St. Louis airport.

  Anheuser-Busch had used the hangar over the years for everything from run-of-the-mill marketing meetings to high-drama negotiating sessions between warring baseball team owners back in the days when it ran the Cardinals. Like everything Anheuser owned, it was done up in rich style—filled with aviation-related Anheuser-Busch mementos and sporting gleaming floors that were clean enough to throw a picnic on.

  Trappings at the hangar still weren’t as cushy as the ninth floor executive suites at headquarters, but meeting at the airport brought benefits on another level: The board and its advisors could be stealthily shuttled to and from the site on Anheuser’s sparkling fleet of corporate jets. They tended to arrive hungry, since Anheuser stocked no food on its aircraft despite their formidable supplies of free beer. But it was tough to complain.

  Each time they landed at Spirit of St. Louis, the board and its advisors would walk through the hangar and into a small waiting room on the ground level, where they could plop down on a set of sofas to wait for their colleagues. They had a view of the tarmac from there and easy access to the adjacent coffee room and a tiny bathroom, which allowed them a few moments to relax as they waited for The Third’s helicopter to float into view on the horizon. A stairway led up to the boardroom on the hangar’s second floor, which was situated down the hall from a small kitchen.

  Board meetings usually followed the same format each time—again, to leave no room for critique. The entire board would sit down for its main meeting first, along with a range of Anheuser-Busch executives, bankers, and attorneys. When that session finished, the executives would leave, often taking the bankers with them, and The Fourth would have a few minutes to make comments before exiting the room. The Third and Pat Stokes would then take the floor before leaving as well, turning the session over to the independent directors and their lawyers. A company secretary who stood sentry outside the boardroom would force everyone else to leave the second floor and go downstairs to wait it out. They weren’t even allowed back upstairs to grab food from the kitchen. “If you were downstairs and went upstairs to get a bagel, they were like, ‘No, you’re not allowed upstairs,’ ” one advisor said, “which always seemed kind of silly.”

  Good corporate governance always warrants a certain degree of precaution, but Anheuser’s board was much more fearful than most about all of the different ways they might get sued. If they wanted to buy Modelo instead of dealing with InBev, for instance, all they would need to do was sufficiently explain that they felt the Modelo plan was better for shareholders in the end. “Skadden said we could go ahead from a legal standpoint and do it,” said one advisor.

  “But there’s always this question mark about what will happen if you go and make an acquisition and fend off a bid, and then the shares trade down. That’s what scared them. Getting sued. Very few companies will do an acquisition in the face of an offer.”

  The board also knew that Anheuser-Busch’s shareholders included some high-powered and influential investors, the most famous of whom was Warren Buffett, the so-called Sage of Omaha. Just two months earlier, Buffett had teamed up with family-owned candy maker Mars to buy Wrigley, the world’s largest gum manufacturer, for $23 billion. The deal, which Goldman Sachs helped engineer, gave Buffett a more than 10 percent stake in Wrigley, and it helped prompt a later bid by Kraft to buy Cadbury—two other companies in which Buffett had major stakes.

  Buffett was influential enough that his utterings tended to sway opinion on Wall Street just as much as former U.S. Federal Reserve Chairman Alan Greenspan’s once had. And Bu
ffett happened to have a significant connection to InBev that tweaked nerves at Anheuser-Busch. He had served on the board of Gillette with Jorge Paulo Lemann and called Lemann a good friend. With his money on one side of the deal and his friends on the other, it was tough to tell how Buffett felt about the proposed transaction. If he publicly endorsed InBev’s bid, it might not be worth Anheuser’s effort to fight anymore. But he was Anheuser’s second-largest shareholder, with a stake of nearly 5 percent, and he didn’t usually come out in favor of hostile takeover bids, which could bode well for Anheuser’s case. Buffett often kept quiet about his investments, however, and many industry watchers assumed he would stay out of the Anheuser-Busch fracas altogether.

  “We all wanted to know where Buffett stood,” said one person close to InBev. “Both sides wanted Buffett on their side.” But on July 11, a month after InBev registered its official bid, he confirmed in an interview that he hadn’t been involved in the matter, and would be “making no news on that subject.”

  Another wrinkle added to the board’s paranoia about lawsuits, and while it shouldn’t have had much of an effect on the directors ’ behavior, it did. Both August III and Enterprise’s Andy Taylor had been personally sued, as former directors of St. Louis’s General American Life Insurance Co., after the company collapsed on their watch and was forced to sell itself to MetLife in 2000 for $1.2 billion. They and other directors, many of them prominent St. Louis figures, agreed to a $29.5 million settlement more than two years later. They admitted no wrongdoing, and the payment was covered by insurance, but the fiasco had put August III and Taylor through the legal wringer, and they were hell-bent on ensuring that it never happened again.

  August III and Taylor focused their lines of questioning during many of the board’s meetings on legal scenarios that were incredibly unlikely. The Third, in particular, raised so many legal concerns that he appeared to sway the board toward undue fear as well. “I think that was done to get some of his fellow directors to be more concerned than they had a right to be,” said one person who heard The Third’s incessant queries. The board’s lawyers pointed out that in the lawsuit-ridden United States, getting sued was almost a matter of course for any board whose company underwent a merger. Some infamous law firms start drawing up documents and searching for plaintiffs the day a deal is announced.

  August III, however, was also soliciting opinions from others. “He was taking it from third parties,” said one Anheuser-Busch advisor. “He’d raise the most horrible and rare potential results as possibilities.” He was “crazy-focused on the legal side of things,” said another. The behavior pattern fit perfectly with The Third’s longstanding habit of scuttling potential deals by pricking as many trial balloons as he could before they got off the ground.

  “I remember he said, ‘I’m not going to spend the rest of my life in depositions,’ ” said another advisor. “He was very hung up about that. It was an issue every time.”

  That fear seemed to serve as an equally cumbersome millstone around Taylor’s neck. As one advisor put it, “He was involved in some deal with August that led to shareholder litigation, so that was his only concern.”

  Goldman Sachs had started working with Anheuser-Busch’s management on its restructuring efforts not long after the gathering in Cancun, and it had officially signed on to advise the company on the InBev situation on May 27, four days after the leaks first erupted and just prior to the board’s first meeting. Two weeks later, Citigroup had solidified the terms of its own engagement with the company. But Goldman’s ability to capture the flag first paid off handily. Although the board hired both banks for advice, it wanted only one of them to speak on its behalf during the critical talks with Modelo and other parties—and it chose Goldman.

  “Would Citi have liked to have been in all the rooms and negotiations? Yeah,” said one person close to Anheuser-Busch. “But I think the company realized that was going to be too many chefs” in the kitchen. “Citi was brought in because, I think, the board wanted to not necessarily have a bank that could be accused of only being on management’s side.”

  Being relegated to a secondary role wasn’t an easy pill for Citigroup’s Kalvaria and Schackner to swallow, but they handled it gracefully. They were, after all, one of just two banking teams that were actively advising on one of the biggest takeover defenses in history. Citigroup was set to earn up to $30 million in fees, plus another $2 million for the quarter, for advising Anheuser-Busch, and Goldman had up to $40 million in fees coming its way.

  The board erected a Chinese wall between Goldman and Citigroup in the boardroom, again in the interests of being cautious. Bankers from different institutions often combine forces on certain tasks if they’ve both been hired to advise on a deal. But Anheuser’s board asked the two banks to make all of their presentations separately, using separate sets of analysis, to make it clear that they had solicited enough independent advice. The Goldman team would stand first to outline its case to the board, and Citigroup would follow. Both teams reached the same general conclusions and provided similar recommendations throughout the process, but Anheuser’s directors felt they could never be too careful.

  Anheuser had also considered whether to hire a bunch of other banks as co-advisors to tie them up and prevent them from helping to fund InBev’s takeover. Because of the conflicts of interest, no bank that was actively counseling Anheuser-Busch would be able to assist InBev as well. Yet the board opted not to go that route, which didn’t improve the odds of its takeover defense.

  The board met twice in late May and early June—once on May 29 and then again on June 13, once they had InBev’s proposal in front of them and could review the bid. “Ladies and gentlemen, this is a very serious offer,” The Third said when he addressed the board that day, confirming the obvious. Anheuser’s directors had known InBev was serious the moment its bid came in at the rumored $65 a share, which was higher than many of them expected its initial foray might be.

  “I was surprised that they picked such a big number,” said lead director Sandy Warner. “Once $65 was on the table, that was a pretty good price.”

  But things didn’t really fire up in St. Louis until the morning of Thursday, June 19, when the teams from Goldman, Skadden, and Citigroup shuttled in on “Air Bud” from the Teterboro, New Jersey, airport and assembled at the soccer park to prepare for the board’s scheduled meeting the following day. After a comprehensive dry run, part of the group left to grab dinner together while others headed to the Four Seasons hotel downtown to finalize their materials and get a decent night’s sleep. The next day’s session at the airport would be the first in which both banking teams would present their views to the board.

  Meetings at the airport hangar allowed August III and, when he also flew in, August IV, to land their helicopters outside and stride straight into the waiting room minutes later—which is exactly what The Third did the next morning as he made his usual ceremonial arrival. He often showed up a minute or two after the rest of the crew assembled. “It was always a staged entrance,” said one advisor.

  The Third and the rest of the company’s directors filed up the stairs to the second floor of the hangar and settled into their places around the makeshift conference room’s giant U-shaped table, which didn’t match the grandeur of the horseshoe-shaped boardroom table down at headquarters. Whether out of seniority or decorum, The Third always sat at the top of the horseshoe next to Pat Stokes and The Fourth while the rest of the board scattered up and down either side—always in the same seats. By the time Anheuser’s other executives and advisors claimed the chairs that ran along the walls, the room was usually packed.

  The Third slipped out of character that morning and started spinning animated stories as his colleagues readied for the meeting—a rarity for someone who wasn’t prone to small talk. St. Louis was awash in the worst floodwaters in 15 years, and with the Mississippi River threatening to crest near record levels, the basement of his farmhouse was soaked. Water damage
didn’t present the same quandary for August III as it did for St. Louis’s poorer residents, but his visible agitation still gave him a more relatable quality that morning.

  There had been a major defection from the board’s ranks just a day earlier, which also prompted some chatter as the meeting kicked off. When the negotiations between Anheuser-Busch and Modelo had started eight days prior, the two brewers’ boards of directors had been heavily intertwined. The Third and The Fourth were both members of Modelo’s 20-person board, as were Tom Santel; Anheuser’s legal head Gary Rutledge; Pedro Soares, who tended to act as a “body man” for The Fourth; and former U.S. Ambassador to Mexico Jones, who had served on Anheuser-Busch’s board since 1998. Meanwhile, Carlos Fernández, who was chairman of his own board at Modelo, had been an Anheuser-Busch director since 1996.

  That changed quickly, however. If Modelo wanted to adopt the best negotiating stance it could, Fernández needed to be free to talk to both Anheuser-Busch and InBev and to play them off each other. There was no way he could do that and still serve on the Anheuser-Busch board of directors. It would represent a clear conflict of interest.

  A key item on the Anheuser board’s agenda that Friday was an update on its negotiations with Modelo, so Fernández had resigned from his position the day before. When Anheuser announced the decision on Friday in a press release, analysts and investors speculated that Fernández had realized it was time to put Modelo’s needs over Anheuser’s. The two companies had been begrudging bedfellows to begin with. He now needed to switch gears entirely and focus on securing the best future—and the most money and independence possible—for Modelo.