Dethroning the King

by Julie MacIntosh

  If InBev had offered just $68 per share, which would have put its bid at parity with the plans Anheuser had developed on its own, or if it hadn’t raised its bid at all, the board’s phone session that night would have been much more interesting. “They could have bluffed us and said, ‘We’re sticking with $65, and then we would have had to decide what to do,” said Jim Forese. “All of those get to be the great ‘ifs’ of history.”

  “What if they hadn’t” [raised the bid]? asked Warner, who found it interesting to speculate—even though he had assumed InBev would toss in a few more dollars. “We might then have bought the other half of Modelo.”

  Instead, the two sides came to an acceptable price without much of a scuffle at all. “By the time InBev bumped their price to $70, I think the board was just tired,” said one person close to Anheuser. “I think they were also scared.” InBev’s budding effort to eject them from their positions wasn’t the main thing that had motivated them, but it certainly had a degree of effect.

  If anything caused Anheuser’s directors to breathe a sigh of relief once InBev’s new offer rolled in, it was the realization that selling the company would let them escape a mess they had helped create. It would put an end to the debate over whether The Fourth needed to be replaced, and it would quell the need for argument about why the board had bowed to The Third’s wishes and put him in charge to begin with. One of the biggest advantages to selling the company, aside from the money they were set to make, was not having to admit they might have made a mistake.

  Back in 2006, when The Fourth had interviewed to become CEO against a couple of other candidates, he professed to the board that he planned to emulate his father. He’d be a hands-on executive, The Fourth said, just like his dad was, and his reputational problems were well in the past. Yet after the board promoted him into the position, they started hearing complaints that August IV wasn’t on the job enough—that he was often absent and tough to find. “It was always hard to get him in the mornings,” said one advisor to the company. “It was hard to get him, period.” He was great at motivating Anheuser-Busch’s beer distributors, but there was more to being CEO of Anheuser-Busch than giving rousing pep talks.

  “I just can’t imagine, unless there was a negative personality transformation, how they could have ever made this guy the CEO,” said one Anheuser advisor. “It’s one thing if the family had 40 percent of the business. It’s just another example of, ultimately, a corporate board having done something that didn’t make that much sense. Certainly among the positives of selling the company was not having the world know about the management issues, not having that glaringly in front of them.”

  Whitacre had attested in a press release issued on September 27, 2006, the day of August IV’s appointment, that he was the individual who was most qualified to lead the company. “The reason he was qualified is because he had done a pretty robust job running the U.S. operation, and he had been quite good at sort of tearing down the walls of history,” said Jim Forese. “He was an advocate of making fundamental changes, given what was going on in the industry. And he had a pretty good record. He had a pretty good team around him.”

  “Certainly, no one ever called me and said, ‘How stupid could you be to name The Fourth as the CEO?’ ”

  “If anyone had been groomed for that position, certainly he had,” said General Shelton. “I mean, marketing, sales, running the brewery, being a German-qualified brewmaster—he seemed to be the full package. We had watched him for quite a period of time, and I think the board felt very comfortable with him moving up to become the CEO.”

  Years later, the decision remained contentious. “I tell you, if I were August III and I wanted to continue family control or dominance of the company, I wouldn’t have put The Fourth in there,” said one person who has served on a number of high-profile boards. “The behavior pattern didn’t make any sense. That was a bad mistake by that board. If a board has one thing it has to do right, it’s to get the CEO right.”

  The board was basically stuck with the consequences of their actions. They were leaning in favor of InBev’s offer in part because “nobody had confidence in The Fourth, and the one who had the least confidence in The Fourth was The Third,” said another advisor. “If they didn’t sell the company, they didn’t have the gumption to shoot August IV in the head.”

  “This was sort of a nice way out after letting The Third convince them to put The Fourth into the top job, which never should have happened in the first place.”

  The Third’s decision to support his son’s CEO candidacy seemed particularly puzzling to those who were now watching him endorse a sale of the company to InBev. It represented a backtrack of epic proportions. “August the Third vouched for him in a very strong way, and August the Third was very persuasive with the board,” said Ambassador Jones.

  “He put his son in place. Quite frankly, I think he had hoped that his son would have been more quiet,” said an Anheuser advisor. “But his son then had ideas of his own, and they weren’t necessarily the ideas he liked. That really was a problem for him. It’s very sad. When August [IV] came into the job, I think he had every intention of trying to get that company turned around. Different people might have different views on what his ability was or wasn’t to do that, but certainly, I think his intentions were all very, very good.”

  “He got in the role, and his father immediately started to go against any initiative he had. And as a result, I think August became increasingly despondent because of ... his father leading the board against him and openly criticizing his ability to lead.”

  With everyone in agreement on InBev’s $70 bid that Wednesday night, Sandy Warner called Brito to relay the news. Brito was ecstatic—it was evident over the phone—and he started blazing straight into the specifics of how the companies would negotiate their merger contract, who would work on it, and where. They’d crank all through the night to get the deal done as quickly as possible, Brito pledged.

  “Let’s turn this over to the people who are actually going to do that work, and they can set the schedules,” Warner replied. He had done enough brokering already, and had no plans to get stuck burning any midnight oil negotiating the merger’s intimate details. The two men circled back to their teams of advisors and instructed them to start talks immediately over a deal at $70 a share.

  The decision to reject Modelo was a massive disappointment to several exhausted members of the strategy committee, who had cranked relentlessly through the holiday weekend on the belief that they had the board’s backing. They had walked into the boardroom on Monday thinking that while the session would be long and difficult, The Third and the rest of the board would ultimately support the Modelo deal. They had certainly spent meeting after meeting talking about it. All they needed to do, the executives had thought, was pull everything together in time.

  “We, quite frankly, thought that was one of the great Herculean efforts of all time in the middle of a vortex,” said one person involved in the talks. “To have negotiated it and then to all of a sudden have the board say ‘Nah’—I think the management team in particular probably felt very betrayed.’ ”

  “We were told on Saturday night and Sunday night that the Modelo deal was done,” one strategy committee member said. “It was like, ‘Yes, we have a chance!’ The guys who were working that deal . . . were just devastated to the point where they can’t even talk about it. They’re so bitter. They were led to believe that Mr. Busch and the board were finally agreeing to do the deal.”

  It was impossible not to question the board’s intentions after that. Had they ever really considered approving the Modelo purchase? Or had it been a bluff—nothing more than a trump card to use against InBev the entire time? At most companies, top executives and board members work closely in sync. It had become painfully apparent that there was a significant gap of information and intention between The Fourth’s team and the Anheuser board. It seemed they were firing in opposite directions. That had neve
r been more clear than it was now, with Anheuser’s executives still pushing for the Modelo deal while its board was favoring InBev.

  “I think people understandably felt very used and misled,” said one advisor. “We had a very full negotiation, got there, and then the board wanted to see if that deal was possible as a fallback in case InBev didn’t pay up more.”

  Not everyone was as sympathetic toward Anheuser’s executives, however. “I think they were a bit naïve about it,” said one person close to the company. “I mean, we looked at it, we worked at it, but I never expected it would be the thing to do.”

  Sandy Warner, even after wading deep into the Modelo talks as the board’s representative, wasn’t surprised that The Third had been so vocally opposed to the deal. “Modelo was a big price, so you could expect August would not be in favor of that,” he said. “And he had trust issues over the years with some of the players in Mexico, so he was worried about it.”

  The concept of Fernández leading the company had proved divisive, and nixing the entire Modelo purchase over those concerns would have had all the hallmarks of The Third’s classic deal-avoidance strategy. Despite their close relationship, “Fernández was a deal breaker for The Third,” one strategy committee member said.

  Yet by the time the board decided to reach out to InBev, Fernández had already agreed to take a lesser role, and the issue had been put to rest. “He was going to be head of international, and he was totally fine with it,” said an Anheuser advisor. “In light of what we were going to do, in terms of the premium they were going to get, it really wasn’t what things hinged on. He was willing to give that up.”

  Modelo lost its momentum instead for a different set of reasons—the most important of which was that it wrongly believed Anheuser-Busch was desperate to stay independent. Modelo saw a chance at redemption and went for it all: a huge price, continued autonomy in Mexico, multiple seats on Anheuser’s board, a potential CEO candidate, and even a potential announcement of the deal in Mexico City. It had no idea that The Third and other key board members would favor a deal with InBev.

  “Modelo’s view was that they should be opportunistic—that Anheuser-Busch didn’t want to be sold at any price, and therefore they could charge an exorbitant price to help A-B stay free,” said an Anheuser-Busch advisor. “I just think that strategically, they misunderstood the dynamics of the situation.”

  It was too much to swallow in the end for Anheuser-Busch, a counterparty Modelo had known all along was going to be skittish. The Mexicans ultimately gave Anheuser a reason to knock on InBev’s door.

  “The Modelo people should have realized that the deal would never hold water,” an Anheuser advisor said. “They shot themselves in the foot.”

  “The family was so greedy,” another said. “Their demand was priced so high that it gave good cover to the notion of selling the company.”

  Put more bluntly by a third: “They over-negotiated like crazy. And the board was like, ‘Fuck you.’ ”

  If the deal had come together just one week sooner, it might have actually happened, one Anheuser advisor said. “I bet they drive themselves nuts with that question. But it’s hard to criticize a $15 billion transaction that from birth to execution took three weeks. Saying they took too long is kind of Monday morning quarterbacking.” Furthermore, Anheuser’s board might have decided to reach out to InBev for a higher offer no matter when the Modelo transaction had to grown ripe.

  The deal’s failure was rough for Carlos and María, who met with a big group of other controlling family members that weekend to discuss why things didn’t pan out. And as blame was distributed on Anheuser-Busch’s side after the fact, some of it fell upon Goldman Sachs’s shoulders. Goldman’s team had negotiated the transaction and vocally supported it at times in the boardroom. Rival bankers immediately surmised that Goldman had intended to sell Anheuser-Busch all along, however, in order to win bigger banking fees.

  “I’ve got to tell you, I’ve seen this movie before,” said one banker at a rival firm. “I know the modus operandi. This is something I’ve been saying for I don’t know how many years. You want to get sold? Hire Goldman Sachs. At the end of the day, Goldman was never going to be able to deliver this deal because they didn’t want to deliver this deal.”

  “I think Goldman thought they’ll do the Modelo deal, and then they’ll do another deal down the road,” said another competitor. “They thought they’d get two things out of it.”

  Ultimately, however, the decision about whether to sign Modelo up that day wasn’t up to Goldman Sachs, Citigroup, or any of Anheuser’s other advisors. It was up to the board. And the board’s choice was quite simple. Modelo came with lots of execution risk, and it gave them no way to fix one of the company’s key problems: a CEO and management team who had proven lackluster. The board could endorse a risky plan to buy Modelo and integrate the two businesses, or it could shunt Modelo into a holding pattern and see what InBev had to offer. They had known that Modelo wasn’t likely to walk away during the short time in which they waited for a higher bid from InBev—Anheuser-Busch, after all, had the big checkbook.

  “It’s a simple discussion: shareholder value,” said board member Jim Forese. “We didn’t get confused. Which is why the independent board decided, not the family members or the management.”

  “We made the decision, not August Busch III. He had his views, but he was just one member of the board, and he was not an independent member of the board,” he said. “We concluded that the overall risk, including Modelo, was perhaps not worth the returns given that we could get $70 per share. It was all about the economics.”

  The board’s gamble worked. They never had to find out whether their dalliance with the Mexicans would have yielded a successful defense. “I don’t to this day know whether InBev knew how serious we were about trying to do Modelo,” Sandy Warner said.

  “So much time and effort was spent on the whole Modelo side of this—it was almost like the secret plan to get out of Vietnam,” said one Anheuser-Busch advisor. “It was going to be this trump card we could play whenever we wanted to prevail.”

  “If the Modelo deal had happened, this company would not have been sold,” said another. “We could all wonder whether the stock would be higher or lower today, but if the Modelo deal had happened, I can state with absolute certainty—100 percent confidence—that it would not have been sold to InBev.”

  “The more those risks were laid out, the more it made it almost impossible to pursue one angle that had so much risk versus another angle that didn’t have much risk at all,” concluded another.

  Chapter 15

  A Long Way from St. Louis

  At that point, the war was over. It was a very difficult thing for him to do, and it’s something no one ever sees, but he walked in there, held his head high, and played the role he needed to play despite the obvious personal disappointment of the moment.

  —Advisor to Anheuser-Busch

  Anheuser’s verbal acceptance of an offer sprang both sides into action, and the two companies started cranking away almost immediately on the deal’s specifics. Merger agreements can take weeks, if not months, to draft and negotiate. However, Sullivan & Cromwell attorney George Sampas had been racing to fine-tune a detailed merger document all along, just in case Anheuser-Busch capitulated earlier than they had expected.

  Sampas sent a draft merger agreement over to Anheuser’s lawyers at Skadden on Thursday, and on the morning of Friday, July 11, hordes of advisors from both sides descended on 375 Park Avenue, the imposing steel skyscraper that housed Sullivan & Cromwell’s midtown Manhattan conference center. InBev alone had about 50 lawyers camped out onsite, who, after first prepping their materials on Thursday at the firm’s main office downtown, started scurrying back and forth between the uptown conference center’s carpeted rooms and were soon buried in documents. August IV was destined for Park Avenue that Friday morning as well, but his mindset was decidedly less enthusiastic. His role as
chief executive of Anheuser-Busch—which had already been diluted by his father, by his board of directors, and by his own lack of professional vigor—was verging on extinction. The Fourth was scheduled to meet face-to-face that day with Brito, his business partner-turned-foe. It would mark the first time the two men had seen each other in person since rumors of the takeover bid erupted in late May, and it would probably represent The Fourth’s last chance to dictate the fate of his own career and those of his colleagues.

  The Fourth and Pedro Soares stepped out of their jet in Teterboro, New Jersey, and settled into a car for the traffic-clogged 12-mile drive to Sullivan & Cromwell’s conference center, which was spread across half of the eighth floor of the Seagram Building. It was the same building that housed the Four Seasons restaurant where August IV had dined a year earlier with SABMiller chief Graham Mackay, back when Anheuser-Busch’s options had looked wide open. Peter Gross, who had been touching base with Soares intermittently to track The Fourth’s progress toward Manhattan, stood waiting to meet the pair as they strode across the steel skyscraper’s granite outdoor plaza and toward the lobby entrance. They were an hour late.

  “August, how are you?” Gross asked as The Fourth finished up a conversation on his cell phone and switched off his earpiece. He had eschewed his favorite green suit and cowboy boots that day in favor of an East Coast suburban commuter look: a simple button-down shirt and pair of dress pants. The Fourth shot Gross a look in response to his loaded question that made it clear it had been a rough day.

  “You know, look,” Gross said, hoping to reassure his client and friend. “You’re obviously playing an important role here.” He had hoped that seeing a familiar face might ease The Fourth into the right mindset for what was bound to be a difficult encounter upstairs. The Fourth needed to act as an ambassador for Anheuser-Busch as it approached the end of its run as an independent entity. While he had seemed detached and checked out at times during the past few weeks, he seemed, to his credit, to know what he needed to do that day.