Dethroning the King

by Julie MacIntosh

  “If anything, InBev got unbelievably lucky that they went after something that was vulnerable for reasons that were totally outside of what they truly understood.”

  In the end, InBev didn’t get the protection it wanted from a Modelo lawsuit, nor did it win much flexibility in case its banks attempted to cancel the deal. The banks protected themselves by making it clear they would only finance the deal if InBev’s debt maintained an “investment grade” rating, which signaled it wasn’t overly risky. Whereas they could push the “eject” button if InBev’s ratings dropped, InBev itself couldn’t.

  “If the ratings disappeared by closing, the banks didn’t have to fund,” said one Anheuser advisor. “But the amount of risk InBev took was mind-boggling. InBev was still obligated to close. Which meant they would have had to go find money that couldn’t have been found.” InBev’s legal liability to Anheuser-Busch could be so significant that it would have to essentially hand the company over to Anheuser to pay damages.

  “This was the strongest contract you can possibly imagine, but with this one real risk for InBev,” the advisor said. “The net result is if they had lost their ratings, Bud and InBev would still be one company, but Bud would have gotten InBev in damages for violation of the contract.”

  It was clear how badly InBev wanted to own America’s brewing crown jewel. It represented the fulfillment of a career-long dream for many of its executives and board members—not just the felling and seizure of an American icon but the conquering of the global beer market—and they were willing to put nearly everything on the line for it. They were way past the point of looking back now. By making their bid public, they had essentially told investors they needed Anheuser-Busch. And it was true. InBev’s growth was slowing, and Anheuser-Busch was the only business in the world that completed the picture. If the company ran out of assets to buy and improve, it was going to have to face into the wind and deal with the same stagnant beer market that had been plaguing everyone else.

  “This was InBev’s lifelong dream, to do this,” said one Anheuser-Busch advisor. “InBev never wavered for a moment in their interest in doing the deal. If you had had a buyer who wavered, it would have fallen apart. But they never wavered. This was their dream deal, and they knew they were going to make money on it. That made all the difference in the world.”

  Anheuser knew it was in a position to turn the screws on InBev because it had opted not to publicly malign its rival during the takeover fight. If Anheuser’s team was going to sell such an iconic American institution to a foreign competitor, the least they could do was make one last stand and demand the very best terms possible.

  “I credit Anheuser for being thoughtful enough not to preclude an agreed deal by doing something drastic,” said one InBev advisor. “They didn’t do anything rash, and they left open the possibility that they would have their moment too, at the end, where they could push for what they wanted.”

  With the deal’s price already locked in place, Anheuser turned its focus toward smaller points of contention—some of the same issues InBev’s board had originally weighed as being of likely importance from a psychological standpoint. A few seemed trivial, and were, from a financial perspective. But they gave Anheuser’s employees a boost and secured the company a few desperately needed patriotic and public relations victories.

  InBev had already said when it made its offer that it would keep St. Louis as its North American headquarters and integrate Anheuser-Busch’s heritage into a new name for the company. After some back and forth, both sides agreed to subordinate the “InBev” moniker and name the merged entity “Anheuser-Busch InBev.” InBev also agreed, as it had pledged, to keep all of Anheuser’s U.S. breweries open and to stay committed to Anheuser’s sales and distribution system. To do otherwise, at least up front, would have been foolish—InBev needed the support of Anheuser’s powerful wholesalers if it wanted to make the deal work.

  Anheuser won concessions in two areas that dragged InBev into uncharted territory. InBev’s record of corporate philanthropy was paltry in comparison to that of Anheuser-Busch, which gave $13 million to St. Louis area organizations in 2008 and underwrote everything from local Christmas carol festivals to St. Patrick’s Day Parades. So InBev agreed to support Anheuser’s charitable causes in the area and to pay millions of dollars each year to maintain the costly Clydesdale operations and Grant’s Farm, where admission was still free despite the hundreds of people it employed and roughly 1,000 animals it housed. InBev, whose name meant next to nothing to sports fans, also agreed to honor the all-important naming rights for Busch Stadium.

  “We knew from the outset we were going to have to agree to all of this stuff,” said one person close to InBev. “At that point, people were relieved we were getting the deal done. Everybody was willing to accommodate.”

  Anheuser’s wholesalers were concerned about how much support they’d get from the new company, and Anheuser tried to get InBev to spell out its commitments to marketing. The frugal Brazilians, however, shied away from making any promises over that aspect of their budget.

  “They recognized that Anheuser-Busch was a superior marketer—it’s just that they felt some of the stuff they did was a waste of money. All those sponsorships were a huge cost,” said one person close to InBev. “They had a hard time with the things that were actually beneficial versus those that were just huge ad spends that didn’t actually support the brands. I think they felt that they’d use a much better, more targeted approach to marketing.”

  InBev’s takeover of Anheuser-Busch was worth tens of millions of dollars apiece to some of the banks and law firms working on the deal, and as talks progressed that weekend, their efforts to win as much public credit as possible ramped up in stride. With the financial markets as treacherous as they were and merger activity falling through the floor, even bankers who played no measurable role in the deal were pushing for their firms to be listed as prominently as possible on the press release that would announce the transaction. It seemed as though Brunswick’s public relations team spent more time drafting the list of banks involved in the transaction than they did on any other section of the six-page press release, as mid-level staffers stood watching over their shoulders, constantly questioning the order in which their firms appeared.

  Several banks that were listed on the document did little to nothing and got paid accordingly. Merrill Lynch, for example, was named as an advisor to Anheuser-Busch, and Deutsche Bank as an advisor to InBev. Their inclusion, however, mattered for the industry’s all-important “league tables,” which measure which banks advise on the most deals each quarter. Wall Street firms’ reputations hinge on the perception that they provide sought-after merger advice, and league tables, as flawed as they are, serve as the most useful measure bankers can point to. The bankers who milled about at Sullivan & Cromwell’s offices that weekend knew that it could be months before they saw another deal this big, so they had to make sure they were associated with it.

  Despite the size and significance of InBev’s purchase of Anheuser-Busch, the vast majority of the two companies’ merger agreement was negotiated between noon on Saturday, July 12, and the wee hours of Sunday morning—an infinitesimal period of time relative to most merger deals. It took just 16 hours to cobble together the basic legal document underlying the entire massive merger.

  “From the date of InBev’s public offer to the weekend after July 4, we had a fully executed, complex as hell merger agreement to buy Modelo, and a week after that we had it with InBev,” said one Anheuser insider. “It was just 24/7. The speed at which this thing happened is mind-boggling.”

  Most of Anheuser’s team left the Sullivan & Cromwell offices at around 4 or 5 A.M. on Sunday. They didn’t fill InBev in on the specifics of what was happening next, but the Brazilians knew that Anheuser’s board had a meeting scheduled for later that day in St. Louis. Unless something went disastrously awry before then, they would hold a vote that night on whether to grant final approval to
the deal that had just been negotiated.

  After taking a much-needed break for a couple of hours, InBev’s team reconvened for a critical but, they hoped, largely ceremonial board meeting of their own. Brito and a few other key executives, who had finally had time that morning to grab showers back at their hotel, filed into a conference room at 375 Park Avenue alongside their closest advisors and shut the door.

  The conference rooms were jammed with dozens of lawyers who were still cranking away on the Anheuser-Busch deal, but one room had been vacated and cleaned for another highly confidential meeting between two titans in another industry. H. Rodgin Cohen, Sullivan & Cromwell’s influential chairman, was advising Lehman Brothers’ chief executive Richard Fuld at the time on how to right Lehman’s ship, which had started listing dangerously over the summer. He had arranged for a meeting that afternoon between Fuld and Bank of America over a potential deal between the two companies. Lehman’s proposal fell on deaf ears that day at Bank of America, which ultimately bought Merrill Lynch instead, over a particularly disastrous weekend in September. On that Sunday in July, in two adjoining conference rooms, the fates of two of America’s best-known companies were on the line.

  As InBev’s team in New York took their seats around the conference room table, board members started dialing in from all around the world and engaged in a bit of small talk before the call began. It wasn’t a celebratory moment yet—InBev’s band of Brazilian and European directors had questions about the merger agreement, the dynamics between the two companies, and what would happen next in the takeover process. Most importantly, they wanted to know whether it was clear that Anheuser-Busch’s board would actually approve the deal. Several people took turns speaking—Brito helped answer the board’s questions, as did the teams from Lazard and Sullivan & Cromwell.

  Roughly two hours later, InBev’s satisfied board agreed that signing a deal to buy Anheuser-Busch for $52 billion was worth the financial risk. They were upbeat but anxious.

  “Everybody was like, okay, we’re going to keep our fingers crossed,” said one InBev insider. “We just didn’t know what was going to happen on the other side.”

  Chapter 16

  A Toast on Both Sides

  I think we were blindsided by our conservativism.

  —Anheuser-Busch board member Henry Hugh Shelton

  By the time Anheuser-Busch’s team assembled at Teterboro on Sunday for their 12:15 P.M. departure to St. Louis, they looked like a ragtag bunch—for a bunch of millionaires, at least. Anheuser’s board needed to approve the deal that day if it was going to be announced by the next morning, so just a few hours after many of them staggered out of 375 Park Avenue at the crack of dawn, representatives from Goldman, Citigroup, Skadden, and Kekst climbed wearily back onto an Anheuser-Busch jet, bound yet again for the airplane hangar’s upstairs conference room.

  After the longest night of his life, Tom Santel had stumbled out of Sullivan & Cromwell’s offices and over to the New York Palace hotel at around 6 A.M. He caught a half-hour nap and then, numb to his busy midtown Manhattan surroundings, crossed Madison Avenue to attend mass at the landmark St. Patrick’s Cathedral before heading to the airport.

  Dave Peacock, who wanted to make it back to headquarters before the deal was announced, had also headed for the airport, leaving the lawyers to hammer out the merger’s final terms. He felt it was more important to be on the ground in St. Louis when employees got word that their proud company had been sold out from beneath them. The media were already all over the situation, and the whole world was expecting a deal to be announced within hours. Anheuser’s operations could quickly become paralyzed by dread and uncertainty if key leaders weren’t there to quell the fear.

  Peacock ran into a few members of the New York contingent in the waiting room at the airport as they prepared to board their plane.

  “I guess I’m supposed to say congratulations,” Kekst’s Larry Rand said to him in greeting.

  “I guess you’re supposed to, but please don’t,” Peacock replied, looking utterly spent from the all-nighter he had just pulled. He had been given a chance that weekend to prove his mettle to InBev, which could bode well for him professionally. It was clear by that point that August IV wouldn’t continue on as an executive at the new company, but Peacock, with his deep family ties to the company and blood that “bled Budweiser,” according to a colleague, might get that chance.

  That afternoon, though, Peacock looked too broken up to care. He hadn’t showered or changed his clothes following Saturday’s all-night negotiating session. Most of Anheuser’s executives drove home once they touched down in St. Louis—or had their wives pick them up—so they could grab a few hours of sleep, scrub down, and grab something to eat before the board meeting began. “Quite frankly, we all looked like hell,” said an Anheuser-Busch advisor.

  Vanities aside, the group set off for St. Louis on a jet that, as always, carried plenty of Budweiser but almost nothing to eat. They had been plied with free beer now for weeks. It was the kind of professional assignment aspirational college fraternity boys dreamed of—getting paid huge amounts of money to shuttle back and forth across the country on a beer-filled private jet. No one felt like drinking, though. That had been the case ever since Anheuser’s board threw in the towel.

  As the directors arrived from various corners of the country for their scheduled 3 P.M. meeting, conquering the logistical challenge that had become ritual in recent weeks, some were surprised to see that Ed Whitacre wasn’t flying in to attend the meeting in person. He planned to dial in by phone instead to register his comments and make his vote. Whitacre was a busy man by all accounts, but it seemed strange to have him absent from the final independent board meeting of a legendary American company he had helped direct for decades—a company he had also helped hand over to a rival.

  “I do remember, because he played such a prominent role in everything, that it raised an eyebrow when at this storied company, with this the last board meeting to approve it being sold, he wasn’t there,” said one Anheuser-Busch advisor. “I remember thinking, ‘This is the biggest moment in the company’s history.’

  “But God knows, he could have had an extraordinary event he had to deal with.”

  The board’s final crisis meeting was steeped in regret and sentimentality, but it was fairly perfunctory. Anheuser-Busch’s fate had already been sealed, and the pivotal point had come six days earlier, when the board turned its back on Modelo and decided to approach InBev. The realization that it was all over was devastating to some in the room, but none seemed to be taking it harder than Pat Stokes. “I can’t believe I dedicated 40 years of my life and it came to this,” he said several times to no one in particular. “He’s a really honorable guy,” one Anheuser advisor said. “I think he was really disappointed. I felt really bad for him, [and] I felt bad for Randy. I felt bad for these guys who had busted their asses the whole life of the company and saw this happen, and felt, I think, somewhat powerless to prevent it.”

  After days’ worth of negotiations that had pushed the deal to within a millimeter of success, all the board needed to do now was formally acquiesce. Companies tend not to enter into in-depth talks with their bitter rivals only to jettison a tie-up at the last moment.

  So the teams from Goldman and Citigroup were justifiably surprised when, not long into the board’s discussion, a murmur arose that perhaps Anheuser’s board should spin around and ask InBev for more cash. Gross and Ingrassia, in particular, were incredulous. When Ingrassia had suggested asking for a few extra dollars on Wednesday, before Anheuser and InBev had started negotiating, the directors had let him be chastised as if the concept was utterly ludicrous. Now, with the companies’ merger fully baked, the board wanted to flirt with the idea of demanding more money? They had to be kidding.

  “Guys, we had an opportunity and you chose not to take it. Why are we discussing it now?” Gross questioned tersely, briefly losing his cool out of sheer annoyance more than he wo
uld have allowed himself to a week or two earlier. “You talked about not wanting to worry about risk before, and now you’d have much more risk, completely backtracking on a deal that we’ve now negotiated!”

  It seemed to be suddenly hitting some of the company’s directors that Anheuser-Busch was going to lose its longstanding independence while they were in charge. “We had this flirtation with going back and negotiating, and there was just some strange, last-minute punting that was going on,” one advisor said. “I think at that point, people realized what they had set in motion and it felt a little too real to everybody.” The board quickly dropped the idea and rededicated itself to the matter at hand.

  Skadden’s team walked the directors through the merger document line by line to ensure they knew what they were approving, and the bankers gave a brief rundown that explained why they thought the transaction’s price and terms were fair. The Third and The Fourth were businesslike and professional and showed no hint of emotion, but the rest of the board knew it had to be heart-wrenching for both men—for different sets of reasons.

  “I could only imagine what August III probably felt like, because he had built the company,” said General Shelton. “Having taken over from his dad in a coup, to continue leadership and then build that company into the great conglomerate it was, to him that had to be awfully tough. I just can’t imagine. And of course living right there in St. Louis ...” The Fourth, as far as anyone can remember, didn’t speak a word.

  After roughly two hours of procedural box-checking that seemed like an eternity, the board finally signed off on the merger. It was time to head home.