DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz

by Cristiane Correa

  The brokerage firm had almost no assets. Its modest office was situated in the 34th floor Edifício Avenida Central building at Rio Branco Avenue, 156, next to Largo da Carioca, in the center of Rio. The Garantia brokerage had three rooms without air conditioning in the mezzanine of the building – one for the traders, another for the management and the third one for the custody of securities and shares kept in a safe.

  “The structure was limited to three phones, and we didn’t have any money to pay a secretary,” said Fernandes. The rundown office was no problem for the young partners. They were more interested in the potential of the Rio Stock Market, which was attracting an increasingly large number of investors. This was mainly due to the recently-created Fund 157 that allowed income tax payers to invest up to 12% of their taxes in shares. The Stock Market index jumped almost by 48% between January and March 1971 and the volume of money more than doubled. It seemed too good to be true – and it was. The sharp rise resulted more from speculation than any real growth. As with any bubble, it also burst. Two months after buying the Garantia permit, the stock market began to fall and did not stop. Over 18 months, the index plummeted by 61%. Lemann and his partners saw their main brokerage business decline gradually by the day. Furthermore, they became known as the investors who had paid most for a brokerage permit – a title they bore shamefacedly for almost two decades. It was not exactly a promising start.

  The stock market crisis and urgent need to find a new path led to the decision to concentrate activities on the open market. More than ever, Lemann needed an aligned team. As he was now one of the main shareholders of the company, he could put the principles of meritocracy that he always believed in into practice. To do so, it was important to have talent and sweat. Friendship or blood relations had no value and could even be a problem at times. Children or spouses of partners, for example, were banned from working in the brokerage. Romantic relationships in the workplace were banned. (This may have been the rule that was least respected, as there were a number of marriages between people who worked there – even partners such as Fernandes and Eric Hime married fellow employees. In these cases, one of the couple was forced to leave Garantia.)

  There was a particular kind of professional for whom Lemann was always on the hunt, and whom he baptized with the abbreviation PSD: Poor, Smart, Deep Desire to Get Rich. At the beginning, an education at a top level school or international experience was not one of the main résumé items for which he was looking. The reason was simple. At the time, Brazil was growing mainly as a result of government intervention, with the creation of state-controlled enterprises, incentives to exports and projects financed by foreign debt. The Garantia brokerage and other financial institutions prospered in this rudimentary environment, mainly by trading government debt. Therefore, it was better to have staff who were flexible, with sales flair and even some cunning than brilliant young people without any experience.

  “The ‘University of Life’ for most of the people there was the beach,” said Clóvis Eduardo Macedo who joined Garantia in 1976, became a partner and was one of the PSDs Garantia turned into a millionaire. “They were different times. Kids are now brought up in front of a computer.”

  Macedo, who stayed with Garantia for two decades, follows his former bank’s hymn in his own asset management firm, Nobel, located in Rio’s southern Leblon district.

  Imagine a world without Internet, or even without any kind of computer or financial calculator. At a time when telex was a great technological advance (fax machines only began to be produced in a large scale abroad from the 1970s), all the financial transactions were “physical,” i.e. the sale of a share required the vendor to actually deliver the paper to the buyer. Securities and shares were always marked “to bearer.” This meant that nobody knew who really was buying or selling anything, which opened the way to all kinds of manipulation. If a security was stolen or lost, for example, a court application had to be made to cancel it and issue a new one to replace it. The Brazilian Securities and Exchange Commission (CVM) and the Central Bank, created in 1964, were still novices in a number of areas. This rather loose regulatory scenario left room for a huge gray area. The secret for doing well in the Brazilian financial market in the 1970s was to operate at the very limit, and the PSDs Lemann recruited outdid the others under these circumstances.

  It was essential in this atmosphere of precarious communication that there should be no barriers within the brokerage, at least. Keeping professionals locked up in their own cubicles, isolated from each other, was something that made no sense to Lemann. For this reason, he immediately adopted a workplace model that was still new in Brazil. Instead of the traditional succession of closed offices, the Garantia brokerage office was a large open room, with no divisions between employees and partners. If, on one hand, the lack of walls ended privacy, on the other, it made the group’s work more flexible and reduced the obvious hierarchical differences. Lemann himself spent most of his time at a table in the big room. He and the other main partners – Ramos da Silva, Arinos and Gentil – only shut themselves away in their private rooms when there were confidential subjects to discuss. Otherwise, anyone could get close and talk with the boss without any great formality.

  To complete the informal atmosphere, Garantia brokerage people dressed casually at a time when most financial institutions had an official uniform consisting of dress suits and formal shoes. Casual trousers (khakis virtually became the Garantia standard as time went by) and shirts with rolled-up sleeves became the norm. The staff looked more like students on a university campus than stockbrokers.

  Nothing influenced the culture that Garantia created as much as that of Goldman Sachs. The American bank was founded in New York in 1869 by German Jew Marcus Goldman, his son in law, Samuel Sachs, entering the firm three years later. The company became the most influential and powerful investment bank in the world. Charles D. Ellis, the author of the book The Partnership – The Making of Goldman Sachs, reveals some of its main features:

  ‘Goldman Sachs was a total meritocracy. Mr. Weinberg [Sidney Weinberg, who for decades was the leading partner at the bank] tolerated none of the politics or infighting that hurt so many of the other firms. (…) One use of that power was to keep payouts to partners low, forcing them to build up equity in the firm. ‘Sidney Weinberg set the policy on tough capital retention,’ says partner Peter Sacerdote. ‘It was good for the firm because it made everyone focus always on what was best for Goldman Sachs as a whole firm. And it was good for the individual partner because it kept you financially modest. You couldn’t get into fancy spending habits because you didn’t have the money to spend.’ (…)

  Absolute loyalty to the firm and to the partnership was expected. While strong feelings – including personal dislikes and flashes of anger – were evident for the partners within the partnership, an impenetrable wall of silence kept almost all internal tensions invisible to outsiders. (…) Personal anonymity is almost a core value of the firm. Most things that other firms might celebrate or dramatize are deliberately understated. Morgan Stanley, for example, has elaborate, large, neon-lighted signage with stock quotes visible from several blocks away. In New York, London or Tokyo, there is no indication whatsoever of Goldman Sachs’s presence – other than well-dressed young men and women coming briskly in the building early and going out late.”

  Lemann made contact with Goldman Sachs after a push from his uncle, Louis Truebner, a big cocoa trader. Truebner lived in the US and knew that GS would open the doors to his nephew. A century separated the foundation of Goldman Sachs from the incorporation of Lemann’s Garantia, but the similarities between the two institutions are notable.

  Goldman Sachs professed meritocracy as a central value. They encouraged thrift, put the bank’s success above personal luxuries and encouraged internal competition. This approach had been part of its culture for over a century but was new in Brazil and thus new to Garantia, and if this model was to work, an almost messianic fervor had to be i
nstilled into the team.

  The best jobs in Brazil in the 1970s were with multinationals. Most recent graduates and executives dreamed about working for companies like Shell, IBM or Volkswagen. Not only was the salary high in these companies, but there was an all-round package of benefits – chauffeur-driven cars, schools for their children and even club memberships. Large Brazilian business groups were still rare and usually owned by families, in which the “underlings” rarely reached the top. There was a clear distinction in these companies between the “owners” and the “others.” Variable remuneration, both in Brazilian and multinational companies, was a secondary issue.

  The Goldman Sachs model copied by Lemann turned this order upside down. Garantia paid salaries that were below the market average but the bonus could amount to four or five extra salaries, a potentially huge amount of money at that time. Of course, this was conditional on the employees beating their targets. It was a clear and simple rule that was valid even for the office boys: work well and you will be rewarded. Lemann believed it was essential that everybody, even those at the very bottom, felt like “owners” of the business. Lemann decided that was the only way they would give their best and make the institution grow. To encourage people even more, the bonus was paid twice a year.

  The Garantia pyramid went the opposite way from most companies, and there was no multiplication of hierarchical levels. Staff was basically divided into three areas. The new arrivals, all of whom were eligible for a bonus. The group immediately above worked on commission, and instead of receiving a multiple of their salary, as those below them did, commission workers received a small percentage of the company’s total profit. This usually resulted in each receiving between 0.1% and 0.3% of the firm’s total profit. Those at the bottom could not rise to the group above them, nor was there a minimum time for the worker on the bottom level to move up and work on commission. Everything depended on performance.

  The advancement from a bonus to a commission was the first big step under the meritocracy that Lemann preached. However, even those who made this move could not relax. As they were all assessed on a half-yearly basis by their bosses, peers and subordinates, any one of them could have their commission reduced if their performance during that period was below expectations. Furthermore, if someone increased his commission (or a new worker on commission was chosen), someone else had to lose.

  “Once the partners had left the meeting room and announced who had won and lost, there was no further discussion,” said Diniz Ferreira Baptista, one of the longest serving Garantia partners, having joined in 1977 and left in 1995, when he had a stake of almost 5%, to found Banco Modal with two other ex-Garantia partners, Macedo and José Antonio Mourão (another ex-Garantia partner, Ramiro Oliveira, took over Macedo’s place in Modal later on). “Sometimes, someone would complain to Jorge, but this was not well-regarded.”

  Those who were good rose. Those who were not inevitably turned up as a subject of discussion at the partners’ annual meeting, known as the “smoke signal,” which decided who would be fired. The practice was to get rid of around 10% of the headcount annually. Garantia worked with a team of just over 200 people for more than a decade. This was a rule created by Lemann to prevent the firm from expanding too much. This meant that getting rid of the worst performers was the only way to open room for new, talented young people. The atmosphere at the bank was very tense on the days when the “smoke signal” meeting occurred. Those who were called soon after the partners left the room knew their destiny: the street. The idea of a comfort zone did not exist in the Garantia vocabulary.

  The third step higher – which was even more difficult to maintain – was to become a partner. The privileged few who belonged to this group gained dividends as well as commission. Around 40 employees reached the very top in almost 30 years of Garantia’s history. Oddly enough, there was never a woman among the elite team. The only way to reach this height was to bring spectacular results for the bank and be accepted unanimously by the other partners, who also defined the size of the new partner’s stake. The potential candidates never knew if and when they would become partners, nor the prospective size of their stake. (Some ex-Garantia staff interviewed for this book felt this showed a lack of transparency in the procedure.)

  “From the bank’s earnings, 25% was distributed as profit sharing, 15% as dividends and 60% was capitalized,” said Baptista. “It was a doctrine that could not be changed.”

  Regardless, Garantia’s variable remuneration system was aggressive at the time, not only compared with Brazilian companies and the subsidiaries of the multinationals, but also other financial market institutions. The Multiplic bank was a good example.

  Multiplic was founded in Rio by Antonio José Carneiro and Ronaldo Cezar Coelho as a brokerage that would be transformed into a bank years later – a route identical to Garantia. The bank grew exponentially in the 1970s until it became Garantia’s main rival. In his book, Passaporte para o ano 2000, Luiz Kaufmann, who was Multiplic’s CEO from 1985 to 1990, said that by the end of 1989, the group had shareholders’ equity of US$ 160 million and assets under management amounting to almost US$ 2 billion. However, despite their origins, the Multiplic and Garantia styles were completely different.

  The main reason for the differences between Garantia and Multiplic was that Multiplic had had a foreign partner since 1978 – the Bank of London – which had a 50% stake. Distributing shares among the employees would have, in this case, caused some imbalance, something that neither side wanted.

  “We owned the market,” recalled the 70-year-old Carneiro, sitting in his office at the top of a three-storey building in a quiet street of Leblon’s district, and decorated with two beautiful paintings by the southern Brazilian painter Iberê Camargo. “We paid higher salaries and distributed a bonus at the end of the year, but we did not offer any chance of partnership.” After selling the Brazilian stake to Lloyd’s Bank (who bought the Bank of London) in 1997 for US$ 600 million, Carneiro, who began his career as a teller in a branch of Banco Mercantil de Minas Gerais in Rio, started to invest in different businesses, ranging from advertisement agencies to construction firms. A large part of his fortune in 2012 came from his holdings in electrical energy companies.

  While Garantia staff could become owners, reaching the top came at high price. The bank did not give an equity stake to the new partner but sold it. A case study on Garantia, prepared years later by former students of the Insper Business School, Fernando Muramoto, Frederico Pascowitch and Roberto Pasqualoni, details how the new partners paid for their stake.

  “On average, 70% of the new partner’s earnings were allocated to pay for these shares over two or three years,” the study says. “In quantitative terms, 1% of shares could mean an initial debt of US$ 600,000 for the new partner, which would be paid off from profit sharing, commissions and dividends at annual interest rates of 6% in dollar terms.” Only 30% of the variable remuneration was actually paid to the partners at the time.

  This mechanism fulfilled two purposes at the same time. The first was to retain talents, since leaving the bank before receiving the entire share holding was a bad deal. At the same time, it prevented the partners from having too much money in their pockets and perhaps losing their focus on work.

  “It was very tough at the beginning because what you earned was barely enough to pay for the shares,” said Diniz. “However, as everybody thought the business would take off, those who had the chance always wanted to buy.”

  The rule also helped maintain the austere working atmosphere that Lemann preached inside and outside the bank. He was always a man of simple habits. He had no private secretary (a small group of staff looked after all the partners), did not wear luxury watches or drive imported cars. When he received people for lunch at Garantia, he would dispose of waiters and help serve the guests. On saying goodbye to visitors, he always made sure to accompany them to the elevator (a habit he still maintains). This simplicity once saved him from what could ha
ve been a dangerous situation in 1991. He was driving along the Rio-Santos highway and stopped at a filling station. While he was filling the tank, the place was robbed, but his car, a Passat with more than 10 years on the clock, was of no interest to the thieves and Lemann was able to continue his journey unscathed.

  José Antonio Mourão personifies the rise that was possible within Garantia as few others can. He was born in Vista Alegre, a suburb of Rio, and started working with his father in a butcher’s shop in the district before entering the brokerage in 1972 as an office boy at 16 years old. Despite his humble origins, Mourão, a real PSD, always believed that if he worked hard, he would make money.

  Working during the day and studying in high school at night, Mourão would arrive at the office at seven in the morning and stay until it was time to go to school. His jobs included getting lunches for the office staff and running to Lemann’s house to retrieve his tennis racket when a game unexpectedly arose.

  He had no idea what the word meritocracy meant when he joined Garantia, but quickly felt its effects.

  “After a few months there I earned more money than I had been expecting,” said Mourão. “That’s when I realized that things worked very differently there.”

  Mourão saw an opportunity for growth, so he decided to study economics at the Universidade Gama Filho to get to know as much as he could about the bank’s daily operations and pulled countless all-nighters at the bank. He worked in a number of areas until 1985 when he became a partner, 12 years after entering Garantia and still not 30.