“I worked for Goldman Sachs for a summer between my first and second year studying for the MBA. When the internship was ending, a director spoke to me and explained how my career could develop there. He detailed everything that would happen year by year, when I could be promoted and how my salary would increase. This made me really anxious. I was 27 and thought everything would take too long... I was so nervous I would have thrown myself out the window if it had been open... Career plan? Forget it, I wasn’t interested in anything like that. I thought that if I couldn’t work for Goldman Sachs because it was too structured for me, then I wouldn’t be able to work in any big company. Goldman was the best place in the world at that time. However, I was introduced to Beto and Marcel. They were doing a course at Harvard and took advantage of it to meet the Brazilian MBA students. We spoke and they called me to work at GP for a salary that was tiny. I convinced Beto to pay for a container to bring my things back, but that’s as far as it went. I accepted the offer because they were really good guys, and I thought I would learn a lot. Before doing the MBA course, I had been the owner of a small IT business and wanted to be the owner of something again. I ended up working for GP even before finishing my course.”
But Behring knew nothing about the rail sector and told the GP owners as much.
“Nobody here knows anything about railroads, so you’re in the same position as everybody else,”Sicupira said. “Furthermore, it was your idea to buy the company, so go ahead and sort it out.”
Behring then asked what he should do when he arrived at the company. Sicupira repeated what he had recommended Telles to do when he took over Brahma: “You and your team should do absolutely nothing in the first year that has to do with the business,” he said. “Only do sensible things while you learn how the company works. If you start doing things related to the way the business operates as such, there is a good chance of making a mess of it.”
Behring stuck to the rule and recommendation. While he was learning the details of the business first hand – he would travel on an ALL train once a month to see how the company worked – he began to implement the main commandments from the Garantia culture management handbook. When Sicupira and Telles arrived at Lojas Americanas and Brahma, they had made a point of getting to know not only the directors of the companies, but also those on the second and even some on the third tier. Behring copied the tactic.
“There was a group of almost 100 people and I asked each one to write on a page what they felt was good about the company, what could change and what the opportunities were,” Behring said. “I then spoke to each person separately, even if it was only for 20 minutes. It’s impressive how a simple exchange of information like this can show what you are faced with.” The exercise showed him which employees had a business vision and were prepared to get the company on track. Those who did not fit this description were replaced.
Within a short time, the company’s main aims were common knowledge. Words like “goals” and “controls,” which had never been part of the state-owned enterprise’s vocabulary, were quickly incorporated by the ALL workforce. The sense of urgency and need to control costs were reinforced in a monthly staff letter written by Behring. Notices appeared on the office walls showing the performance of the 300 most senior staff. Behring himself was on the list of professionals assessed in this public way. The directors’ offices were opened up and they started to work in a single room. Behring led the way by example, and the old formula established by Sicupira and his partners worked once again. Within four years, the cash generation expanded by 18 times and the company started making a profit. And per the company’s trumpeted meritocracy, within two years of Behring taking over ALL, R$ 5 million was distributed in bonuses to those workers who had beaten their targets. Before he left the company in December 2004, Behring fulfilled his final, and perhaps most important task, which was to choose and prepare his successor. Bernardo Hees, an economist from Rio who had joined the company in 1998, got the nod.
“Marcel likes to use the expression ‘one trick pony’ to explain what we do,” Behring said. “We only have one ‘trick’, which is to put in good people and our management system to change a company’s results.”
The one trick pony style has its limitation, as it only works when top-notch professionals like Behring are available for long-term projects. Lemann spotted this constraint as soon as he arrived at the GP office.
“He (Lemann) said our most valuable asset was time and we were using it very badly by carrying out a number of businesses simultaneously,” recalled Bonchristiano, the former analyst who became co-president of GP Investimentos.
What this meant was that Lemann felt the focus was being lost, and focus was something he pursued relentlessly, as he did when he gave up the career of a professional tennis player on realizing that he would not be among the world’s top 10. “The private equity business cycle is different from his way of thinking,” said someone who knows the three well. “You can’t go to an investor who is putting money into a fund and say you might make only one or two investments. Nor could you stay with a company for 20 years even if you wanted to. That’s not how this sector works. The private equity area is great, but it does not match the values of Jorge Paulo and his partners.”
This became glaringly apparent in GP’s first years in the 1990s. It quickly bought companies of all sizes, origins, areas and profiles in succession – from e-business startups to telecommunications operators. One example was the Submarino site, which appeared in 1999 at the height of the Internet frenzy. In May of that year, Bonchristiano contacted the entrepreneur Jack London, the founder of the virtual bookstore Booknet, to buy the site. At the time, Booknet was merely a recently-founded company with just over a dozen staff. After 34 days, Bonchristiano had bought the company for US$ 5 million.
GP carried out another three Internet investments with the same speed during that period – the virtual auctions site Lokau, the automobile portal Webmotors and the schedule reminder site Elefante.
However, it was to Booknet, a retailer inspired by Amazon, that the investment fund pinned its main hopes. Bonchristiano quit his daily work at GP, where he was a partner, to become CEO of the new company, renamed Submarino, and stayed there for two years. He set up distribution centers, took the company to other Latin American countries and transformed Submarino into one of the most efficient Internet sales companies in Brazil.
In November 2006, Submarino and americanas.com (controlled by Lojas Americanas and created as an independent electronic retail arm in 1999) announced they were merging to form B2W, Brazil’s biggest on-line retailer. When this transaction was completed, GP left the business completely.
In terms of return on investment, Submarino was a success. Money invested in the former Booknet increased tenfold. However, the effort GP made to transform the aspiring virtual retailer into a solid business was felt to be too much. The experience with Submarino led to a rule within GP: no more investments in start-ups.
The effort to participate in the telecommunication privatization auctions in Brazil in 1998 was also seen to be lopsided. GP was part of the consortium that bought Telenorte Leste (later to become Telemar and Oi) for R$ 3.4 billion. The deal was controversial right from the start. None of GP’s partners – the builders Andrade Gutierrez and Inepar, the La Fonte group (of the Jereissati family), Macal (belonging to businessman Antonio Dias Leite) and the Previ pension fund – had any experience of the telecommunications sector.
The market was already concerned that the consortium would not be up to the job of making a success of the company. It had so many different interests and cultures that the atmosphere among the Telemar partners was hostile, to say the least. It was not uncommon for the board of directors meetings to become battlefields. The board had more than 20 members, two of whom were from GP – Sicupira and Lambranho, who by then had left his position as CEO of Lojas Americanas to work in the private equity area.
In August 2000, Lambranho became cha
irman of the Telemar board. This was a chance for GP to impose its management style on the company – with goals, meritocracy, driven by results. However, GP learned that an equity stake of less than 10% meant it could not overcome the resistance of the other shareholders. Telemar’s confused governance meant it never had the feel of a GP company.
GP sold its stake in the operator in 2008, a decade after the privatization. The deal was not a great success. If GP had invested its initial R$ 350 million in a fixed-income fund, it would have gained a higher return than it did from Telemar. It learned a second lesson: no more involvement in businesses where GP is not free to impose its own culture.
No company gave GP as much of a headache in its early days as Artex, which made bed and table linen and bathroom items and was acquired in 1993. It was based in Blumenau in upstate Santa Catarina, and was a family-controlled concern that had been in the red for four consecutive years. GP sent in Ivens Freitag, a former Brasmotor executive, to get things in order.
Three years after the transactions, with Artex’s results still languishing, GP decided to form an association with Coteminas, the biggest company in the sector. The deal required the creation of a holding company called Toalia, and foresaw the Artex management passing into the hands of Coteminas. GP expected to swap its 50% stake in the holding company for Coteminas shares by the end of 2001.
As the deadline for the sale of the GP stake in Toalia to Coteminas approached, the relationship between the companies soured. The reason for the misunderstanding was obviously money. The private equity firm, which had expected to make a gain of R$ 80 million in Coteminas shares with the deal, realized it would make nothing.
GP claimed Coteminas had deliberately mismanaged Toalia to reduce the ratios used to calculate the value of the company. Josué Christiano Gomes da Silva, the Coteminas CEO, hit back and said the formula for this calculation that appeared in the shareholders’ agreement, had been created by GP, and that the firm had put itself in the position at the end of the day. The case went to court and became such a dilemma, that in 2001, for the first time in its history, GP decided to publicize a dispute with a partner.
The problem was only resolved the following year, when GP gave up the battle and wrote off the loss. The fact that the owner of Coteminas, José Alencar Gomes da Silva (the father of Josué) had been elected Brazil’s vice-president, was certainly a contributing factor in the decision to give up the investment.
When Lemann, Telles and Sicupira bought Brahma in 1999, they saw that they would have to reassess their involvement in the other business where they had investments. It became increasingly obvious to them that the best opportunity for expansion lay with the brewer. Spending time and energy on less promising ventures was a pure waste of time. At the same time, a new generation of partners within GP Investimentos was beginning to put pressure and increase their stake in the company. It looked like the perfect combination.
To Lemann and his partners’ way of thinking, those on top should not prevent those below them from rising. That was totally against their doctrine of meritocracy. The rule also applied to them.
“They had this rare ability to give up things when it was necessary,” said Lambranho.
The transition in the command from the first to the second generation started in 2001. The older partners who were most affected by the change were Sicupira and Thompson, both of whom had been directly involved in running the company since its founding.
“There was a meeting on Mondays in which Jorge Paulo and Marcel took part, and during which we discussed all the companies,” said Carlos Medeiros, a former GP partner. “All the rest was with Beto.”
Medeiros left the management in January 2012 to work exclusively as CEO of BR Malls, a company that transformed itself into the biggest administrator of shopping malls in Brazil during the period it was controlled by GP, from 2006 to 2010.
The founders, who still controlled GP, decided the daily running would be co-managed by Bonchristiano and Lambranho. Dividing power is not usually a simple task. Bonchristiano and Lambranho had very different temperaments and there were those who doubted that the GP founders’ formula would work.
Bonchristiano is known for his diplomatic style and good contacts in the international financial community. Years earlier, he was chosen by the World Economic Forum as one of the 100 leaders of the future. He was cold and rarely raised his voice or became heated during a discussion. He is a marathon runner and had earlier built a summer home in Capri, in southern Italy, where he would stay with his wife and children.
Lambranho is from Rio and usually intimidates those with whom he speaks. He is a tough talker, whose deep voice can be heard at a distance. He likes to know the details of the operations of the companies in which he invests and makes great efforts in pursuit of good opportunities. He is married to his college girlfriend and has two children. He has a taste for paintings and is a collector of modern Brazilian artists.
Despite their different temperaments, Lambranho and Bonchristiano shared the same management principles as Sicupira and his partners. This fundamental similarity generated results, and, two years after assuming command of GP, they asked the founders to consider a new revaluation of the make-up of the shareholding.
“We suggested that we two and the other employees who were 100% dedicated to the business, should buy half of the company and pay for it within four years,” said Bonchristiano. Lemann, Telles, Sicupira and Thompson agreed.
Calculating the amount to be paid was based on the company’s equity value. The debt was settled within a year and the youngest partners bought the rest of the founders’ share. Thompson remained on the board of directors for some time but, eventually, all formal ties to the management were cut.
GP achieved its greatest conquests under the command of Bonchristiano and Lambranho and consolidated itself as the biggest private equity firm in Latin America. Investments like those made in Cemar, the energy company in Maranhão state, brought an astonishing return of 35 times the initial invested capital. Just as Garantia became the most envied investment bank in the 1980s and 90s, so GP became the most acclaimed manager of third-party resources in Brazil for most of the decade starting in 2000. Throughout its history, it invested over US$ 5 billion in the acquisition of 51 companies and spread the business principles established by Lemann, Telles and Sicupira in the Garantia days throughout a large part of them.
“This new generation is going even further than the founders in terms of aggressiveness and culture,” Telles said in a speech in São Paulo in 2008.
The phase of accelerated growth in which GP was virtually a lone star in the Brazilian private equity sector, is now a thing of the past. First, because the competition increased, as international funds like Carlyle, Advent and General Atlantic, and national ones like Vinci (Gilberto Sayão), Gávea (Armínio Fraga) and BTG Pactual (André Esteves) started to gain strength in Brazil. But GP also committed a series of mistakes in its investments. In its attempt to take advantage of the money it had in its funds, the company made lots of deals simultaneously, and did not always have enough partners around to take charge of the acquired companies. Some of these shots were so disastrous that they dented the firm’s reputation.
This is exactly what happened with the dental implants firm Imbra, acquired in 2008. Not even the injection of US$ 140 million by GP was enough to make the operation viable. Two years after the purchase, GP wrote Imbra off and sold it for the symbolic price of one dollar to a little-known group called Arbeit. Three months later, Arbeit sought bankruptcy protection for the company it had just bought. This conclusion hit GP’s image very hard. “All GP’s success from 2004 made the people there become arrogant,” said an executive from the sector. “They started acting as though they were invincible and had no competitors, but they learned in the worst possible way that they could also make mistakes.”
The stumble triggered alarm bells among the management. “It was a good warning,” Bonchristiano admitted. �
��We are here again, doing business, but with greater strictness, discipline, care, focus and calm to avoid mistakes.”
A new scare was to come. In February 2013, LBR, a dairy sector company controlled by GP, filed for a judicial reorganization under Brazilian law. It was founded in 2011 with the merger of LeitBom and Bom Gosto, and massive financial support from Brazil’s development bank, the BNDES. LBR’s initial intention was to be the “national champion” in the milk sector, but this did not work out.
Kill the competition
through its cash
There have been few fiercer battles in the history of Brazilian capitalism than that between Brahma and Antarctica in the 1990s. The two biggest players on the domestic beer market fought publicly and ferociously for the leadership. It was more than just a war between products. It was a war between management styles. Brahma, under the leadership of the Garantia team, followed a script that preached informality in the workplace, meritocracy and the constant pursuit of better results. Antarctica, controlled by the Zerrenner Foundation, was the opposite. Its management consisted of older men who wore ties and only took decisions by consensus. Both companies had a market share of around 30% in the mid-90s. Each was the main obstacle to the other’s growth.
“The two companies competed day and night and killed each other to gain market,” said Telles afterwards, in a reference to this phase.
Letting Antarctica win ground was unthinkable for the Brahma people. A saying in the office was, “A penguin’s place is in the refrigerator,” a sarcastic reference to the penguin illustration that appeared on the Antarctica label.
DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz Page 15