Bacardi and the Long Fight for Cuba

by Gjelten, Tom

  Over the years, Bosch had personally acquired enough stock in the five Bacardi companies to give him about a 2 or 3 percent equity share. His wife, Enriqueta, as one of Enrique Schueg’s four children, inherited a quarter of Schueg’s original 30 percent share, and by prior arrangement with Pepín she left all her stock to their two sons, Jorge and Carlos. In 1977, however, Bosch and his sons sold their entire stake to the Canadian liquor company Hiram Walker, putting a portion of the Bacardi business in the hands of a rival for the first time ever. Bosch and his sons were joined by a few other family members who had been seeking an opportunity to sell part of their own holdings, and the total sale involved about 12 percent of all the shares in the Bacardi companies. Bosch had been willing in theory to sell the stock back to the Bacardi family, but the sincerity of his offer was disputed. Some Bacardis later complained that Bosch had given the family only a few days to suggest a price and that he had not seriously pursued a deal with them. Hiram Walker paid only $45 million for the entire Bosch/Schueg chunk, a price that valued the Bacardi interests as a whole at about $375 million. A year earlier, Bosch himself had estimated the Bacardi assets to be worth about $700 million. Not only had outsiders acquired a piece of Bacardi; they had gotten it at a bargain price.

  Business school professors who study family-owned enterprises cite the issue of leadership succession as the biggest challenge such companies face. As long as the founders are in charge, family businesses tend to outperform others. Most such firms, however, do not survive the transition to a second generation of family owners, and still more fail during the third generation. Typically, the company founders do not want to step down and let go of their life work, no matter their age. Their children or designated successors, meanwhile, may be ambivalent about taking over and do so reluctantly.

  By the time Pepín Bosch retired, the fourth Bacardi generation was well represented in the company, and it appeared the firm might be an exception to the rule that family companies have limited longevity. Don Facundo’s sons guided the business through long years when it was continually on the verge of bankruptcy. Emilio Bacardi, after taking over from his father, was replaced by his brother-in-law Enrique Schueg, who in turn passed the reins to his own son-in-law, Pepín Bosch. Each of the successions had gone smoothly. But Bosch, having managed Bacardi’s rebirth outside Cuba, was almost a second founder of the company, and his departure was jarring. As the New York Times observed, Bosch ran the firm “by sheer strength of intellect and business acumen, operating virtually without secretarial help or close aides, and traveling constantly despite his age.” In the mold of other brilliant family businessmen, Bosch refused to retire at a normal age, apparently unwilling to trust his own sons—or any other family members—to carry on without him.

  The Bacardi enterprise demonstrated both the benefits and the dangers of family-owned companies. For years, the Bacardis had been an example of how family stockholders take a longer-term view than investors who buy into a company looking for a quick profit. They had shown that a chief executive with family ties to his stockholders is likely to enjoy a level of autonomy that other executives could only dream of. And they had shown that being free from the quarterly scrutiny of financial analysts means that families with their own companies can use them to pursue social or political objectives. Had Bacardi been publicly owned, the stockholders would surely have been less likely to support a corporate aim to “raise high the name of Cuba.”

  On the other hand, a family-owned company like Bacardi had to be on guard against the perils of nepotism, especially given the Latin tradition of taking care of one’s relatives. Pepín Bosch and his predecessors had to worry that by keeping their enterprises private they were denying themselves access to the capital funds that were available in public equity markets. In addition, familial loyalties (or jealousies) could get in the way of clear-eyed strategic decision making. A focus on social and political missions can lead a family company to invest in peripheral, even self-indulgent, activities that have nothing to do with bottom-line needs. With the retirement of Pepín Bosch, the Bacardis found themselves facing all these issues and more. They hung over the family business for the next fifteen years, and the strain of dealing with them brought the business close to a breaking point.

  Pepín Bosch was not formally replaced in 1976 as the Bacardi boss, because his authority did not derive from any particular executive position. To the extent he had a successor as the overall leader of the family business operation, it was Eddy Nielsen, the Bacardi executive around whom the family had rallied when Bosch first announced his intention to step down. Nielsen’s only official post, however, was at Bacardi Imports, where he had presided since 1971. Even after assuming the new family leadership role, Nielsen kept his old job title and his same corner office in the Bacardi building on Biscayne Boulevard.

  At Bacardi Imports, Nielsen had proven to be an exceptional corporate manager. As a grandson of Amalia Bacardi and Enrique Schueg, he had deep family roots, and Spanish was his mother tongue. He was rarely seen in anything but a conservative business suit, however, and upon meeting him few people guessed that he was Cuban. Born in Massachusetts to Lucía Schueg and Edwin Nielsen Sr., a Norwegian immigrant physician, Nielsen had been schooled in the United States and spent four years in the U.S. Army before heading to Cuba to take a position with the family company. After Castro’s revolution, Pepín Bosch sent Nielsen to Mexico to serve as assistant manager of the Bacardi operation there. He was of the same generation as Daniel Bacardi, who had been second in command of the Santiago operation, but as a U.S. citizen and fluent English speaker, Nielsen was better positioned to direct the company’s multinational operations, and by 1975 he was recognized as the senior executive within the family after Bosch. For his part, Daniel had toiled most of his Bacardi work life in the shadow of Pepín Bosch and shown little interest in the political maneuvering that would be needed to secure the top leadership position. (Nor did he control enough shares to give him the leverage he would need to run the company.)

  At a family meeting, Eddy Nielsen received the support of the other Schueg shareholders and the descendants of Facundo Bacardi Moreau, as well as the tacit support of the Emilio and José Bacardi branches, and he became the de facto chairman. His goal was to bring more order and openness to Bacardi corporate planning and policy making. The increasingly complex business environment, in Nielsen’s opinion, demanded a more institutionalized organization than what Bosch’s informal family council provided. He organized a new Bacardi entity, mysteriously named International Trademark Consultants (INTRAC), with the sole function of overseeing the five Bacardi companies. The executive secretary was Guillermo Mármol, Pepín Bosch’s longtime lawyer and confidante and someone who understood as well as anyone how Bosch had managed the Bacardi companies’ intertwined activities. Like Bosch’s family council, the INTRAC board had seven members, with two representatives from each of the three main Bacardi family branches, and one from the smaller group of shareholders descended from José Bacardi Moreau. Nielsen was the board president. His closest colleague was Manuel Jorge Cutillas, the distilling engineer from Santiago and grandson of Emilio and Elvira’s daughter Marina. Though just forty-four, Cutillas had held top positions with Bacardi Mexico, Bacardi & Company in Nassau, and Bacardi International in Bermuda. He had one of the family’s sharpest managerial minds, and the New York Times had already identified him as a possible successor to Pepín Bosch.

  The organization of INTRAC came at a critical time in the evolution of the Bacardi business. Each of the companies in the rum empire had significantly grown, and their relations were becoming complex. The largest, Bacardi Corporation of Puerto Rico, had the biggest rum distillery in the world, selling most of its production to Miami-based Bacardi Imports, the exclusive U.S. supplier. Mexico was the province of Grupo Bacardi de Mexico, S.A., which had its own distilleries at La Galarza and Tultitlán. Bacardi International in Bermuda owned distilleries in Canada, Brazil, Spain, and Mart
inique and oversaw rum sales everywhere but in Mexico and the United States. Nassau-based Bacardi & Company owned the rights to the Bacardi trademark, meaning other Bacardi companies had to pay it for using the mark. One of the thorny issues was how to establish what prices and fees the companies should charge each other. Family members didn’t necessarily own shares in the same proportions across all the Bacardi companies, so they were always watchful to see that one company was not favored over another in the allocation of expenses and profits.

  In the first few years, Nielsen was generally successful in his efforts to keep family members happy and the business thriving. From 1976 to 1979, total Bacardi sales in the United States leaped an astounding 70 percent. Consumers during those years switched en masse from whiskeys to the “white” spirits, rum and vodka. The trend was especially pronounced in the African-American community, where rum and Coke became the drink of choice. Among the partying crowd, the daiquiri and piña colada cocktails became hugely popular. By 1980, Bacardi rum was the single most popular liquor brand in the United States, outpacing the previous top seller, Seagram’s 7 Crown whiskey. By 1983, about two thirds of all rum sold in the world carried a Bacardi label.

  But the dramatic growth in Bacardi income presented the family business with a new strategic challenge: The companies found themselves with more cash than they knew how to handle. In the past, excess revenue had been reinvested in new rum production facilities, but Bacardi executives decided they did not need more industrial capacity. Alternatively, the family rum business could acquire additional liquor brands. Bacardi was unusual among major liquor manufacturers in being a one-brand company, and that put it at a major disadvantage in competing for distribution clout against those companies that owned a portfolio. By 1983, however, liquor sales in general had begun to level out, particularly in the United States, where there was a move toward moderation in drinking and increased interest in health and fitness. Under the circumstances, it did not seem to be a good time to invest in other liquor companies. It was a time for major business decisions.

  Eddy Nielsen and his Nassau ally, Manuel Jorge Cutillas, argued that the family should consider moving outside the spirits sector together. Within the space of a few months, they persuaded Bacardi directors to purchase Lloyd’s Electronics, a New Jersey-based importer of cheap audio equipment, telephones, and clock radios, and also to set up a new company called Bacardi Capital. Financial services was a booming sector, and Nielsen and Cutillas were convinced that a diversification in that direction would be a profitable move for the Bacardi family. Bacardi Capital was organized with the idea that it could serve the Bacardi family by investing in the financial markets.

  Not all the family members were convinced that it made sense for Bacardi to expand outside the business it knew best. One skeptic was Daniel Bacardi. Having grown up around the factory in Santiago and overseen its operations for many years, Daniel had a deep sentimental attachment to the rum industry. At seventy, he still considered himself a Cuban patriot and loyal santiaguero. He was proud that over the previous century his family had become synonymous with rum making, and he believed it should stick to that enterprise. If there was excess cash beyond what was needed to sustain and build the rum enterprise, Daniel argued, it would be better to return the money to the stockholders and let them invest it as they pleased. His counsel proved prescient. Lacking the knowledge and experience needed to develop a sound business strategy in either the electronics or financial services field, the Bacardis failed miserably in both areas. By the time Bacardi Corporation divested itself of Lloyd’s in 1985, the venture had lost close to thirty million dollars, and with its disastrous attempt to play the bond market, Bacardi Capital cost its investors more than fifty million before it, too, was shut down. There would be no more attempts to diversify outside the spirits industry.

  There remained the problem, however, of Bacardi’s competitive disadvantage as a one-brand liquor business. Under laws enacted after Prohibition, liquor manufacturers or importers in most states were required to sell their products in the United States through independent distributors. A company with a portfolio of liquor brands had more leverage with a distributor, because it could provide him with a variety of products in a single commercial relationship and pressure him to carry the whole package. If Bacardi were to survive and prosper in the consolidating spirits industry, it would need to build strategic alliances with other liquor companies, if not pursue formal partnerships.

  The association with the Canadian liquor company Hiram Walker that sprung from the Pepín Bosch stock sale provided a starting point. In the summer of 1985, Eddy Nielsen and Manuel Jorge Cutillas discussed a possible strengthening of the tie between the two companies through a stock swap. In addition to the 12 percent share of Bacardi stock that Hiram Walker already owned from its purchase of the Bosch bloc, the Canadian company could pick up another 10 percent or so, increasing its Bacardi position to more than 20 percent. In return, the Bacardis would take a minority stake in Hiram Walker. Depending on the valuation of the Bacardi shares transferred to Hiram Walker, the Bacardi investors would have to pay additional cash for the Hiram Walker shares. The deal would allow both liquor concerns to strengthen their distribution networks by linking their product lines, a promising move given the early indications of a consolidation trend in the spirits industry.

  But it would have also put as much as a quarter of the family rum business in nonfamily, non-Cuban hands, and that news sent the family into an uproar. To the older Bacardis, the idea of selling off another sizable portion of the patrimony was unthinkable. No one was more upset than eighty-six-year-old Amalia Bacardi Cape, the youngest daughter of Emilio and Elvira. Amalia was the family guardian of her father’s memory, and for her the Bacardi firm existed in part to uphold his legacy. She mobilized relatives to make telephone calls and write letters, and they soon turned a majority of the family shareholders against the proposed stock swap, effectively killing the Hiram Walker deal before it was even negotiated. In 1987, Bacardi repurchased the stock that Pepín Bosch and his sons had sold Hiram Walker a decade earlier, thus ending any relationship with the Canadian company.

  The family disagreements that erupted around the Hiram Walker deal lingered, however. Behind the dispute was a Bacardi identity crisis, years in the making. This was a company that had always belonged to a single Cuban family with a deep sense of national heritage. By the 1980s, however, it was also a transnational liquor firm struggling to compete with larger and more diversified companies. The family directors needed to resolve what those two facts meant for the firm’s evolution. To the Bacardis, there was no more powerful symbol of their Cuban roots than the company that bore their name; on the other hand, they wanted their company to grow and prosper, and that necessarily meant change. But how much and in which direction? The answers were no longer obvious.

  The ties between the stockholders and the management in a stable family company are likely to be unusually trusting, but those same relations become acrimonious when the family members are squabbling. The arguments over diversification and the Hiram Walker stock swap eroded the good feeling that had existed previously between the Bacardis and their corporate leadership. Some family members, notably Daniel Bacardi, began to question the judgment of Eddy Nielsen and Manuel Jorge Cutillas. Daniel soon emerged as the leader of a “dissident” minority group within the family that wanted to limit management prerogatives. Debate escalated into confrontation, shattering friendships and straining family relations, and the tensions lingered for years.

  The dispute divided the Bacardi family along old lines of wealth and status. A key issue was how earnings should be split between reinvestment and dividends. In the first years after the family left Cuba, Pepín Bosch had instructed Bacardi executives to maintain dividends at about 50 percent of earnings, but the proportion had subsequently declined, to the dismay of the smaller shareholders. Because dividends are taxed at a higher rate than capital gains, stockholders who did
not need extra income preferred to see their shares grow in value, while the less wealthy family members favored bigger quarterly checks. Daniel Bacardi’s dissidents were largely united by their concern that the Bacardi management could not be trusted to act on such sensitive questions in the best interests of all family members.

  The conflicts within the family prompted the dissident group in 1986 to oppose a management move to reprivatize the Puerto Rico-based Bacardi Corporation, 10 percent of whose stock had been publicly traded since 1962. Daniel Bacardi and his followers opposed the buyback because privatization would have freed the company from Securities and Exchange Commission (SEC) reporting requirements. From the management’s point of view, SEC regulations hindered the company’s freedom of action. But the dissidents feared that another merger plan might be pursued behind closed doors, so they opposed any move that would enable the management to operate with greater secrecy. The disagreement led to litigation and was not resolved until 1992.

  With comity eroding, other family conflicts were exposed, including a division between those family members who were employed by Bacardi and those who were only stockholders. As with other intrafamily squabbles, this one arose along lines of descent; Emilio Bacardi had more children and grandchildren than did his brothers, Facundo and José, or his sister, Amalia, so stockholdings in his branch were dispersed among many more heirs. Being less wealthy on average, Emilio’s descendants were more likely to look for a job within the company. Generally they got one, and some relatives who did not work for the company complained that the tradition of Bacardi employment had gone too far. In the increasingly competitive business environment, they argued, the widespread employment of Bacardi family members (or their spouses) was a drain on company resources.