Dethroning the King (25 page)

To address concerns about Anheuser-Busch's flagging superiority, The Fourth's team ratcheted up its focus on a cost-cutting program they dubbed “Blue Ocean.” The effort to wring out waste first started in the company's brewing division under Doug Muhleman, a calm-spoken Californian with a fondness for nautical references. The Fourth soon implemented it more broadly, initially targeting cuts of $300 million to $400 million over a span of four years. Anheuser-Busch had always kept its interactions with Wall Street to a minimum during The Third's tenure, but with his son in charge, the strategy committee started considering whether to give analysts a detailed outline of their cost-cutting plans to prove they were moving in the right direction.

All of the fuss over saving a few hundred million dollars, however, indicated to some industry watchers that Anheuser-Busch was missing the point completely. The right response to SABMiller's dramatic move in the United States wasn't a paltry cost-cutting campaign. Across the Atlantic in Leuven, Belgium, InBev took SABMiller's move as a call to action.

In October 2007, not long after MillerCoors was unveiled, August IV met casually in New York with Jorge Paulo Lemann, the billionaire banker, spear fisherman, and former Wimbledon tennis player who had co-created InBev and was one of its most influential board members. Lemann, Telles, and Sicupira had steered themselves straight toward the top of the brewing industry since being rebuffed long ago by The Third.

Through their giant 2004 deal to merge AmBev with Belgium's Interbrew, the trio had taken a significant stake in InBev and three seats on the new company's board. The Brazilians and Belgians agreed to share control, but it wasn't long before InBev's Leuven headquarters started to look as though they'd been dropped into Belgium from Sao Paolo. Many of InBev's most important positions were soon filled by executives from AmBev's side of the deal.

The Fourth had forged a connection to Lemann through an important joint venture the two companies had struck just as he was taking Anheuser's helm the prior year. Their meeting in New York didn't seem particularly unusual to people on Anheuser's side, given that relationship.

The meeting held much more importance to people on InBev's side. Lemann, after referencing the deal SABMiller had just unveiled, suggested to August IV that day that their companies should consider a merger. The Fourth quickly demurred. He had plans of his own to resurrect Anheuser-Busch, and was eager to get back to St. Louis to focus on his cost-cutting campaign. Lemann's remark wasn't enough to formally register on Anheuser's radar screen. According to a regulatory filing it made a year later, “no acquisition proposals were made by InBev” in 2007 or early 2008. However, it rang alarm bells for some.

“To the extent you were on DEFCON 3, everything dialed up to DEFCON 4 or 5,” said one person close to Anheuser-Busch. “There was no perception that anything was just innocent and casual. You sort of had the sense that there had been a change, which led to lots more preparation, lots more analysis. You could sort of feel that the odds were higher that something was going to happen than they had been.”

The Fourth may not have felt Lemann's comment was anything other than an off-the-cuff remark. It had been quite deliberate, however. His quick dismissal of the notion of a merger suggested to InBev that it might have to consider more forceful ways of luring Anheuser-Busch into a deal. “They always said they wanted to put the two companies together, but just not then,” said a person close to InBev.

Although August IV brushed Lemann aside that day, he did tell some Anheuser executives privately that a merger with InBev could be a great way for Anheuser-Busch to unlock value. “But I don't think that anybody on our side ever thought we would lose control of the company—that we would lose control at the board level,” said an A-B executive, who posited that InBev began carving Anheuser-Busch up for eating soon after Lemann and The Fourth sat down.

“August IV was a babe in the woods at that meeting.”

—Anheuser-Busch insider, on The Fourth's trip to Tampa

 

 

 

W
hile The Fourth's encounters with SABMiller and InBev and the meeting he engineered in Cancun naïvely sent up a few flares, his instincts were right. Anheuser-Busch was vulnerable. He actually contributed to the problem just before his official start as CEO, however, when he pushed ahead with his joint venture with InBev despite warnings from his father.

The companies had first considered a deal to make Anheuser the exclusive U.S. importer of InBev's European brands back in early 2005, when Pat Stokes was chief executive. They spent roughly half a year working through the terms of an agreement before talks collapsed. They tried again the next year after Carlos Brito, who had been stationed up in Toronto during the first round of negotiations, was named CEO of InBev. This time, Brito dealt directly with August IV, who was just a few months shy of becoming CEO. Negotiations were held and information was exchanged, but yet again, the talks broke apart.

By late 2006, with The Fourth poised to become CEO, he and his team decided that finally inking the venture would rally distributors and help address the company's stagnating growth. The Fourth wanted the deal to be the first big initiative he pushed through as he transitioned into the top spot. He and his team ensured that the third round of talks with InBev was a success, and the tie-up was announced right after Thanksgiving.

The venture yielded plenty of benefits—Anheuser-Busch won the ability to offer U.S. consumers a broader variety of beers, like Stella Artois, Beck's, and Hoegaarden. The Fourth's eagerness to get the deal done, however, brought worrisome consequences.

Many joint venture agreements include a “standstill” clause that prevents partners from buying up shares in each other, attacking each other's boards of directors, or making other moves that could be viewed as steps toward an unsolicited takeover attempt. The Third had opposed the idea of a deal that did not legally protect Anheuser's independence, and it would have been perfectly reasonable for Anheuser-Busch to force InBev to agree to a standstill. That never happened, though. By the time the companies' third round of talks got underway in 2006, demanding a standstill provision to ward against a takeover wasn't a major concern for The Fourth.

In his defense, the joint venture was too small in scope to warrant a standstill agreement as a normal course of action. “I'm sure A-B could have raised it,” said one company advisor. “I do think that would have been an interesting thing to bring up. But it also would probably have been outsized, relative to the scope of what that JV was.”

“If A-B continued along the path they were on and InBev continued on the path they were on, I don't know if a standstill would have mattered at some point,” the advisor added. “Public pressure (to merge the companies) might have been fairly significant nonetheless. But that said, a standstill is a standstill, and it would certainly have been helpful in a raid defense.”

Curiously enough, despite all of the other efforts The Third undertook to limit his son's autonomy, he let The Fourth proceed with the deal rather than breaking out his veto. “His dad thought it was a stupid deal, but he let his son go ahead and do it,” said one person close to Anheuser-Busch. Though it wasn't evident at the time, The Third's willingness to acquiesce had significant bearing later on the company's future and on the success of his son's reign.

The partnership opened the doors to InBev's executives and let them walk right in to kick the tires and see whether Anheuser-Busch was worth buying—and for how much.

“It gave them an inside snapshot of how bloated the company was, because we had these guys following us around for a couple of years,” said a former Anheuser-Busch executive. “They saw all of the executives coming in on corporate jets. They were just appalled at the excessive corporate overhead in the company.”

“I think they were able to see the extent of what they could cut when they got in,” the executive said. “Despite the worldwide economic meltdown, it gave them the strategy and the belief that if they could get the deal done, they could realize the cost savings.”

The joint venture let InBev shack up for a while with Anheuser-Busch before deciding whether to marry it. It showed InBev where to make cuts and how to improve Anheuser-Busch's business. The companies' year and a half of cohabitation may have soothed The Fourth into trusting Carlos Brito, but it handed InBev a stockpile of ammunition on a silver platter. It didn't matter that The Fourth started trying to slash costs once he became CEO. With all of its miserly experience, InBev knew it could take any savings plan The Fourth concocted and top it.

“The gold-plated nature of the way A-B ran their business was not simply an invention of August Busch IV,” one of the company's advisors said. “That had been in place for generations upon generations. Did InBev get a closer look at that and say to themselves, when they saw all of the aircraft and the hangar and everything else, that, ‘Boy, there are a lot of costs we could cut out?' Yes.”

The Fourth even invited Brito to one of the company's annual wholesaler conventions, where he had a chance to see for himself what Anheuser-Busch spent on discretionary items. August IV couldn't have chosen a more inappropriate guest to invite to his over-the-top party.

“That was August's naïveté, bringing the guy in,” said one former Anheuser executive.

Under Brito, who had a Teflon-like resistance to the trappings of corporate wealth, InBev had never been a cushy place to work. The company earned its reputation as the “Wal-Mart of brewers” not long after it was created, and Stanford business school graduate Brito and his legion of American-educated MBAs took number-crunching and analysis to the extreme—to the point where critics argued that they were ruining the beer business.

Brito, a protégé of Jorge Paulo Lemann's, worked in an open floor plan office at a large table, surrounded by the staffers who reported to him. He decried anything that could be viewed as a symbol of professional status, and flew coach class on all but the longest airplane trips. As he liked to point out, most of InBev's beer-swilling customers didn't fly first class either.

In Anheuser-Busch's heyday, its executives bunked down at the sumptuous Pierre hotel, which is perched on New York's Fifth Avenue at the southeast corner of Central Park. Brito, however, abided by the same hotel policy InBev enforced for its whole organization, which meant that he wasn't staying at the Four Seasons while his underlings set up house at a local tourist trap. He stuck to a more pedestrian class of hotels—the kind in which it made sense to check behind the headboard for bedbugs, just in case. Before AmBev merged with Interbrew and the Belgians put their feet down on the matter, the Brazilians were even said to have bunked in pairs on some business trips to save money.

A married father of four and native of Rio de Janeiro, Brito's office uniform was casual and no-frills—a pair of blue jeans paired with a button-down shirt, sometimes tucked beneath a sweater. Jeans were the norm at InBev, and many members of the company's board even wore them during meetings. For an event of modest importance, Brito might upgrade to a pair of khaki pants.

Even Brito's name left little room for frivolity. There had been a handful of Carloses in his Jesuit high school class when he was young, which was bound to get confusing, so his teachers and classmates started using his blunt-edged surname instead. From that point onward into adulthood, the only two people who called him “Carlos” were his mother and, eventually, his wife. Compared to some of the larger-than-life personalities who commanded the beer industry over the years, Brito was a study in exercised restraint.

The one counterpoint to that, however, was his hunger for competition and desire to win. He habitually peppered his dialogue with jargony, business-themed catchphrases—the kind that are often mounted on office posters beneath a picture of a breaching whale or a waterfall. Despite his affinity for measurements and targets, Brito saw his job as a quest to understand what makes people tick—or in his case, what makes a person knock back one brand of beer on a Friday night rather than another. Like August III, he was a beer evangelist. He could wax at length about the proper type of glass in which each of InBev's beers should be poured, or about what the label badge on each bottle said about the person drinking it.

It was only natural for Brito to see his venture with Anheuser-Busch as fertile testing ground for a merger. To many on Wall Street, a merger between InBev and Anheuser had taken on an air of inevitability even before their partnership was struck. The debate had initially centered on which company would be the aggressor and which would be the target. As InBev swelled in size, Anheuser lost its right to claim the driver's seat.