Dethroning the King (39 page)

“There was a constant trying to patch that up, and trying to make it work,” Jones said. “It never seemed to be the same after that.”

Carlos Fernández, the anointed son of another family dynasty, found himself pinned in a difficult spot a couple of times when the dynamic between The Third and The Fourth was at its worst. Fernández had forged a surprisingly tight bond with The Third over the years, despite his elders' distrust of the man. He and August were brutally honest with each other. Carlos felt comfortable cutting it to August straight, in a way his dutiful subordinates and the rest of the board wouldn't.

“How would you feel about running Anheuser-Busch?” The Third quietly asked Carlos during one of his trips to St. Louis. Things were rough at the time between father and son, and Carlos assumed The Third was making his comment out of spite. He brushed it off, saddened that the two men's relationship had deteriorated to such a point. It proved not to be an isolated incident, however. Once or twice more, during dinner with the board of directors the night before a meeting or while visiting his farmhouse, The Third again floated the idea of having Carlos take the reins.

The spat over the shareholders' meeting cooled from a boil to a simmer after a few months, but the volatile dynamic between August III and August IV remained evident as the InBev saga intensified. The Fourth, who seemed unwilling to challenge his father's dominance, receded further and further into the wings as the fight progressed. He rarely made presentations on the company's operations or other management issues, and he became increasingly out of touch and distant. If there was ever a time when Anheuser-Busch needed to run like a well-oiled machine, it was that summer. Unfortunately, too many of its internal gears were rattling loose to make that a possibility.

“If he said four words any time we were in a board meeting, he said a lot,” said one Anheuser advisor. “I can't remember The Fourth ever asking a question,” said another. “I think he was frightened. I have seen in my life fear in a lot of situations. There was fear in his eyes. Fear of saying the wrong thing. Even when it was his program, he didn't advance it. Even if he embraced it, Randy [Baker] handled a lot of it; Dave [Peacock] handled a great deal of it.”

The strangest thing about their dynamic was that The Third had convinced the board of directors to install The Fourth as CEO. That would suggest that he had a certain level of confidence in his son. Few things he did seemed aimed at bolstering his son's ego, however, or catalyzing his ability to lead the company. With Stokes presiding as chairman and Warner heading up the group of outside directors, The Fourth was left to represent Anheuser's management. Unfortunately, August III and the board didn't appear to have a particularly high level of respect for Anheuser's team of top executives.

The Fourth decided in June to hire Ken Moelis, a well-connected Los Angeles-based banker, as an extra advisor—thanks in part to his close friendship with Ron Burkle. Burkle was a key client of Moelis, who had stepped down as the top banker at UBS in 2007 to start his own bicoastal firm.

Moelis was ostensibly there as an advisor to the company, and was listed as such on its press releases. His real task, though, seemed to be counseling and protecting The Fourth. “August was, quite frankly, probably feeling a bit under siege, not only from InBev but from members of his own board at times,” one advisor said. “It probably didn't seem like a bad thing for him to have a couple of extra friends around to talk to.” Moelis attended several board sessions, but he never presented in any of them and stayed largely out of the fray. “Look, when we can be helpful reinforcing something you think is important, just reach out to me and tell me,” he told his fellow bankers at one point.

“Ken was very quiet in the background, and I think got paid a very modest amount of money,” said one person close to Anheuser. August IV was incredibly loyal to his friends, and it didn't surprise the rest of Anheuser's team in the least to see him hire Moelis. They figured Burkle had asked him to pull Moelis on board, and he was happy to extend the favor. The relationship proved symbiotic. Moelis's firm received publicity for being associated with such a high-profile takeover defense, and August IV gained an advocate and counselor. It was hard to blame The Fourth for wanting someone in his corner of the ring.

“It's not like The Fourth was leaning back and Ken was whispering in his ear,” said one advisor. “But I got the sense that Ken probably had some late night conversations with The Fourth to give him comfort that he wasn't observing any screw-ups.”

Pat Stokes, who had been the chairman of Anheuser's board for a year and a half when InBev came knocking, did his best to keep the group running in an orderly way. His was a tricky cross to bear, however. Stokes was one of The Third's original whiz kids from Wharton and had been his right-hand man for years. Yet he had shifted some of his allegiance over to The Fourth to straddle the impossible divide between the two men and preserve his own career and integrity.

“I put Pat in the Randy [Baker] category, of having mastered the ability to be a professional but to not get trapped,” said one person close to Anheuser. “He was clearly The Third's guy, but I thought he carried himself well.”

“Pat Stokes, God bless him, he figured out how to manage the family situation,” this person said. “He was a surprisingly impactful person in a very quiet way, because he was one of the few people who had the credibility to not be cowed by The Third.”

With Stokes at the steering wheel, the board sat down together on June 20 to compare Anheuser-Busch's options. A few executives explained to the group that they had found ways to save $1 billion in annual costs during their two-day session at the soccer park—much more than first anticipated. Those measures, plus a hike in beer prices, would probably boost the value of the company's shares by a few dollars apiece. Still, as Goldman and Citigroup weighed in with their views on the plan, it became clear that slashing costs alone wasn't going to push Anheuser's shares above the $65 floor set by InBev.

Cost reductions combined with a deal to buy Modelo, on the other hand, certainly might, if combining the two companies boosted their growth a few years down the road. It had been only eight days since the Modelo talks first started, and just one day since Fernandez resigned, but a deal to buy the rest of the Mexican brewer was already clearly in focus as Anheuser's best defensive play.

That meant that Anheuser actually needed to wrap something up with the Mexicans, though. Having Modelo as an option wasn't useful unless the likelihood of a deal was legitimate, and the talks were already running into snags. The board wasn't as sure as The Fourth seemed to be about the notion of allowing Carlos Fernández to be CEO. If they were going to entertain paying the huge price The Fourth and his team were eyeing—$15.2 billion—they weren't eager to also cede leadership of the company. How could they explain that to shareholders? It would look like they were paying Modelo to steal Anheuser-Busch's keys.

Goldman and Citigroup both ran through projections on how worthwhile a Modelo deal would be at certain prices, and they compared the rich price Anheuser had proposed to other beer deals that had been done more cheaply. The deal could put Anheuser-Busch at risk if it wasn't executed well, they pointed out. If the board wanted to fend off InBev, continuing those talks was its only real option. So the board gave the Anheuser-Busch executives who were spearheading the Modelo talks a green light to continue.

By the time the board met again five days later, on Wednesday, June 25, it had let two weeks tick by without making a response to InBev's bid—a painfully long time by Wall Street's standards, at least, if not by St. Louis's. Anheuser-Busch had issued a second press release on the 16th to reiterate that its board would announce a decision when it was good and ready, and investors had been waiting since then for an answer. They were finally about to get one.

Anheuser CFO Randy Baker stood up first that day to outline the latest stage in the Blue Ocean cost-cutting scheme, and Goldman and Citigroup then presented their conclusions on InBev's bid. Both keyed in on the same things. The bid was opportunistic, they said—InBev was preying on Anheuser-Busch at a time of weakness. With Blue Ocean, they might be able to boost the company's stock price toward $65. And if they pulled out all the stops by acquiring Modelo and maybe even spinning off the company's entertainment division, Anheuser was probably worth $67 or $68 per share. InBev's current offer simply wasn't enough. If InBev's team wanted to lock Anheuser-Busch down, they'd have to go higher.

“The company knew it certainly had more than $65 in value,” said one advisor. “They had worked the numbers. But it came down to execution risk. The question was the ability of the current management to execute on those plans.”

The answer to that question wasn't clear. For now, though, the bankers said, the board had a strong enough rationale for rejecting the bid. It wasn't a recommendation they made lightly: Judging a takeover bid as inadequate can be risky for a bank. Kalvaria and Schackner had spent time discussing their potential inadequacy opinion the night before on conference calls with Citigroup's attorneys.

The board held a meeting by telephone the next day, once everyone had returned to their home bases, to confirm its rejection of the bid and to run through its next steps: moving more forcefully down the road with Modelo and rallying shareholders around the company's new Blue Ocean effort. Anheuser had a highly anticipated conference call with investors and analysts coming up on Friday, and Randy Baker and The Fourth were prepping to use the opportunity to unveil their new cost-slashing plans to the world.

The board agreed unanimously over the phone that InBev's $65 per share bid was simply too low. Whether or not various directors wanted to sell the company, it seemed clear they could get more. There was no indication of what InBev would do next. While it might drop the effort in the wake of Anheuser's rejection, it could also try to circumvent the board and convince Anheuser's shareholders directly that a takeover was the best option. Still, the board's conviction was strong that day in late June.

“It was a relatively easy rejection,” said one Anheuser insider. “To be candid, I don't think there was ever great doubt with the first bid that we were going to reject it,” said another. “I don't think there was great controversy. It's just standard practice in M&A—the first bid somebody makes, you reject. The question is, what do you do with the second bid?”

In a press release issued later that day, Stokes said InBev's bid did “not reflect the strength of Anheuser-Busch's global, iconic brands Bud Light and Budweiser, the top two selling beer brands in the world.” Warner, as lead independent director, added that the offer wasn't competitive “with alternative plans the company has developed in recent months,” a nod to the Blue Ocean scheme Anheuser was about to unveil. To show that they weren't stonewalling to shareholders' detriment, Warner added that the board would “continue to consider all opportunities that build shareholder value.”

The board's independent directors, anticipating that their rejection of InBev's offer might be the start of a very public war rather than the end of it, had agreed the day before in St. Louis to hire law firm Simpson Thacher & Bartlett for additional advice. Speculation had been building that the group would hire their own legal counsel, and for good reason. Things were starting to get messy, particularly when it came to the company's entanglements with the Busch family.

Adolphus Busch IV, The Third's estranged half-brother, had shocked Anheuser's executives, the press, and even members of his own family the prior week by issuing a public letter that called for Anheuser to negotiate with InBev. Adolphus directed some of his plea straight to the board, reminding them to remember their obligations to shareholders.