Bitter Brew: The Rise and Fall of Anheuser-Busch and America's Kings of Beer (41 page)

One journalist who met with the Fourth early during his first few months as CEO thought he came off as a smart, amiable middleweight. “He had boyishness about him, not the gravitas of a CEO. He was like someone I might have played ball with in high school and we'd go have a beer together. He seemed younger than his age. He carried himself like a guy who was trapped in his youth.

“He was clearly very bright,” the journalist said. “He had a tremendous memory, and could roll off stats about the industry and stories about the challenges his father had faced through the years, but he tended to go off on tangents in his conversation, jumping around like a jackrabbit, veering from one subject to the next. He didn't shy away from talking about the takeover rumors and the realities the company faced, but he sometimes rambled on about inconsequential beer history.”

The takeover story died down during the summer of 2007 when nothing happened, but it heated back up again in October when SABMiller and Molson Coors, the No. 2 and No. 3 brewers in the United States, announced they were merging their domestic operations to better compete with A-B. MillerCoors, a merger of two mergers, would control about 30 percent of the U.S. market, significantly reducing A-B's competitive advantage.

Shortly after the MillerCoors announcement, August IV met in New York with Jorge Paulo Lemann, the most influential of the three Brazilian investment bankers behind the creation of InBev. A Harvard graduate who drank only mineral water, the sixty-eight-year-old Lemann was ranked No. 165 on
Forbes
magazine's list of the world's wealthiest people, with a fortune estimated at $4.9 billion. The Fourth believed the meeting was a casual one. When Lemann mentioned the MillerCoors deal and suggested that A-B and InBev consider a merger, the Fourth apparently didn't perceive it as a serious proposal. He brushed the suggestion aside as if it were an off-the-cuff remark, saying he had other plans for reinvigorating his company. But Lemann was dead serious about a merger, and the fact that the Fourth did not pick up on that or report Lemann's comment back to the A-B board in a way that set off alarm bells was an indication of how unprepared he was to play in this ballpark. Having been rebuffed twice on the idea of a friendly merger—by August III in 1997 and now his son—Lemann and his partners commenced plans to acquire A-B by less friendly means.

It appears that the Fourth similarly misjudged the situation with Carlos Brito, the man Lemann put in place as CEO of InBev. The forty-eight-year-old Brazilian, who held a degree in mechanical engineering from the Federal University of Rio de Janeiro and an MBA from Stanford (paid for by Lemann), was in many ways the antithesis of the Fourth. Married with four children, he eschewed the trappings of executive success, avoiding first-class travel and fancy hotels, operating without an assistant, a company car, or even his own desk. “We don't have corporate jets,” he pointedly told an auditorium full of Stanford graduate students in February 2008, as InBev was secretly lining up financing to buy A-B. “I don't have an office. I share my table with my vice presidents. I sit with my marketing guy to my left, my sales guy to my right, my finance guy in front of me.” Private offices fostered mediocrity, he said. “Mediocre people love to be behind closed doors, playing games and stuff.” And there was no free beer at InBev, either. “I don't need the company to buy my beer,” he said. “I can afford to buy my own.”

During his fifteen years at AmBev, Brito had built a reputation as a ruthless cost cutter and wholehearted proponent of Lemann's “zero-based budgeting” philosophy, which supposedly helped the company achieve an astonishing 50 percent profit margin by requiring every department to justify all costs for each year rather than simply adjusting the baseline spending from the previous year. As he told the grad students at his alma mater, “We say the leaner the business, the more money we will have at the end of the year to share.”

And yet the Fourth thought it was a good idea to invite Brito to A-B's annual sales meeting with distributors, the company's most conspicuous display of over-the-top spending.

The merger/takeover rumors reignited in the spring of 2008, fueled by the
Wall Street Journal
's gossipy but usually reliable Heard on the Street column, which reported that A-B and InBev “already have held discussions,” according to “people in the industry familiar with both brewers' thinking.” Noting that “reports of the talks surfaced as long as a year ago,” the column said, “They have become more serious, and a deal is possible this year, people in the industry say.”

In truth, the two companies had not had any “talks” other than the brief exchange between August IV and Jorge Lemann in October. In the wake of the item, however, the price of A-B stock briefly jumped 3 percent. The
Journal
kept on the story, reporting on April 11 that during A-B's annual sales meeting with distributors in Chicago a few days earlier, August IV had brought the crowd to its feet by declaring there would be no sale of Anheuser-Busch, “not on my watch.”

The
Journal
attributed the story to “sources in the room,” but the company refused to confirm or deny the Fourth's statement. “We had a meeting with our wholesalers with the goal of inspiring our sales force,” said marketing VP David Peacock, who declined to characterize comments “that were shared in confidence with our distribution system in an effort to keep them focused on performing in support of our business.”

The Fourth had blundered again. It was naive of him to think that anything he said to a crowd of five hundred people was confidential, or would stay that way for long. And to publicly reject a buyout offer even before it was made smacked of arrogance or ignorance, or both. No sober, experienced CEO of a publicly traded Fortune 500 company widely rumored to be the target of a takeover attempt would do such a thing. He didn't have the authority, and it was not in the interest of the stockholders.

Perhaps the pressure was getting to him. The company's domestic market share grew by a paltry one-tenth of a percent in 2007. Sales of Budweiser and Michelob continued to fall. Despite a few brief spikes in response to takeover rumors, the stock remained stuck around $48 a share, the same as it had been for five years—“flatter than two-year-old beer,” in the words of one analyst. The company was being investigated and publicly excoriated by eleven state attorneys general, including New York's Andrew Cuomo, for allegedly illegally marketing caffeine-laced alcoholic drinks—Tilt and Bud Extra—to underage consumers.
^*
And A-B department heads were scrambling to find more than $400 million in spending cuts just as the company was preparing to drop a bundle on the rollout of a high-profile new product, Bud Light Lime. Meanwhile, the specter of InBev hovered over everything.

It was not a good time for August IV to pull a disappearing act. But beginning in January 2008, he rarely showed up at the brewery, preferring to work out of the company's suite of offices at the soccer park near the Spirit of St. Louis Airport, which was much closer to his home. A massive construction project on Interstate 64 between West St. Louis County and the city offered a convenient excuse for the change, though several other routes could have provided an easy commute from his house on Lindberg Boulevard to the plant. His new office offered a fully equipped gym, which he used incessantly as part of a manic physical fitness regimen that included daily sessions with his ever-present Korean bodyguard/martial arts master, Bong Yul Shin, whom the Fourth referred to as “Mr. Shin,” as if he were a James Bond character.

Once again, the Fourth had created a safe haven for himself, a secure space where access was restricted to all but a small cadre of devoted and indebted underlings who could be trusted with his secrets. The new office arrangement helped hide from the rest of the company the fact that the chief executive's workday usually didn't begin until the early afternoon and continued into the early morning, the latter hours conducted in bars, restaurants, or, increasingly, his home, where some members of his inner circle gathered nearly every night.

“His guys would come over and they would watch TV; it was work, but they were also like his family,” said a confidant who claims he was sometimes there five or six nights a week. “
Scarface
was his favorite movie. They watched it religiously. As the night wore on, he would get more drunk. He drank beer and wine mostly. He usually had a chef there to cook, and a housekeeper, and two A-B security guys.”

By then, the Fourth had returned to his playboy ways when he traveled, or when his wife, Kate, was out of town. In the latter case, he made sure the security camera recordings at the house were erased before she returned so she wouldn't find out what went on while she was away. “Kate thought she could change him,” said one of August's confidants, “but it was never going to happen.”

Given the Fourth's increasingly dissolute behavior, his closest associates were not shocked when he showed up loaded at the National Beer Wholesalers Conference in Washington, D.C. But the five hundred or so A-B distributors who watched as he walked unsteadily into the grand ballroom of the Hyatt on the afternoon of May 13, 2008, were stunned by his condition.

“The wholesalers for all the brands were [at the convention], at least a thousand of them, along with the largest brewers—SABMiller, Molson Coors, InBev,” said an A-B distributor who was in the ballroom. “The Fourth was going to be our headliner. But he didn't get very far. He stumbled over words as if he was reading from a teleprompter in a different language. His speech was slurred, halting, and very deliberate. It was obvious that he could not focus. This was clearly not from overindulging in a ‘beverage of moderation.' It wasn't booze; something else was going on. It was painful to see the face of our company in such a state
in public
.”

“When it was over, it was all anyone talked about, that evening and for many days afterwards,” recalled another distributor who witnessed the meltdown. “I couldn't believe that his people let him get up there like that. Obviously, they were in disarray.

“This was not a home game; we were in the nation's capital,” the distributor went on. “There are no secrets in the beer business anyway. No matter what you sell, it's all a big fraternity. So everyone knew about this. I have to believe it factored into what InBev did. They thought, ‘If that's the leader, then something is terribly wrong.'”

In all likelihood, Brito and company already knew about the Fourth's weaknesses. They weren't barbarians at the gate, after all; they'd been inside the walls for more than a year. And in any significant corporate acquisition, it is standard practice for the prospective buyer to conduct a due diligence investigation that includes a rigorous vetting of the CEO and his management team to determine whether they should be kept on after the takeover. The investigations usually are conducted either by big law firms or private investigative agencies such as Kroll, which employ former investigative journalists and retired law enforcement officers to gather intelligence. Depending on the size of the company and the risk involved, these due diligence investigations can be exhaustive and expensive, sometimes costing up to half a million dollars or more. And because the investigative report is provided to the client on a confidential basis, its so-called executive summary often contains a good deal of unproven gossip, which can be as significant to a buyer as fact. When it came to gossip, of course, August IV was an open book, with new chapters being written all the time.

On May 22, nine days after the Fourth's disturbing performance in Washington, the InBev board of directors met to discuss the details of their planned merger offer. The following day, the
Financial Times
reported that InBev was readying a cash offer of $65 per share, a total of $46 billion, for all outstanding shares of Anheuser-Busch. InBev expected a “cool reception” from August IV and the A-B board, the
Financial Times
said, and was prepared to follow up with a public appeal directly to A-B shareholders.

The information was attributed to unidentified “sources with a close knowledge” of the deal, but the details were so specific there was little doubt as to the accuracy. The article named the various investment bankers involved in the financing package and said that InBev had approached August IV “informally last October, but [he] insisted he would protect Anheuser's independence and wanted time to show his mettle at a job to which he had only recently been promoted.”

The story broke on the Friday morning leading into the Memorial Day weekend. By the time the markets closed, A-B stock had shot up by 8 percent to a record $56.61. A-B management made no official public statement regarding the
Financial Times
' story, but during the day August IV sent a memo to all employees urging them to stay focused on their jobs. “We can't control rumors or speculation,” he said. “But we DO control our growth strategies and how we operate our business. It is our job to conduct our business in ways that will keep the company strong, profitable, and growing.”

In a defiant flourish that sounded like something his father would say, he added, “Some of our competitors would like nothing better than to see Anheuser-Busch get distracted by rumors over the holiday. They underestimate us.”

Out at Belleau Farm in St. Peters, Missouri, the Fourth's uncle, Adolphus Busch IV, read the
Financial Times
story with interest and concern. As the owner of a substantial amount of A-B shares and a financial partner in a large A-B distributorship in Houston, he'd been frustrated for some time with the lackluster performance of the stock. Now, apparently, the A-B board was about to be offered a 34 percent premium on the going price of the shares, and his nephew had already said no. How could he do that?