Dethroning the King (22 page)

“When evaluating other businesses relative to the U.S. beer business . . . almost any other investment paled by comparison,” explained one former top Anheuser-Busch executive. “Now, there comes a point where you have to think beyond next year or three years and say, “In ten years, the map is going to be global, it's not going to be domestic, and these other companies are expanding. I need to position myself for that eventuality by making decisions today that might hurt the short-term return on investment, but are smart overall.”

The Third had a strong aversion, in particular, to taking on too much debt, which would have been a requirement for any takeovers of size. The global financial crisis that started in 2007 showed the hazards of excess debt, and many companies whose top executives were less cautious than The Third became part of the wreckage. August III's aversion to risk, however—both financial and operational—limited Anheuser-Busch's growth opportunities. He preferred to reinvest the boatloads of cash Anheuser churned out each year back into his business.

“That's the part that just doesn't connect to me,” said a former executive who watched The Third shelve a long string of potential transactions. “As smart of a finance guy as he was, he knew he had enough money to pull off these deals. A-B was flush with cash.”

“A-B was not only better financed, it was the largest brewer in the world at the time,” said beer industry scribe Harry Schuhmacher. “They could have easily stretched its balance sheet a little bit to get those deals done, but they were unwilling to do it.”

Getting the numbers to work wasn't the only obstacle on the international front. The Third was a control freak of the highest order, and it was impossible to imagine that anyone could run an Anheuser-Busch operation abroad with the same oversight and intensity he showed in St. Louis. In many cases over the years, his rigid dedication to quality paid off. It didn't make it easy to find suitable takeover targets, though—or the people to run them.

“It was clear to me he couldn't go beyond the U.S.” said Rick Hill. “He was not a very good partner with anybody. We would be a minority partner, but August could never say, ‘You know the market better than I do, you run it.' He was a hard guy to deal with, I'm sure, for the minority partners. He was that kind of guy, though. He had strong principles.”

Rather than contract brewing beer on location in Asia, for instance, Anheuser used to ship beer in sealed containers from the United States all the way to Japan. It gave the Japanese a taste of the real King of Beers, but the costs were huge.

“We never had any respect for anybody else's ability to make beer,” said one former executive. “We didn't trust anyone. We didn't trust consultants, we didn't trust advisors. We only trusted one man's opinion on what we should do or shouldn't do.”

While The Third had a talent for seeming to be everywhere at once, even he couldn't have it both ways when it came to global expansion. He couldn't possibly command operations in other countries the way he did in St. Louis, with his hands in every pot. Still, the alternative—easing back and letting someone else have day-to-day control of foreign assets—made him too uncomfortable.

The Third preferred to default to the same triggers that had always yielded growth for Anheuser-Busch—focusing on advertising and brewing consistent beer. The usual triggers weren't going to cut it anymore though. To compete in the new, globalized brewing market, Anheuser-Busch needed economies of scale—the cost savings big companies can generate relative to their smaller counterparts. While its rivals grew into brewing behemoths, Anheuser-Busch engineered its own destruction by becoming overly dependent on American consumers and turning its back on hundreds of millions of increasingly affluent drinkers around the world.

“We were quite aware that we went from being the largest brewer in the world to a company that looked up to InBev,” said Douglas A. “Sandy” Warner III, the former chairman of J.P. Morgan Chase and one of Anheuser-Busch's most powerful board members. “I remember like it was yesterday sitting in the boardroom, and somebody saying, “Are we comfortable that in the process of the decisions we're taking . . . our relative size and scale is diminishing? Are we comfortable about that? Because that has implications. And we were. I think that was unanimous. We felt we were doing the right thing.”

“The Third screwed the whole company up,” said one Anheuser-Busch advisor. “Remember, InBev was 'this' big, SAB was ‘this' big, and they were ‘this' big,” he said, spreading his hands farther and farther apart as he named each brewer. “Anheuser stayed that big. Remember, the first deal that AmBev, the Brazilians, tried to do was a merger with Anheuser-Busch way back when, and he threw them out. They then went and did the Interbrew deal. He never globalized. He turned down every single opportunity.”

In 2004, Anheuser-Busch, whose employees had long boasted about working for the world's largest brewer, abruptly lost that title. AmBev, whose proposals for global domination Anheuser had shunned, announced that March that it would merge with Belgian brewing giant Interbrew in an $11.4 billion deal to create the world's top brewer by volume. SABMiller outstripped Anheuser in size not long afterward.

Anheuser-Busch's strategy committee, which had started debating the merits of a big acquisition years earlier, began to actively argue over whether they needed to merge with another brewer, and its meetings grew heated and contentious. “It all happened at once,” said one committee member. “It was just amazing in those strategy committee meetings, because people were just blaming everybody.”

Anheuser's executives started tossing around a range of options, all of which had been run over ad nauseam in the past. Some wanted to buy SABMiller. That would require a huge pile of debt—if SABMiller's Mackay was even willing to hop on board. Others focused on whether they could buy the rest of Grupo Modelo, the Mexican brewer in which Anheuser-Busch had already amassed a half-stake. However, the Modelo people disliked August III and much of the rest of the old guard at Anheuser-Busch. They even considered a merger with Dutch brewer Heineken, but dealing with the Heineken family was too complicated. The Third hadn't left his son a whole lot to work with.

He should have employed “an M&A strategy that had built up the business more and was more global,” said one advisor to the company. “They were so limited in terms of international scope and the cost structure. It wasn't just The Fourth who did this. If anything, The Fourth came in and tried to be more forward-leaning, and The Third didn't want him to be.”

“I got the sense that he was always trying to goad his father into doing more internationally, and his father would say, ‘That's not your purview,” said Harry Schuhmacher. “Your responsibility is the United States.”

As Anheuser-Busch began searching for ways to play catch-up, China was an obvious answer. The Third had recognized China as a fast-growing and lucrative market, but his investments there had been cautious. Anheuser owned a tiny stake in Tsingtao, and it had also started brewing Budweiser locally in 1995 after buying a majority interest in China's Wuhan International Brewery. So in 2002, with Pat Stokes at the helm, the company decided to ramp up its exposure to China by cutting a deal to slowly raise its Tsingtao stake from 4.5 percent to 27 percent. The price Anheuser paid was rich for the limited amount of additional authority it won—the Chinese government remained Tsingtao's largest shareholder. Tsingtao was something people could hang their hats on in St. Louis, however, and it emboldened the company for when Harbin Brewery, China's fourth-biggest brewer at the time, came up for grabs in 2004. In an uncharacteristic move that indicated Anheuser-Busch had set aside some of its reticence, it won a month-long takeover battle for Harbin after SABMiller withdrew from the bidding. Victory didn't come cheaply, however. SABMiller already owned a significant stake in Harbin, and Anheuser had to pay off both SABMiller and Harbin's other shareholders at an inflated price to acquire the shares it didn't already own.

Even after showing aggression in the Harbin battle, Anheuser couldn't catch a break from those who felt it was already too far behind. “China was, like, an accident,” one advisor to the company said. “A relatively small piece of the business.”

“They just completely missed the boat when eastern Europe opened up, and when there was growth in Latin America,” said Harry Schuhmacher. “They did have an early cue in China, but as far as the rest of the world, it really allowed SABMiller and then later InBev to just take all of those opportunities. That was just the culture. It was a Midwestern culture of conservatism, insularity and cronyism. It started to open up when August Busch IV rose through the ranks.”

Unfortunately, The Fourth's efforts were too little, and way too late. By mid-2008 when InBev made its approach, the results of Anheuser-Busch's decades of expansionary paralysis were visibly clear. On a glass map of the world that hung in the lobby of the company's executive offices in St. Louis, an array of tiny lights scattered across the screen were meant to signify the breadth and reach of its facilities around the world. The United States and China were well illuminated, but most of the rest of the map remained pitch black.

—Advisor to Anheuser-Busch

 

 

 

A
s The Fourth started to reach out to some of the parties his father had alienated over the years once he became CEO, it became apparent that he was operating with one hand tied behind his back, and his own father had fastened the knot. The Third hadn't fully loosened his grip on the company's scepter. A full year after his son took over, The Third remained an imposing presence at the company. He was still visiting wholesalers, causing confusion about who they should interact with at the mother ship, and he only moved out of his office at Anheuser-Busch headquarters at the end of 2007 when the board forced both him and Pat Stokes out of the building.

“A succession from a strong CEO, let's say Jack Welch to Jeff Immelt, is hard,” said board member Sandy Warner in reference to General Electric, where he also served as a director. “In the case of Immelt and Welch, which I've lived through, Welch hasn't been in the building once since he retired as CEO.”

“August Busch III kept his office,” Warner said. “Never moved his office. So it's hard to start when you succeed a brilliant, successful, long-term CEO. It's doubly hard when the guy is still on the board, still in his seat, still in the same place everybody has been used to for over 20 years . . . Then add to that that he's your father, and you've created an absolutely impossible situation.”

“He knew that company from the lowest employee to the highest, and all of the procedures and processes. I think it was difficult to let go,” said fellow board member Ambassador Jones. “I think there were some judgment calls and management decisions that The Third didn't agree with, and some he disagreed with more vehemently than others.”

The Fourth had won the promotion he had always aspired to. When he pulled a business card out of his wallet and read the title, that's what it said—Chief Executive. He never felt like he was really in charge, though. It was maddening. As one former strategy committee member said, “I can't remember the titles we all had, because the reality was that August III was always there.”

August IV was concerned that Anheuser-Busch was vulnerable to a takeover, however, and he was desperate to convey his growing sense of uneasiness and urgency to his colleagues.

During a meeting with The Fourth and Anheuser Chief Financial Officer Randy Baker in St. Louis not long into The Fourth's tenure, a high-ranking Citigroup banker named Leon Kalvaria ran through a list of dangers Anheuser-Busch faced at the hands of its rivals. Kalvaria's ties to the beer industry ran deep—he had advised Lemann, Telles, Sicupira, and the other Brazilians at AmBev during their merger with Interbrew, and had watched as the Brazilians asserted control over the operation and ousted John Brock, Interbrew's CEO. Kalvaria had also worked with SABMiller several times, both when it took a majority stake in Italy's Peroni in 2003 and when it bought Grupo Empresarial Bavaria, Colombia's largest brewer, for $7.8 billion in 2005. After working for so many years in the brewing space and spending so much time with its top executives, he knew what made each of Anheuser's competitors tick and where they had stashed any skeletons in their closets.