Dethroning the King (35 page)

On Sunday, June 15, four days after InBev bid for Anheuser-Busch, Mercado put in a phone call to Frank and caught her in the middle of her son's graduation ceremony at Stanford University in California. Oprah Winfrey was the university's graduation speaker, and her speech made headlines, largely because she had endorsed Barack Obama in the upcoming presidential election after a career spent staying out of politics. Frank ended up with less time than she had expected for reveling in her moment as a proud mother.

“You have to be in Mexico City now,” Mercado told her bluntly. “They want you there now.” It was an abrupt flash back to reality, but Frank knew this was her best chance to get involved in what was shaping up to be the year's most exciting takeover battle. Anheuser and InBev were already working with other communications firms, and Modelo was the next-biggest player tied up in the fracas.

She left her family earlier than planned on Sunday and flew from San Francisco to Los Angeles to catch a connection to Mexico City. She didn't have much time to get up to speed, but reams of coverage of the budding war over Anheuser-Busch had been in all the papers. Frank spent the flight to Mexico scouring packets of media clippings that detailed The Fourth's checkered history, the warped dynamics of the Busch family, and the tainted relationship between Anheuser-Busch and Modelo. There were lots of bases to cover.

Mercado seemed just as concerned about the prospect of trying to negotiate with InBev, however, as he was about Modelo's talks with Anheuser-Busch. Based on the work he had done with InBev's Brazilian honchos in the past, he knew that swimming in both companies' shark tanks at the same time could be dangerous. The Busches tended to wear their prejudices on their sleeves, and the messy history between the two companies was already out there. Talks with InBev's steely crew, on the other hand, could be trickier to navigate. And the stakes for Modelo were incredibly high.

“Mercado knew InBev really well, and he was really, really concerned,” said one Modelo advisor. “He just kept saying, ‘You've got to understand these people. What we're doing is really going to be nasty.”

—Former Anheuser-Busch marketing ace Bob Lachky

 

 

 

O
n the night before Anheuser-Busch's first takeover-related board meeting in St. Louis, the teams from Goldman Sachs and Skadden touched down relatively late. It was late enough that the best place they could find with a kitchen that was still open for dinner was an old Italian restaurant in a sketchy warehouse district just off the banks of the Mississippi River.

The place was nearly empty when the small group of bankers and lawyers sat down, but the questionable digs didn't bother Skadden's Joe Flom, who launched an impressive attack on a massive surf and turf platter. Flom, a man in his mid-80s who, “dripping wet out of the shower, might weigh 105 pounds,” according to one colleague, pounded down substantially more than his diminutive frame seemed it could handle. But he had as aggressive an appetite for a good takeover fight as he did for food, and he was gearing up for battle. He needed all of the energy he could muster.

Flom's work for Anheuser-Busch far predated the creation of InBev, as did his close relationship with The Third, and the Brazilians ' hostile bid appeared to have set his blood to boil. His aptitude for defending vulnerable corporate clients had grown legendary over the years. He had a knack for finding alternate takeover suitors or, at the very least, wringing more money out of bidders' pockets when they appeared to be bone dry.

Flom had been a key figure on Wall Street since the late 1970s, when he and rival corporate attorney Martin Lipton were considered the best in the takeover business. Flom was particularly well known in deal-making circles for the “Jewish dentist” defense, which he concocted in 1975 while defending dental equipment maker Sterndent against a hostile bid from Magus Corporation. Flom decided that attention should be drawn to the fact that Magus was part-owned by Kuwaitis, and started loudly proclaiming that if the deal occurred, Sterndent's clients—many of whom were Jewish dentists—were bound to take their business elsewhere. The scare tactic worked well enough to give him time to find another bidder for his client, and the episode showed how a well-run public relations campaign could bolster traditional legal takeover defense measures.

“His first instinct was to show a good, strong defense,” said one Anheuser-Busch advisor. “If you do that, you're going to be able to negotiate or find something else. Flom's theory has always been ‘You give me enough time, and I'll find a solution.'”

“At the end of the day,” said the advisor, “Joe always has an incredible instinct for moving things around so you can maximize value.” Flom was getting to be somewhat long in the tooth, however, and wasn't as intimately involved with Skadden's day-to-day practice as he used to be. That was where Paul Schnell, another top Skadden M&A attorney, came in. The two spearheaded Skadden's team of advisors to Anheuser-Busch, with Schnell handling many of the particulars.

Anheuser's directors were accustomed to meeting 9 or 10 times a year. The Busches traditionally hosted dinner for the group in St. Louis on the night before each of their gatherings, which had always given the board's members plenty of time to catch up on anything that had transpired in the last month and a half.

But they were about to start getting to know each other much, much better. On May 29, six days after news of InBev's interest hit the papers, the board had met to discuss the rumors. Gossip had been swirling for months that the Brazilians were on the prowl, and the board knew InBev was big—and getting bigger. It was clear that Anheuser-Busch needed to keep growing to avoid being consumed. But few of the board's members believed that the company was already within InBev's reach. “I don't think anyone on the board felt that it was as close as it was—that InBev would be able to amass enough capital to buy Anheuser-Busch,” said General Shelton. “That part of it caught us by surprise.”

With so much uncertainty suddenly facing the company, the board had a solid docket of issues to cover that day. Goldman's team outlined how InBev might try to finance a bid at the rumored $65 per share, the company's executives laid out their progress on their Blue Ocean cost-cutting plan, and Skadden made the first of many presentations that covered the board's duties to shareholders. They mulled over the potential for a deal with Modelo, and debated whether to try to meet with InBev to hear things straight from the horse's mouth.

But when the board disbanded that day, the ball was in August IV's court. Barring any overtures from InBev, they planned to let him and the rest of Anheuser's management push ahead with their cost-slashing efforts and restructuring plans. And as the days ticked by with no word from Belgium, Anheuser's directors began to hope the takeover threat had dissipated. Maybe InBev couldn't cobble together the financing it needed, or had thought twice about the wisdom of sparring with its joint venture partner.

They weren't off the hook for long. When InBev faxed in its offer, everything dropped right into their laps, and their collective nightmare began. Many people who serve as corporate directors would relish the chance to bid for a rival company, but few are eager to be placed under a microscope on the receiving end. Suddenly, a raft of investors and news anchors turned their focus toward Anheuser's 14 board members to gauge how they might react. And their judgments weren't pretty.

Anheuser's board of directors during the fight against InBev constituted a significant improvement on its governing bodies of old. Past directors of the company had included a deputy U.S. defense secretary who resigned in an insider trading scandal and a wealth of cronies and St. Louis-based supporters of the Busch family. Facing a barrage of criticism from shareholders, The Third had taken some halfhearted steps late in his tenure to flesh out the group with a few people who seemed more independent. But The Fourth said he wanted to push those efforts further to “bring new board members on that have a diverse point of view.”

The Fourth, however, had not appointed a single new board member since becoming CEO. All of the directors he answered to were installed by his father with the exception of James Forese, a former chairman of IKON Office Solutions and IBM executive, who was elected in 2003 while Stokes was in charge. “They were trying to change the board, and I was the last member to go on as sort of the ‘next generation,' ” said Forese, who spent several weeks at the company with both The Third and The Fourth when he was appointed, learning about the business.

The convoluted relationship between August III and August IV wasn't the only thing that made for complicated dynamics within the group. Nine of its members had served for at least a decade, which led to complaints that they were too heavily entrenched in August III's camp. Several served together on the boards of other companies. The Third, for one, sat on the boards of AT&T and Emerson Electric with three other Anheuser directors, and he and fellow director Edward E. Whitacre Jr. had known each other for decades. The Third had been one of the AT&T directors who approved a controversial $161.6 million pay package for Whitacre in 2007, the year he retired.

The heaviest criticism tended to center on the financial relationships between certain directors. Anheuser-Busch paid for tens of millions of dollars in auto rentals and other services each year from Enterprise Rent-A-Car, which was run by board member Andrew Taylor, although Anheuser argued that the amount it paid wasn't big enough to represent a conflict of interest. The company used the services of some firms that employed its board members and made donations to others. Pat Stokes came under fire because his son owned a lucrative Anheuser-Busch beer distributorship.

Four directors were considered insiders: Stokes, the two Augusts, and Carlos Fernández, Modelo's CEO. Everyone else was considered “independent,” despite some of their longstanding business and personal ties to each other. Close relationships can yield certain benefits in the boardroom. But they can also lead directors to strike allegiances that pollute their decision-making abilities with insider politics. “There was a lot of cross-stocking of the board,” said beer industry scribe Harry Schuhmacher. “They were all friends, and they were all on each others' boards. They all kind of looked after each other. That helped to insulate the company from the real world.”

Accordingly, Anheuser-Busch was awarded a grade of “F” in corporate governance from The Corporate Library—the worst score possible—in April 2008. It was taken to task for potential conflicts of interest between its board members and the advanced age and tenure of certain directors, among other things. Anheuser's score from RiskMetrics, another shareholder advisory firm, was higher, and the Corporate Library boosted its grade slightly to “D” in June. But it was still nothing to be proud of.

When August III was questioned at the outset of the InBev battle about the ties between board members, he said the directors at issue didn't sit on any committees that could pose conflicts. “Second thing is, there's a great advantage to being able to communicate with the person who was running Emerson, the person who was running AT&T,” he said. “Think of the cross-pollenization and communication that we had on planning, finance and other matters.” He closed with a sweepingly broad statement: “As far as integrity is concerned, people who are running major companies in this country today would never touch something that was a conflict of interest [except] in a few publicized cases. So I don't think there are any questions with overlapping or cross-pollenization of boards.”

Most of Anheuser's advisors say its directors got too much flak for their apparent conflicts. There were lots of connections between members of the group, they admit, but that didn't detract from their professionalism. “The board as a body, contrary to what everybody believed was going on, was actually doing their work very diligently,” one company advisor said.

Nevertheless, the directors took a bruising in the media for ostensibly being beholden to August III, and it served as a major point of frustration. To counter the persistent criticism, Anheuser-Busch's board went to great lengths to do everything by the book during its battle with InBev. They were advised to meet in person as often as possible, and they obliged, knowing their every move would be viewed under a magnifying glass. But rather than convening at headquarters, where they knew they might be spotted by employees and the hungry local media, they agreed to sequester themselves within Anheuser's private airplane hangar at the Spirit of St. Louis airport.