Dethroning the King (24 page)

That same arrogance allowed the fire that had been stoked in people's bellies down in Mexico to cool over time. After a few months passed and none of their competitors tried anything sinister, many of the company's executives returned to business as usual. “If you know a threat is coming, recognition is one thing. But you've got to then act on it,” said one advisor to the company. “There's a big difference in life between recognizing a potential threat and truly addressing the possibility of it and acting accordingly.”

“I think if we were to all look back, we would probably all agree we would prefer to have acted on some of these things sooner.”

August IV did make a few moves in that direction. After Cancun, he hired Goldman and Citigroup and looped in Skadden, the company's longtime corporate law firm, to evaluate Anheuser's options and defend it against unwanted advances. The team kicked quickly into gear with a review that lasted roughly half a year. The Fourth also paired Anheuser CFO Randy Baker up with public relations firm Kekst and charged him with a mission that was largely kept under wraps: preparing for a potential attack from an activist investor.

When The Third launched into his tirade at the quail hunting plantation in Florida, however, he had a point.

“I was very, very nervous about a whole bunch of banks giving their perspective,” said one of the bankers who presented in Cancun. “I was worried they were having too many banks come to talk to them, and I was worried they'd be too honest with too many banks. Some of the banks not selected would be heavily incented to go and shop some of the information they had picked up in a fairly confidential environment.”

The Fourth's inclusion of so many banks in Mexico did appear to come back to haunt the company once InBev made its play for Anheuser. J.P. Morgan, whose Cancun presentation didn't click with the audience, wasn't picked to work with Anheuser on its defense strategy. In the end, though, that suited J.P. Morgan just fine. When InBev started hatching its takeover plan roughly a year later, just as the financial markets were starting to disintegrate in the wake of Bear Stearns's collapse, it knew it needed to recruit one or two of the world's strongest banks if it was going to successfully rustle up $40 or $50 billion in financing. The first person InBev looked to was Jamie Dimon, the head of J.P. Morgan, who had just taken control of Bear Stearns and was emerging as one of the U.S. government's favored partners on Wall Street. Dimon was happy to accept such a lucrative piece of business.

“The Third was right,” said one of Anheuser-Busch's advisors. “J.P. Morgan didn't get picked and then worked on the other side.”

Randy Baker, the company's lean, square-jawed, and generally unflappable chief financial officer, was particularly furious about how the situation played out. J.P. Morgan had been Anheuser's go-to bank for credit for as long as many Anheuser insiders could remember, and just weeks before the firm allied with InBev, its bankers had been out talking to Anheuser-Busch to see how they could be helpful.

Given the two companies' longstanding credit relationship, J.P. Morgan was the bank Anheuser-Busch would have naturally turned to for money if it had wanted to buy the other half of Mexican brewer Modelo. The bank essentially abandoned its relationship to accept a more profitable commission advising InBev. Anheuser's board was livid. Citigroup indicated it was willing to help finance the company when it was hired for strategic advice, which replaced the loss of J.P. Morgan to a degree. J.P. Morgan was the strongest bank out there at the time, and after years of access to its credit, Anheuser-Busch suddenly found the door slammed in its face. With J.P. Morgan's former chief, Sandy Warner, as a key member of Anheuser-Busch's board, it made things even more awkward.

“J.P. had a long historic relationship with Anheuser-Busch and had done a lot of financing for Anheuser-Busch,” said one advisor. “I think Anheuser-Busch thought it was incredibly disloyal that J.P. showed up on the InBev side. That being said, to be fair to J.P., they clearly were not asked to be an advisor. J.P. Morgan was incredibly upset that Anheuser-Busch didn't want to use them. And when InBev was looking for a balance sheet . . .”

The Fourth, chastised by his father's anger but not deterred, started making an effort in 2007 to show that he was receptive to merger ideas that would give Anheuser-Busch a bigger global presence. He had built up a relationship with Paul Walsh, the chief executive of alcohol beverage giant Diageo, on the board of FedEx. Walsh seemed interested in exploring whether Diageo and Anheuser-Busch could strike up some sort of deal, and the two executives held a series of quiet but deliberate conversations that centered on two different potential transactions.

In one scenario, London-based Diageo would sell Guinness to Anheuser-Busch in exchange for a stake in Anheuser of roughly 20 or 25 percent. Anheuser was lukewarm on the notion of owning Guinness, however, and while that deal was periodically discussed, it never gained significant traction. The two companies also discussed something that would have taken things much further: an all-out merger to meld Anheuser-Busch's beer empire together with Diageo's spirits and wine. Diageo owned some of the world's best-known brands, including Smirnoff vodka, Johnnie Walker whisky, and Captain Morgan rum. In certain aspects, combining those brands with Budweiser, Busch, and Michelob sounded like a brilliant concept.

Brewers and spirits companies have long struggled to find a magic solution that makes merging their businesses worthwhile. Beer and liquor are made, distributed, and marketed differently, so there aren't many ways to combine efforts and save costs. Plus, investors had been valuing liquor companies more richly than brewers, which made for a financial disconnect that was tough to overcome. Anheuser-Busch and Diageo couldn't concoct a recipe that worked.

The connection between the two companies remained alive enough, however, for Citigroup's Kalvaria to reach out to Walsh right after InBev made its takeover bid. Kalvaria asked to hear Walsh's point of view on the offer, listening for a sign that Diageo was interested in being a “white knight” for Anheuser-Busch—someone who could rescue it from InBev. Walsh knew Diageo couldn't offer nearly the same amount of cost savings as InBev could. He was not about to enter a bidding war he would almost certainly lose.

“Forget it,” Walsh told Kalvaria. “I'm not going anywhere near this.”

As they ran over the company's options in 2007, several top Anheuser-Busch executives continued to favor something even bolder: an all-out merger with global giant SABMiller, which was looking to stay ahead of the pack as the industry continued to consolidate.

That summer, August IV and David Peacock, his close deputy, met SABMiller's Graham Mackay for dinner at the Four Seasons restaurant in New York, which is housed on the ground floor of the Mies van der Rohe-designed Seagram Building on Park Avenue in Manhattan. The Four Seasons' Pool Room, a see-and-be-seen spot for New York's financial and media glitterati, was hardly a discreet setting for high-stakes merger discussions. The dinner was largely meant to help The Fourth and Mackay get to know each other, not to allow for furtive deal-making chatter.

The Fourth and Mackay spent the meal talking about their respective businesses, barely brushing over how they might fit together. After the bill was paid and August IV and Peacock headed out, Mackay and Kalvaria met for a drink at the Four Seasons hotel, where Mackay was staying. Dinner had gone smoothly enough to consider whether to push things further along, but there were some big questions that would need to be answered. What would it look like if the two brewing giants were hammered together? Where would the merged company be based? And who would run it? If Mackay remained CEO, August IV could perhaps run the company's business in the Americas. And despite the spotty history between The Third and Mackay, it might be worth handing August III a role as well. Rather than sticking to SABMiller's home base in London or moving to Anheuser's beloved but inaccessible St. Louis, they could split the difference and be based in New York. The concept was hardly even in its infancy, but Mackay and August IV indicated after that meeting that they were willing to pursue talks further, and the two companies spent more time analyzing a potential deal. It became one of the Anheuser-Busch strategy committee's most commonly talked-about options late that summer.

The key to the deal was how to handle Miller. The U.S. government's antitrust authorities would never allow a merger that joined the country's top two domestic competitors. Still, there seemed to be a simple fix—SABMiller would sell Miller to Molson Coors, the third-largest brewer in the country. It wasn't guaranteed to work from an antitrust perspective, but the companies' advisors felt it would pass muster. That was enough to perk up Anheuser's strategy committee and set its wheels in motion. “There was a flurry of analysis and activity around whether a merger with SABMiller would work or could work, and what it would mean,” said one of the company's advisors.

Like most of Anheuser-Busch's dalliances with rivals, though, the SABMiller deal died on the vine. They were both big, proud companies that wanted to play the role of acquirer rather than target, and neither wanted to pay a premium for the other. The constant disconnect between August III and his son also threw cold water on the effort. The Third let The Fourth's management team spin its wheels to evaluate the potential transaction, but some executives never felt that the SABMiller option had any real momentum.

“In effect, I think August IV got pulled back by The Third, saying, ‘Don't go down this route here,” said one person close to the talks. “You had the whole palace coup going on, where most of the people The Fourth liked got fired—which was kind of also right around the end of those discussions,” said another.

A strategy committee member agreed, referencing the stalled-out talks with both SABMiller and Diageo. “I don't think it was ever with a plan to go make a deal, because he could never get it past his father. The bottom line was that nothing could be done without the approval of The Third or the board of directors. It was like, ‘You can talk to whomever you want, but I'm not going to allow it to happen.' ”

Meanwhile, SABMiller had also been talking about a merger with InBev, and some InBev board members seemed to favor a deal with SABMiller over one with Anheuser-Busch. SABMiller didn't fit quite as well with InBev as Anheuser-Busch did, but a deal with the South Africans could be much easier to execute than one with the unwilling Americans. InBev and SABMiller held a brief round of discussions, but the talks snagged on several significant issues. SABMiller was uncomfortable with the strong controlling position of the families that owned most of InBev and felt its shareholders wouldn't put up with such a structure. InBev, meanwhile, wanted to pay little or no premium.

“SAB's point was ‘You know what, if you want to buy the company, give me a price. But we're not going to play with this,” said one person who was involved in the talks. The discussions wandered off nowhere, and the idea was shelved.

By October of 2007, SABMiller had endured enough puttering around. Five years after buying Miller to get a U.S. foothold, it announced a groundbreaking deal to merge those operations in the United States into a joint venture with Molson Coors that would be called “MillerCoors.” The deal joined America's second- and third-largest brewers to create a much stronger competitor to Anheuser-Busch, and was especially painful because Anheuser had scrapped talks with SABMiller only months earlier. Now, SABMiller was pounding down a second stake right in Anheuser's backyard.

Citigroup's Kalvaria quickly called Graham Mackay to see whether Anheuser could tempt him into abandoning the venture or integrating Anheuser into it. “Why did you do this instead of trying to push it further with us?” Kalvaria asked, before pointing out that SABMiller could have it both ways. Anheuser and SAB could still merge and then sell Miller to Molson Coors, just as they had discussed months ago. It might even make things smoother.

Mackay thanked Kalvaria for his interest but brushed the idea aside. The certainty of the Molson Coors deal was too valuable to sacrifice for the chance to play yet another waiting game with Anheuser-Busch.

After the MillerCoors venture was announced, Wall Street's legion of analysts and investors started handicapping which brewing giant would be next to make a major move, and many focused their sights on Anheuser-Busch. August IV had loosened the guidelines that limited the amount of debt Anheuser could take on, which gave it the financial flexibility it needed to be an active acquirer. By that time, though, it was looking more and more like a juicy target.