Bitter Brew: The Rise and Fall of Anheuser-Busch and America's Kings of Beer Part 25

By then, of course, he'd been promoted to CEO.

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THE LAST WATCH

The long-awaited coronation of August IV as chief executive officer of Anheuser-Busch came on September 29, 2006, beginning with a statement from the board of directors.

"After careful consideration, we selected August Busch IV as the individual most qualified to a.s.sume that role. We believe that the company, its employees and its shareholders will be well served by his leadership."

August III, who was resigning from all executive responsibilities at age sixty-eight, said of his son, "August IV has successfully prepared himself by leading the U.S. beer company through a period of great change and challenge. He brings with him the new thinking of his generation yet appreciation for the great traditions and values of the company."

For sheer disingenuousness, the two statements would be hard to top. The board members knew better than anyone that the Fourth's record of leadership was questionable. His five years as president had been marked by flat sales, an underperforming stock, and a series of expensive TV commercials that won rave reviews but relatively few new customers. At least two key longtime sales executives had resigned during his presidency, each stating in their official exit interview-one directly to August III-that they were leaving because they had no faith in the Fourth's ability to lead the brewing division. The board's decision to elect Pat Stokes as chairman of the board and to allow August III to stay on as a member even after he retired was a clear sign that they didn't trust the Fourth's ability or his judgment. To say that he was "the individual most qualified" for the job fell somewhere between dishonest and delusional.

The statements were boilerplate corporate blather, of course, fashioned by public relations consultants intent on a.s.suring the investing world that all things were as they should be. But August III's statement contained a paragraph that no one would have dared to write for him. It stands out as perhaps the most emotional published remark of his forty-five-year career.

"This company is like no other," he said. "For me, this has never been just a job, it has been my pa.s.sion. I've taken great pleasure in working with people of character, creativity and commitment who have become my second family. Above all, it is the men and women with whom I have worked that I will miss most."

August IV's official statement contained the requisite expressions of grat.i.tude and respect for his predecessors-"I am proud to accept this challenge that carries a great deal of personal meaning for me ... my father and Pat [Stokes] leave behind a legacy of unparalleled excellence"-but privately he was deeply disappointed at the way things worked out. When he walked into his first board of directors meeting in December, the two men he'd reported to for the past twenty years would be sitting there, still judging his performance. Both had taken big retirement packages-$34.6 million for Stokes and $64 million for August III-but August III was going to serve as a consultant for another six years, during which time the company would continue to cover the cost of his security and travel, including his jet and helicopter, and maintain his executive office at 1 Busch Place. So his father wasn't even leaving the building. Supposedly, August III was going to serve as just another member of the board. The notion was ridiculous. If August III were in the boardroom, by dint of history and force of personality, he would be the man in charge. The nuclear particles would align.

So the promotion to CEO didn't change much for the Fourth, except that, as he ruefully noted to Forbes magazine, "I'm the one who is going to be accountable."

He faced some formidable problems. All the major U.S. brewers were losing young consumers to import brands, microbrews, wine, and distilled spirits. Budweiser had lost 16 percent of its market share since 1996. As president, the Fourth's strategy had been to fight the compet.i.tion by joining them. In addition to Jekyll & Hyde, Spykes, and Bacardi Silver, he added fourteen microbrew-style beers to a product roster that now numbered more than forty brands, including such seemingly whimsical concoctions as Chelada Bud, Michelob Ultra Lime Cactus, and Michelob Ultra Tuscan Orange Grapefruit. It definitely wasn't his grandfather's beer company anymore.

In his first major move as CEO, the Fourth entered into a deal with Belgium-based InBev that made A-B the exclusive U.S. distributor of InBev's best-known European brands-Beck's, Ba.s.s Ale, and Stella Artois. His father objected to the idea when it was first proposed in 2006. He'd dealt directly with InBev's key Brazilian backers and didn't trust them. InBev was now A-B's biggest compet.i.tor on the world stage and was widely rumored to be eyeing A-B as a possible takeover target. August III thought it was a bad idea to get into a partnership that would give InBev a window onto A-B's operations. But the Fourth kept pushing for it, and in an uncharacteristic display of restraint, his father didn't try to marshal support on the board to block the deal; he let it happen, and InBev moved into a small office just across Pestalozzi Street from the A-B executive offices at 1 Busch Place.

The takeover rumors were well founded. For years, A-B had been protected by its size and stock price: it was simply too big and too expensive to be swallowed by a compet.i.tor. But things had changed. A-B wasn't the biggest brewer anymore. Its stock was undervalued. Its record of 150 years in operation wasn't so intimidating in an industry whose world leader had not even existed four years before. InBev was not so much a brewer as it was an investment portfolio of beer brands-more than two hundred of them-that its owners had ama.s.sed by gulping down six-hundred-year-old European breweries for breakfast. So as August IV took over the job he had coveted so for long, he was buffeted from all sides by warnings that, sooner or later, InBev would make a move.

Super Bowl XLI offered him some respite from the doom-and-gloom-sayers. As usual, A-B had gone all out, mounting a total of nine commercials for the broadcast. At a rate of $2.6 million per thirty-second spot, that represented an investment of more than $24 million in commercial time alone. Production costs and a week's worth of festivities in Miami leading up to the game probably added at least another few million to the tab. A-B's exclusive deal with the NFL precluded commercials by any other brewer, so the company was easily the dominant advertiser on America's most-watched TV broadcast. By way of comparison, Coca-Cola had four commercials during the game, General Motors had three, and Doritos and Honda each had two.

In the first Super Bowl marred by rain, the Indiana Colts beat the Chicago Bears 2917, but the score that mattered to A-B came out a few days later when USA Today published its weekly Ad Meter chart. Based on the second-by-second reactions of 238 electronically monitored adult volunteers, A-B logged an unprecedented seven of the ten most liked ads aired during the broadcast, including the top two, both for Budweiser. The top-rated spot was the now famous Budweiser "King Crab" commercial, which featured scores of animatronic red crustaceans crawling out of the ocean on a tropical island to worship around a bright red cooler filled with Budweiser.

The Fourth and his management team were ecstatic. Never mind that Ad Meter measured the opinion of only a few hundred people in Houston and McLean, Virginia; the A-B executives knew that online viewing of the Top Ten commercials exploded in the week after the broadcast. The company estimated that its 2006 ads were viewed on YouTube more than 21 million times in the three days following the game. And that audience skewed a lot younger than the TV audience.

A few days after the Super Bowl broadcast, A-B unveiled a new product that had been in development for nearly a year-an online entertainment network called Bud.TV. Aimed at twenty-one- to twenty-seven-year-old consumers who were hard to reach with traditional broadcast television ads, Bud.TV promised a lineup of one- to three-minute programs that featured the kind of hip, mocking humor that A-B commercials had become famous for, ranging from comedy sketches created by writers from Sat.u.r.day Night Live and The Howard Stern Show to short films produced by actor Kevin s.p.a.cey's company, Trigger Street Films, to a making-of-a-doc.u.mentary reality series called Finish My Film, which was to be produced by Matt Damon and Ben Affleck's production company, LivePlanet. The premise of Finish My Film was that LivePlanet would shoot the first and last minutes of a short film and invite viewers to submit proposals for filling in the middle. Whoever came up with the best proposal would be invited to Los Angeles, where they would be filmed making their film.

For a St. Louisbased beer company, Bud.TV was an undertaking of breathtaking ambition, one that bordered on "creative hubris," said the New York Times. But it seemed like the kind of new-generation, outside-the-barrel thinking that August III and the board were hoping for when they promoted the Fourth to CEO. A-B launched Bud.TV with a first-year budget of $30 million-a pittance, considering the company's annual marketing budget of more than $1 billion-and high hopes that within a year or two it would grow into a Top 100 Web site with 2 to 3 million unique visitors per month.

It didn't come close. Plagued by a clumsy age verification system that cross-checked would-be visitors' names against a database of state-issued identification and caused even the Fourth to complain that he couldn't get on, Bud.TV drew 253,000 visitors its first month and only 152,000 its second. One episode of a series called "Replaced by a Chimp" drew only 384 views on YouTube. In April 2007, Advertising Age reported that Bud.TV ranked as "the 49,303rd busiest site on the Web, just ahead of p.o.r.nography site www.jstfu.com, and just behind www.rubber-cal.com, which bills itself as a 'comprehensive source for sheet rubber.'"

The following month, it got worse-traffic to the site was so light that the Web measurement service Comscore could not measure it, according to Ad Age. When A-B finally pulled the plug on Bud.TV, the vice president of marketing was quoted as saying, belatedly, "If the [TV] networks can't continuously produce that [volume of content], how can a beer company?"

Coming on the heels of the Spykes debacle, the failure of Bud.TV was especially embarra.s.sing. But August IV had more pressing issues to worry about. His father was chairman of the board's executive committee, which gave him oversight of executive hiring. Even though August III didn't come to the office on a daily basis, he was in the Fourth's ear constantly, calling him several times a day. He objected to two key members of the Fourth's management team and ordered him to get rid of them. The Fourth protested and got him to relent on one executive by moving him to a less prominent job. The other man, who was rumored to have played a role in the Fourth's faked drug test, was allowed to resign with a generous separation package.

As recounted in the book Dethroning the King, August III was infuriated when he learned that the Fourth had invited a group of Wall Street investment bankers to attend what was supposed to be an internal meeting of A-B executives at the Ritz-Carlton Hotel in Cancun, Mexico, and asked them to present their ideas about how A-B might remain compet.i.tive in the new global beer economy. August III thought it was a terrible tactical error.

"All you did by bringing those bankers in there was send a telegraph wire out to InBev that you're ready to be taken over," he supposedly hollered at the Fourth in front of a group of other executives during a weekend quail-hunting trip in Florida. "You're putting up a For Sale sign. You're giving away too much information. All you did was get everyone in the world to sharpen their knives."

Sure enough, within weeks, the financial press and beverage industry trade publications picked up on the Fourth's meeting with the investment bankers and interpreted it as a sign that A-B was actively seeking a merger partner. Beverage World reported that "industry a.n.a.lysts are predicting a 70 percent chance" that A-B would merge with InBev. "They have no choice," one a.n.a.lyst was quoted as saying. "They can introduce new products and they have a number of [cost cutting] initiatives, but they still face execution risk and, at the end of the day, it's a global beer industry." A Brazilian business newspaper reported incorrectly that InBev had already had preliminary merger talks with A-B. In nearly all the early speculative reports, A-B was depicted as on the defensive, vulnerable, running out of room to maneuver.

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 compet.i.tive 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 ant.i.thesis of the Fourth. Married with four children, he eschewed the trappings of executive success, avoiding first-cla.s.s travel and fancy hotels, operating without an a.s.sistant, 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 Peac.o.c.k, 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 a.n.a.lyst. 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 ma.s.sive 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 s.p.a.ce 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 a.s.sociates 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.