Dethroning the King (40 page)

“When Anheuser-Busch became a public company, the Busch family and Anheuser-Busch management understood that future decisions had to be made in the best interests of all shareholders,” Adolphus wrote to The Fourth and the rest of Anheuser's board. “InBev's offer provides the opportunity for Anheuser-Busch brands to compete globally. I believe that as directors you have a fiduciary duty to commence negotiations with InBev in order to bring about this deal.”

Andrew Busch, another half-brother of The Third, then said exactly the opposite a day later, coming out in support of August IV, the board, and the company's efforts to “remain a strong company headquartered in St. Louis.”

Adolphus owned less than 1 percent of Anheuser's shares. Still, 1 percent of the company would be worth $460 million if Anheuser accepted InBev's offer. These were powerful sums of money, even for a family padded with generations of wealth.

The situation was shaping up to be more than some of Anheuser-Busch's directors had bargained for. After years spent acquiescing to The Third and hearing little pushback from investors, they were caught in a hail of crossfire not only between Anheuser and InBev—which would have been bad enough—but between Anheuser and its own founding family. “You think of these guys as board members—would you want to be dragged into this?” said one former executive. “When they saw the family thing, they figured, ‘I don't need this.' Whitacre didn't need it, Taylor definitely didn't need it. He's running his own company. They didn't want to get the board sued, because they'd seen that before.”

One former Anheuser staffer said that Adolphus's letter was like waving a red flag in front of a bull to The Third, whereas others contended that Adolphus was being used by InBev and called his letter a red herring—the same type of unpredictable slop that tends to crop up in many high-profile takeover fights.

“When this stuff happens, God knows who gets up who owns stock and might say something,” one Anheuser insider said. “The fact that there was a ‘Busch' after his name . . . at the end of the day, the Busch family owned a very small amount of stock in the company. So a Busch family member who held a very small amount of stock, coming out saying something, got the credit that deserved—it got a headline but substantively didn't [involve] enough stock for it to be determinative.”

“I think it probably pissed him off a fair amount, but The Third never lost his cool,” said one advisor.

When the independent board members started to push in favor of hiring their own lawyers, the initial plan was to hire well-known New York M&A attorney Ed Herlihy from law firm Wachtell, Lipton, Rosen & Katz. There, again, Anheuser's Augusta connections came into play. Herlihy was one of the country's top bank merger experts, and he had been hired by J.P. Morgan's Jamie Dimon to lead the bank's fire-sale purchase of Bear Stearns. He was also an avid golfer and a member of the exclusive country club. “We looked to see who was on the board, and we saw the Georgia connection,” said a top attorney at a rival firm. “We obviously knew who at Wachtell they must have been talking to.”

Skadden felt it had matters under control and wasn't keen on hiring anyone else. It argued that bringing in another law firm might draw unwanted attention and prompt questions about why such measures were needed. The outside directors, however, wanted a separate set of advisors who would protect their interests as they looked more closely at buying Modelo. When the idea of hiring Wachtell was nixed over potential conflicts of interest, they turned to Simpson Thacher & Bartlett's Charles “Casey” Cogut, another well-known M&A lawyer. Cogut and the rest of his team mounted up after it became clear that the board was going to reject InBev's bid.

“Skadden had been resisting separate counsel for various reasons,” said one person close to the matter, but “there was still a notion amongst the independent directors that they wanted it, and this was a good point of demarcation.”

The board's decision to hire Simpson Thacher rallied the troops over at InBev, who felt it validated their strategy of targeting certain members of Anheuser's board. InBev saw the move as an indication that Warner, Whitacre, and the other independent directors would drive Anheuser's decision making from that point on, rather than insider August III and his son.

InBev's team got wind that Anheuser's board was meeting that Wednesday, and since they hadn't heard an offer to fire up negotiations, the Brazilians readied themselves for rejection. They weren't about to cry in their coffees—they had assumed it would come to this, and they quickly authorized their advisors to move into their second planned phase of attack. Anheuser-Busch didn't know what was about to hit it. Or perhaps more accurately, it didn't know it was about to get hit so soon.

On June 26, just a few hours before Anheuser's board agreed by phone to turn down InBev's bid, InBev filed suit in Delaware on a critical matter that had huge repercussions: whether Anheuser's entire board of directors could be removed without cause all at once. The filing wasn't so much a traditional lawsuit as it was a request to clarify a key point. InBev believed that the whole board could be ejected simultaneously through a written shareholder vote, but it wanted to make sure the courts agreed before it took any additional steps. The lawsuit was a major shot across the Anheuser board's bow—a warning that InBev might launch an effort to eject them against their wishes. InBev wanted them to feel the threat of what was coming next.

Years earlier, when takeover rumors first started dogging the company, Anheuser-Busch had grown worried enough about its security to institute some hefty anti-takeover protections. It decided to stagger its directors' tenures, which meant only a fraction of the board would come up for election each year, and it installed a “poison pill” shareholder rights plan, which would make a hostile takeover prohibitively expensive by flooding the market with new shares of stock if a bidder tried to vacuum up too large a stake in the company.

Anheuser's staggered board remained in place until 2006, when in response to a trend in corporate America toward increased shareholder rights and transparency, the board followed in the footsteps of many of its corporate brethren and “destaggered” itself. It had already let its poison pill provision expire two years earlier. The move to destagger helped appease the shareholder rights' groups that were constantly harassing the company, but it was done in a way that left a loophole InBev could exploit.

When a Delaware-based company destaggers its board, it usually adds legal language that says the board cannot be completely removed without committing some sort of infraction. In this case, though, that language wasn't included. As one person close to InBev put it, “It was somebody's oversight.”

Anheuser's board begs to differ. “Were we aware of what we were doing? The answer is yes,” said director Jim Forese. “You don't have that kind of high-powered board not know what it was doing.” Members of the board opted to destagger their terms and not to entrench themselves in their jobs because they wanted to improve the company's corporate governance, he said. They had no regrets.

General Shelton, however, admitted that while the board knew what it was doing, the fact that they might all be ejected together may not have registered until it smacked them in the face. “We all knew that was a possibility when we signed up for it,” he said. “But until you get put in that situation, I don't think the reality of it is driven home quite to the extent that it is when you say, ‘This could get ugly pretty quickly.' ”

Ambassador Jones seconded that perspective. “It could be considered a mistake, I suppose,” he said. “We did it because we were trying to do a number of things that put us in line with the then-concepts of good corporate governance.”

“I don't think we envisioned InBev at that time, or a hostile takeover, because we thought we had a very good company and that wouldn't be an issue.”

Whether it was an oversight or a noble but naïve move to boost shareholders' rights, the board was highly vulnerable. Unless they challenged InBev's lawsuit and somehow won, which they quietly believed was unlikely, InBev would be able to call for a special vote to replace them with an entirely new slate of directors. To make matters worse, InBev would only need a bare majority of Anheuser's shareholders to vote in favor of any new board members it proposed, a low hurdle compared to the two-thirds majorities required by some other companies. InBev had found the holes in Anheuser's defensive armor, and it was tearing at them.

“The road to Hell is paved with good intentions,” said one company advisor. “In an era where people are looking for quick hits, if you have a staggered board, don't end it. If you don't have a staggered board, there's no way you're going to be able to put one in. A staggered board is a real lifesaver.”

If the Busch family had still been in control of Anheuser-Busch, however, there would have been no need for debate over poison pills and staggered boards at all. Their votes would have determined Anheuser-Busch's fate.

Most family-owned companies establish two-tiered shareholding structures once they become publicly traded, which provide a way for families to maintain voting control even if they reduce their economic stake. The technique worked well for candy maker Mars, which had stayed solidly independent, and for publisher Dow Jones, whose controlling family members decided to sell to Rupert Murdoch's News Corp. It would have been logical to assume that the Busch family had voting control of Anheuser through its own dual-class system.

Yet no such structure existed. The entire Busch clan held a combined financial stake of less than 4 percent of the company, not nearly enough to influence the result of a shareholder poll. Even if every family member opposed a takeover and they convinced Warren Buffett to follow suit, they would deliver a mere 9 percent of the company's votes. Control of Anheuser-Busch's fate, in other words, had slipped into the hands of the hedge funds and cutthroat speculative investors who had been buying up chunks of Anheuser stock from more traditional “mom and pop” stockholders since InBev's bid became public. Those cash-hungry investors were exactly the type who might vote to upend Anheuser's board if InBev pressed forward with its new plan.

J.P. Morgan's team had been stunned to hear that the Busches lacked voting control over the company they had founded. When InBev's advisors sat down for the first time in May with Doug Braunstein and Hernan Cristerna, one of the firm's top European bankers, Cristerna was particularly taken aback.

“Wow, I've always thought the family really controlled the company, or at least had significant influence,” he said during at meeting at Lazard's offices in New York. “With these numbers, I'm surprised they weren't taken over years ago.”